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, 1997 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
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Common Stock
(23,553,942 shares outstanding as of September 30, 1997)
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
1997 and December 31, 1996
Condensed consolidated statements of income--three 4
and nine months ended September 30, 1997 and
September 30, 1996
Condensed consolidated statements of cash flows 5
--three and nine months ended September 30, 1997 and
September 30, 1996
Notes to condensed consolidated financial 6
statements--September 30, 1997
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II. OTHER INFORMATION 22
SIGNATURES 22
EXHIBIT 11.1 23
2
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PART I. FINANCIAL INFORMATION
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands) September 30, December 31,
1997 1996
---- ----
ASSETS
CURRENT ASSETS
Cash and equivalents $ 22,188 $ 38,936
Accounts receivable -- net 31,171 29,998
Inventories 24,173 21,280
Net investment in sales-leases 9,843 8,243
Prepaid expenses and other assets 5,606 7,008
--------- ---------
TOTAL CURRENT ASSETS 92,981 105,465
PROPERTY & EQUIPMENT 16,134 11,189
OTHER ASSETS 16,167 15,957
--------- ---------
$ 125,282 $ 132,611
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 13,482 $ 8,915
Other current liabilities 17,293 16,841
--------- ---------
TOTAL CURRENT LIABILITIES 30,775 25,756
DEFERRED TAX LIABILITY 10,710 8,635
OTHER LIABILITIES 4,254 3,286
SHAREHOLDERS' EQUITY
Common stock 60,473 59,875
Retained earnings 42,441 35,464
Equity adjustment for foreign
currency translation (314) (359)
--------- ---------
102,600 94,980
Less:
Treasury stock at cost (23,057) --
Receivable from Employee
Stock Ownership Trust -- (46)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 79,543 94,934
--------- ---------
$ 125,282 $ 132,611
========= =========
3
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
(In thousands except Ended September 30, Ended September 30,
per share amounts) 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 56,915 $ 47,435 162,061 $ 133,384
Cost of sales 30,617 27,819 89,191 75,348
--------- --------- --------- ---------
GROSS PROFIT 26,298 19,616 72,870 58,036
--------- --------- --------- ---------
Research & development 1,873 1,568 5,852 4,933
Selling, general and administrative 17,844 13,895 51,035 40,233
--------- --------- --------- ---------
19,717 15,463 56,887 45,166
--------- --------- --------- ---------
OPERATING INCOME 6,581 4,153 15,983 12,870
Interest and other income 106 393 924 1,356
Interest expense (12) (10) (37) (43)
--------- --------- --------- ---------
INCOME BEFORE TAXES 6,675 4,536 16,870 14,183
Income taxes 2,697 1,847 6,798 5,811
--------- --------- --------- ---------
NET INCOME $ 3,978 $ 2,689 $ 10,072 $ 8,372
========= ========= ========= =========
NET INCOME PER SHARE (1):
Primary $ 0.16 $ 0.10 $ 0.39 $ 0.31
========= ========= ========= =========
Fully diluted $ 0.16 $ 0.10 $ 0.37 $ 0.31
========= ========= ========= =========
Average number of common
shares outstanding (1):
Primary 25,149 26,886 26,035 26,770
========= ========= ========= =========
Fully diluted 25,640 26,910 27,155 26,796
========= ========= ========= =========
</TABLE>
4
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
(In thousands) 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 3,978 $ 2,689 $ 10,072 $ 8,372
Adjustments to reflect operating activities:
Depreciation and amortization 1,051 1,107 3,291 3,002
Changes in operating assets and liabilities (1,044) (863) (2,488) (16,999)
Other 2,492 2,209 6,726 4,903
-------- -------- -------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 6,477 5,142 17,600 (722)
INVESTING ACTIVITIES
Proceeds from disposal of property
and equipment 76 11 81 143
Cash used in acquisition -- -- (825) --
Additions to property and equipment (1,630) (2,232) (8,050) (4,702)
-------- -------- -------- --------
NET CASH USED IN INVESTING
ACTIVITIES (1,554) (2,221) (8,794) (4,559)
FINANCING ACTIVITIES
Payments for repurchase of common stock (7,598) -- (25,091) --
Proceeds from exercise of stock options (810) 105 (463) 591
-------- -------- -------- --------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (8,408) 105 (25,554) 591
INCREASE (DECREASE) IN CASH
AND EQUIVALENTS (3,485) 3,026 (16,748) (4,690)
CASH AND EQUIVALENTS
AT BEGINNING OF PERIOD 25,673 31,924 38,936 39,640
-------- -------- -------- --------
CASH AND EQUIVALENTS
AT END OF PERIOD $ 22,188 $ 34,950 $ 22,188 $ 34,950
======== ======== ======== ========
</TABLE>
5
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1997
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, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. 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, 1996.
NOTE B--INCOME PER SHARE
Primary earning per share assume that outstanding common shares were increased
by shares issuable upon the exercise of all outstanding stock options to which
market price exceeds exercise price less shares which could have been purchased
with related proceeds.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in an increase
in primary earnings per share for the third quarter ended September 30, 1997 and
September 30, 1996 of $.01 and $.00 per share respectively. The impact is
expected to result in an increase in primary earnings per share for the nine
months ended September 30, 1997 and September 30, 1996 of $.01 and $.02 per
share respectively. The impact of Statement 128 on the calculation of fully
diluted earnings per share for these quarters is not expected to be material.
NOTE C--EQUITY TRANSACTIONS
All average share and earnings per share calculations have been adjusted for the
Company's two for one stock split effected in the form of a stock dividend,
distributed on October 21, 1997 to outstanding shareholders of record on October
7, 1997.
During the second quarter of 1997, the Company also initiated a stock repurchase
program under which the Board of Directors authorized the repurchase of up to
1,470,000 shares (on a pre-split stock basis) of its common stock. The Company
repurchased the entire 1,470,000 shares. As of September 30, 1997, the Company
held 1,247,399 shares in treasury. From time to time, the Company reissues these
shares in connection with the exercise of employee stock options.
6
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PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. The words "expects,"
"anticipates," "believes," "intends," "will" and similar expressions identify
forward-looking statements which are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statements. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in "Factors that affect
results of future operations" and elsewhere in this Form 10-Q.
Inter-Tel is a single point of contact, full service provider of digital
business telephone systems, IP telephony products, CTI applications, voice
processing software and long distance calling services. Inter-Tel's products and
services include the AXXESS and Inter-Tel Axxent digital business communication
platforms, the AXXESSORY Talk voice processing platform, the Vocal'Net IP
telephony gateway and the Inter-Tel.net private IP telephony network. The
Company also provides maintenance, leasing and support services for its
products.
The Company has developed networks of direct sales offices, dealers and
VARs that sell the Company's products. In recent periods, the Company has
focused on expanding its direct sales capabilities and its dealer and VAR
network. The Company has acquired a number 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 and VARs 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.
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, the cost and
effect of acquisitions and the availability and cost of products and components
from the Company's suppliers. Historically, a substantial portion of the
Company's net sales in a given quarter have been recorded in the third month of
the quarter, with a concentration of such net sales in the last two weeks of the
quarter. 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.
7
<PAGE>
The Company offers to its customers a package of lease financing and other
services under the name Totalease. Totalease provides to customers lease
financing, maintenance and support services, fixed price upgrades and other
benefits. The Company finances this program through the periodic resale of
monthly lease payments to financial institutions.
Results Of Operations
The following table sets forth selected statement of operations data
expressed as a percentage of net sales for the periods indicated:
Three Months Nine months
Ended September 30, Ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 53.8 58.6 55.0 56.5
----- ----- ----- -----
Gross profit 46.2 41.4 45.0 43.5
Research and
development 3.3 3.3 3.6 3.7
Selling, general
and administrative 31.4 29.3 31.5 30.2
----- ----- ----- -----
Operating Income 11.5 8.8 9.9 9.6
Interest and other
income 0.2 0.8 0.5 1.0
Interest expense 0.0 0.0 0.0 0.0
Income taxes 4.7 3.9 4.2 4.3
----- ----- ----- -----
Net income 7.0 5.7 6.2 6.3
----- ----- ----- -----
Net sales for the third quarter of 1997 increased 20.0% to $57.0 million
from $47.4 million in the third quarter of 1996. Net sales increased 21.5% to
$162.1 million in the first nine months of 1997 from $133.4 million in the first
nine months of 1996. For the quarter and nine months ended September 30, 1997,
sales from direct sales offices and wholesale distribution accounted for
approximately $6.2 million and $19.6 million of the increase respectively,
compared to the corresponding periods in 1996. The remaining increases occurred
in network and long distance sales and other operations.
Gross profit for the third quarter of 1997 increased 34.1% to $26.3
million, or 46.2% of net sales, from $19.6 million, or 41.4% of net sales, for
the third quarter of 1996. Gross profit increased to $72.9 million, or 45.0% of
net sales, in the first nine months of 1997 from $58.0 million, or 43.5% of net
sales, in the first nine months of 1996. These increases were 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.
In addition, gross margin increased during the third quarter and nine months
ended September 30, 1997 based on a percentage increase in sales through the
Company's direct sales offices compared to its dealer network.
Research and development expenses for the third quarter of 1997 increased
to $1.9 million, or 3.3% of net sales, from $1.6 million, or 3.3% of net sales,
for the third quarter of 1996. Research and development expenses increased to
$5.9 million, or 3.6% of net sales, in
8
<PAGE>
the first nine months of 1997 from $4.9 million, or 3.7% of net sales, for the
first nine months of 1996. This dollar increase was primarily attributable to
expenses relating to the continued development of the AXXESS software and
systems, unified messaging and voice processing software, the Vocal'NET, and CTI
applications. The Company expects that research and development expenses will
continue to increase in absolute dollars as the Company continues to develop and
enhance existing and new technologies and products. These expenses may vary,
however, as a percentage of net sales.
Selling, general and administrative expenses for the third quarter of 1997
increased 28.4% to $17.8 million, or 31.4% of net sales, from $13.9 million, or
29.3% of net sales, for the third quarter of 1996. Selling, general and
administrative expenses increased to $51.0 million, or 31.5% of net sales, for
the first nine months of 1997 from $40.2 million, or 30.2% of net sales, for the
first nine months of 1996. The increases for the quarter and first nine months
reflected increased selling, incentive, training and other compensation costs
attributable to the increased sales through the Company's direct sales offices,
additional personnel to support the direct dealer network and the expansion of
long distance operations, development of the Inter-Tel.net Network and expenses
associated with the expansion of international operations. In addition, the
Company increased its sales and technical training staff, expanded its credit
management group and made increases in reserves for accounts receivable. The
Company expects that selling, general and administrative expenses will increase
in absolute dollars, but may vary as a percentage of net sales.
Interest and Other Income. Interest and other income decreased
approximately $400,000 in 1997 principally as a result of lower levels of cash
available for investment.
Net income for the third quarter increased 47.9% to $4.0 million, or $.16
per share, compared to net income of $2.7 million, or $.10 per share, for the
third quarter of 1996. Net income increased 20.3% to $10.1 million, or $.39 per
share, for the first nine months of 1997 compared to net income of $8.4 million,
or $.31 per share, for the first nine months of 1996.
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 increased sales, if any, in Japan and other parts of Asia and
elsewhere could result in higher international sales as a percentage of total
revenues; however, international revenues are currently not significant.
Liquidity and Capital Resources
At September 30, 1997, the Company had $22.2 million in cash and
equivalents, which represents a decrease of approximately $16.7 million from
December 31, 1996. The Company maintains a $7.0 million unsecured revolving line
of credit with Bank One, Arizona, NA. This credit facility is annually renewable
and is available through July 31, 1998. Under the credit facility, the Company
has the option to borrow at a prime rate or adjusted LIBOR interest rate.
Historically, the credit facility has been used primarily to support
international letters of credit to suppliers.
9
<PAGE>
Net cash provided by operating activities totaled $17.6 million for the
nine months ended September 30, 1997, compared to net cash used by operating
activities of $722,000 for the same period in 1996. The increase in cash
generated in 1997 was primarily the result of profitable operations plus non
cash depreciation charges and a slightly improved net working capital position.
Net working capital improved principally due to a $5.0 million increase in
current liabilities, which was largely offset by accounts receivable and
inventory increases of $4.1 million due to higher revenues and operations. 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.
Net cash used in investing activities, primarily in the form of capital
expenditures, was $8.8 million and $4.6 million for the nine months ended
September 30, 1997 and 1996, respectively. Capital expenditures and cash used in
an acquisition totaled approximately $8.1 million and $825,000, respectively, in
the first nine months of 1997. The Company anticipates making additional capital
expenditures during the remainder of 1997, which will relate to the expansion of
facilities, equipment and management information systems used in operations.
Net cash used in financing activities totaled $25.6 million for the nine
months ended September 30, 1997 compared to net cash generated of $591,000 for
the same period in 1996. During the second quarter of 1997, the Company
initiated a stock repurchase program under which the Board of Directors
authorized the repurchase of up to 1,470,000 shares (on a pre-Stock Split basis)
of the Common Stock. The Company expended approximately $7.6 million and $25.1
million for stock repurchases in the third quarter and the nine months ended
September 30, 1997, respectively, which were funded primarily through existing
cash balances. The Company reissued shares with a cost basis of approximately
$2.1 million and $4.1 million in the third quarter and nine months ended
September 30, 1997, respectively, relating to stock option exercises and
issuances. The proceeds received for the stock reissued was less than its cost
basis. Accordingly, the difference has been recorded as a reduction to retained
earnings.
The Company offers to its customers lease financing and other services,
including its Totalease program. The Company funds these programs in part
through the sale to financial institutions of rental income streams under the
leases. Resold lease rentals totaling $92.0 million and $66.0 million remain
unbilled at September 30, 1997 and December 31, 1996, 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 its lease programs profitably and on a
substantially current basis, the timing and profitability of lease resales could
impact the Company's business and operating results, particularly in an
environment of fluctuating interest rates and economic uncertainty. If the
Company is required to repurchase rental streams and realize losses thereon in
amounts exceeding its reserves, its operating results will be adversely
affected.
The Company believes that the net proceeds from the Company's proposed
follow-on offering of 3,000,000 shares of Common Stock (pursuant to a
registration statement filed with the Securities and Exchange Commission on
October 31, 1997) and its working capital and credit facilities, together with
cash generated from operations, will be sufficient to develop and expand its
Inter-Tel.net network, to finance acquisitions of additional resellers of
telephony products and other strategic acquisitions or corporate alliances, and
to provide
10
<PAGE>
adequate working capital for at least the next twelve months. 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 the Inter-Tel.net network 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. 10
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"), which is required to
be adopted on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The impact is
expected to result in an increase in primary earnings per share for the third
quarter ended September 30, 1997 and September 30, 1996 of $0.01 and $0.00 per
share respectively. The impact is expected to result in an increase in primary
earnings per share for the nine months ended September 30, 1997 and September
30, 1996 of $0.01 and $0.02 per share respectively. The impact of SFAS No. 128
on the calculation of fully diluted earnings per share for these quarters is not
expected to be material.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. The adoption of SFAS 131 will have no impact
on the Company's consolidated results of operations, financial position or cash
flows.
Factors That May Affect Results of Future Operations
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, including without limitation statements
regarding the Company's expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in this document
are based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements. The
cautionary statements made in this Form 10-Q should be read as being applicable
to all related forward-looking statements wherever they appear in this document.
The Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including those
set forth in the following risk factors and elsewhere in this document. In
evaluating the Company's business, shareholders and prospective investors should
consider carefully the following factors in addition to the other information
set forth in this document.
11
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Rapid Technological Change; Dependence On Recently Introduced Products
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 key factors in the Company's future
success.
During the past twelve months, the Company introduced unified messaging on
its AXXESSORY Talk platform, developed a number of enhancements to its existing
AXXESS and AXXESSORY Talk platforms and introduced Vocal'Net. The Company is
also currently in the later stages of developing the AXXESS 5.0 platform, a
significant software upgrade and enhancement to its AXXESS and AXXESSORY Talk
platforms. The Company's future success will depend, in large part, upon the
timely and successful introduction of the AXXESS 5.0 platform. The Company's
future success will also depend upon market acceptance of the Company's other
new products or enhancements, including Vocal'Net. There can be no assurance
that these introduced products and enhancements will be successful. 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. Further, if the markets for IP network products
or CTI applications fail to develop or grow more slowly than the Company
anticipates, or if the Company is unable for any reason to capitalize on either
of these emerging market opportunities, the Company's business, financial
condition and results of operations could be materially adversely affected.
Occasionally, new products contain undetected program 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. For example, in the third quarter of 1996, the Company's operating
results were adversely impacted by a recall of the Inter-Tel Axxent digital
communication platform. Although the Company seeks to minimize the number of
bugs in its products by its test procedures and 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.
Developing Market for IP Network Telephony; Uncertain Regulatory Environment
The market for IP network voice communications products has only recently
begun to develop, is rapidly evolving and is characterized by an increasing
number of market entrants who have introduced or developed products and services
for Internet or other IP network voice communications. As is typical in the case
of a new and rapidly evolving industry, the demand for and market acceptance of
recently introduced IP network
12
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products and services are subject to a high degree of uncertainty. There can be
no assurance that voice communications over IP networks will become widespread.
Further, even if voice communications over IP networks achieve broad market
acceptance, there can be no assurance that the Company's products, in particular
Vocal'Net, will achieve market acceptance.
The adoption of voice communications over IP networks generally requires
the acceptance of a new way of exchanging information. In particular,
enterprises that have already invested substantial resources in other means of
communicating information may be reluctant or slow to adopt a new approach to
communications. The lack of control over IP network infrastructure and each
user's system configuration may cause users of IP network voice communications
delays in the transmission of speech, loss of voice packets and inferior sound
quality relative to standard telephony networks. If these factors cause the
market for IP network voice communications to fail to develop or to develop more
slowly than the Company anticipates, the Company's IP network telephony products
could fail to achieve market acceptance, which in turn could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The regulatory environment for IP network telephony is subject to
substantial uncertainty. There can be no assurance that the sale and use of IP
network telephony products such as Vocal'Net will not violate telecommunications
or other regulations in any of the countries in which such products are or will
be marketed and used. In the United States, the Company believes that there are
currently few laws or regulations directly applicable to voice communications
over IP networks or to access to, or commerce on, IP networks generally.
However, changes in the regulatory environment, particularly in regulations
relating to the telecommunications industry, could have a material adverse
effect on the Company's business. The increased commercial acceptance of voice
communications over IP networks could result in intervention by governmental
regulatory agencies in the United States or elsewhere in the world under
existing or newly enacted legislation and in the imposition of fees, charges or
taxes on users and providers of products and services in this area. There can be
no assurance that such intervention or imposition of fees, charges or taxes
would not have a material adverse effect upon the acceptance and attractiveness
of IP network voice communications. Moreover, legislative proposals from
international, federal and state government bodies could impose additional
regulations and obligations upon on-line service providers. The growing
popularity and use of the Internet has increased public focus and could lead to
increased pressure on legislatures to impose such regulations. While the Company
is not aware of any other proposed legislation or regulation directly affecting
its business, the Company cannot predict the likelihood that any future
legislation or regulation will be enacted, nor the financial impact, if any, of
such resulting legislation or regulation. In the future, the Company may also
develop and introduce other products with new or additional telecommunications
capabilities or services, which could be subject to existing federal government
regulations or result in the imposition of new government regulations, either in
the United States or elsewhere.
Risks Associated with Vocal'Net; Dependence upon IP Network Infrastructures;
Risk of System Failure; Security Risks
In September 1997, the Company began commercial shipment of Vocal'Net, its
stand-alone IP telephony gateway product and, to date, revenues from the sale of
this product have not been significant. To achieve market acceptance, Vocal'Net
will be required to
13
<PAGE>
demonstrate its functionality, scalability and reliability, of which there can
be no assurance. In addition, there can be no assurance that Vocal'Net will
comply with industry standards or that industry standards will not change and
render Vocal'Net obsolete. In the event that Vocal'Net fails to achieve market
acceptance, the Company's business, financial condition and results of
operations could be materially and adversely affected.
The success of Vocal'Net will also depend upon, among other things, the
continued expansion of the Internet and other IP networks and their network
infrastructures. There can be no assurance that the infrastructure or
complementary products necessary to make the Internet a viable commercial
network will continue to be developed. In addition, there can be no assurance
that IP networks will retain their current volume, distance and
time-of-day-independent pricing structure, or that the costs of access to IP
networks, lack of capacity or poor voice transmission quality of IP networks
will not adversely affect the market for IP network products and services.
Moreover, critical issues concerning the commercial use of the Internet
(including security, reliability, cost, ease of use and access and quality of
service) remain unresolved and may affect the growth of IP network use. There
can be no assurance that the Internet will be able to meet additional demand or
its users' changing requirements on a timely basis, at a commercially reasonable
cost, or at all.
The Vocal'Net gateway can be vulnerable to computer viruses or similar
disruptive problems. Computer viruses or problems caused by third parties could
lead to interruptions, delays or cessation of service. Further, inappropriate
use of the Internet or other IP networks by third parties could potentially
jeopardize the security of confidential information, such as credit card or bank
account information or the content of conversations over the IP network, which
may deter certain persons from ordering and using the Company's products. Until
more comprehensive security technologies are developed, the security and privacy
concerns of existing and potential users may inhibit the growth of IP networks
in general and the market for the Company's IP network products in particular.
Development and Maintenance of Inter-Tel.net Network
The Company is currently utilizing its Vocal'Net technology to develop and
expand its own IP network, Inter-Tel.net, to carry telephone traffic. The
Inter-Tel.net network is in its initial stages of deployment and, accordingly,
is subject to a high degree of risk. To date, the Inter-Tel.net network has
established points of presence in the San Francisco Bay Area, Washington, D.C.,
Chicago, New York, Phoenix and Los Angeles. If the market for IP network
products fails to develop or develops more slowly than the Company anticipates,
the Company's Inter-Tel.net network could become financially burdensome to
maintain or obsolete, either of which could materially and adversely affect the
Company's business, financial condition and results of operations.
The Company is dependent on third-party suppliers of telecommunications and
Internet network transmission services for implementation of Inter-Tel.net and
does not currently have long-term contracts with such suppliers. The Company's
ability to expand Inter-Tel.net is dependent upon its ability to obtain services
from such suppliers. Certain of these third party suppliers are or may become
competitors of the Company, and such suppliers generally are not subject to
restrictions upon their ability to compete with the Company. To the extent that
any of these suppliers raise their rates or change their pricing structure, the
Company may be materially adversely affected. Also, the Company faces the risk
that there will be a disruption in the service provided by these suppliers, and
can give no assurance
14
<PAGE>
that there will not be a significant disruption in such service in the future,
thereby causing a disruption in the services provided by the Company to its
customers.
Moreover, although the Company has devoted, and intends to continue to
devote, substantial resources to improve the quality of telephone conversations
using Vocal'Net and the Inter-Tel.net network, there can be no assurance that
the problems of voice communications over the Inter-Tel.net network that exist
today, including delays in the transmission of speech, loss of voice packets and
sound quality inferior to that of standard telephony networks, will be
eliminated or reduced. In the event that the Company is unable to improve upon
the sound quality and other limitations of voice communications over the
Inter-Tel.net network and to offer such improvements to its customers on a
cost-effective basis, the Inter-Tel.net network could fail to achieve market
acceptance, and the Company's business, financial condition and results of
operations could be materially and adversely affected.
Highly Competitive Industry
The market for the Company's products is highly competitive and in recent
periods has been characterized by pricing pressures and business consolidations.
The Company's competitors include Lucent Technologies, Inc. ("Lucent") and
Northern Telecom Limited ("NorTel"), as well as Comdial Corporation ("Comdial"),
EXECUTONE Information Systems, Inc. ("Executone"), Iwatsu America, Inc.
("Iwatsu"), Mitel Corporation ("Mitel"), NEC Corporation ("NEC"), Nitsuko
Corporation ("Nitsuko"), Matsushita Electric Industrial Co., Ltd. ("Panasonic"),
Siemens Rolm Communications, Inc. ("Siemens"), Toshiba America, Inc. ("Toshiba")
and others. Many of these competitors have significantly greater financial,
marketing and technical resources than the Company. The Company also competes
against the regional Bell operating companies ("RBOCs"), which offer systems
produced by one or more of the aforementioned competitors and also offer Centrex
systems in which automatic calling facilities are provided through equipment
located in the telephone company's central office.
The Telecommunications Act of 1996 (the "Telecommunications Act") and AT&T
Corporation's ("AT&T") announcement to divide itself into three enterprises has
had an impact on competition in the communications industry. The
Telecommunications Act opened the market for telephone and cable television
services, forcing telephone companies to open their networks to competitors and
giving consumers a choice of local phone carriers. Conversely, local phone
companies are now able to offer long distance services. In addition, cable
television companies can offer telephone services and Internet access. These
changes have increased competition in the communications industry and have
created additional competition and opportunities in customer premise equipment,
as these new services and interfaces have become available.
In the market for voice processing applications, including voice mail, the
Company competes against Applied Voice Technology, Inc. ("AVT"), Active Voice
Corporation ("Active Voice"), Centigram Communications Corporation
("Centigram"), Lucent and other competitors, certain of which have significantly
greater resources than the Company. In the market for long distance services,
the Company competes against AT&T, MCI Communication Corporation, Sprint
Corporation and other competitors, many of which have significantly greater
resources than the Company. The Company also expects to compete with RBOCs,
cable television companies, satellite and other wireless broadband service
providers and others for long distance business as those companies
15
<PAGE>
gradually respond to the Telecommunications Act. Key competitive factors in the
sale of telephone systems and related applications include price, performance,
features, reliability, service and support, name recognition and distribution
capability. The Company believes that it competes favorably in its markets with
respect to the price, performance and features of its systems, as well as the
level of service and support that the Company provides to its customers. Certain
of the Company's competitors have significantly greater name recognition and
distribution capabilities than the Company. The Company expects that competition
will continue to be intense in the markets addressed by the Company, and there
can be no assurance that the Company will be able to continue to compete
successfully.
In the market for IP telephony products, the Company competes against
existing IP telephony gateway providers such as Lucent, NetSpeak Corporation,
VocalTec Communications Ltd., Vienna Systems Corporation and others. Several of
these competitors have been active in developing and marketing IP telephony
products for a greater period of time than the Company and have already
established relationships with customers within their market. In addition, the
Company could face significant competition from vendors such as Cisco Systems,
Inc., Bay Networks, Inc., 3Com Corporation, Motorola, Inc. and MICOM
Communications Corp., should such established data vendors choose to enter the
market for IP telephony products. Such companies currently produce products
that, if equipped with voice capabilities, could represent a considerable threat
to the Company within that market. Moreover, should the market for IP telephony
products become fully developed or develop at a rapid rate, large companies such
as IBM Corporation ("IBM") and Microsoft Corporation ("Microsoft") could choose
to develop proprietary software designed to facilitate voice communication over
an IP network.
As the Company enters the markets for local telephone service and IP
network access, it will face additional competition from RBOCs and other
providers, which have larger marketing and sales organizations, significantly
greater financial and technical resources and a larger and more established
customer base than the Company. In addition, RBOCs and other providers have
greater name recognition, more established positions in the market and long
standing relationships with customers. Therefore, there can be no assurance that
the Company will compete successfully in these markets.
Many of the Company's current and potential competitors have longer
operating histories, are substantially larger, and have greater financial,
manufacturing, marketing, technical and other resources. A number also have
greater name recognition and a larger installed base of products than the
Company. Competition in the Company's markets may result in significant price
reductions. As a result of their greater resources, many current and potential
competitors may be better able than the Company to initiate and withstand
significant price competition or downturns in the economy. There can be no
assurance that the Company will be able to continue to compete effectively, and
any failure to do so would have a material adverse effect on the Company's
business, financial condition and operating results.
Management of Growth; Implementation of New Management Information Systems
The growth in the Company's business has placed, and is expected to
continue to place, a significant strain on the Company's personnel, management
and other resources. The Company's ability to manage any future growth
effectively will require it to attract, train, motivate and manage new employees
successfully, to integrate new employees into
16
<PAGE>
its overall operations and to continue to improve its operational, financial and
management information systems.
The Company implemented a new MIS system late in 1995. The MIS system
significantly affected many aspects of the Company's business, including its
accounting, operations, purchasing, sales and marketing functions. Following the
date of implementation, the Company experienced difficulty with the new MIS
software, which increased the Company's costs, had an adverse effect on the
Company's ability to provide products and services to its customers on a timely
basis and caused delays in coordinating accounting and financial results. During
the fourth quarter of 1996, the Company determined that the limitations of the
existing system software would prevent Inter-Tel from establishing an integrated
and centralized dispatch and telemarketing center. As a result, the Company
signed an agreement with a large, established software and database vendor to
replace its existing MIS software and implement, maintain and support alternate
MIS software to be utilized throughout the Company. Accordingly, during the
fourth quarter of 1996, the Company wrote off the software license and
implementation costs relating to the system software being replaced.
The actions to replace the MIS software could result in additional costs
and delays associated with obtaining a fully functional MIS system, including
but not limited to the costs of procuring additional or alternate hardware and
software required but not available in the current system configuration, and
additional personnel. Any such cost or delay could have a material adverse
effect on the Company's business, financial condition and operating results. In
addition, implementation of this system software and the transition from the
current system software to the new information system software will require
substantial financial resources, time and personnel.
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 its respective
suppliers or customers. Further, there can be no assurance that the Company will
be able to successfully integrate any 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, financial
condition and operating results.
Dependence Upon Contract Manufacturers and Component Suppliers
The Company currently procures certain components used in its digital
communication platforms, including certain microprocessors, integrated circuits,
power supplies, voice processing interface cards and IP telephony cards from a
single source or limited sources of supply and, accordingly, product
availability could be limited. As the Company deploys its IP telephony products
and the Inter-Tel.net network, the Company expects that it will be required to
increasingly rely upon third party software and hardware suppliers. 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.
17
<PAGE>
Varian Associates, Inc. ("Varian") currently manufactures a significant portion
of the Company's products at Varian's Tempe, Arizona facility, including
substantially all of the printed circuit boards used in the AXXESS and Inter-Tel
Axxent digital communication platforms. From time to time, the Company has
experienced delays in the supply of components and finished goods, and there can
be no assurance that the Company will not experience such delays in the future.
The Company's reliance on third party manufacturers involves a number of
additional risks, including reduced control over delivery schedules, quality
assurance and costs. Any delay in delivery or shortage of supply of components
or finished goods from Varian or any other supplier, or the Company's inability
to develop in a timely manner alternative or additional sources if and when
required, could damage the Company's relationships with current and prospective
customers and could materially and adversely affect the Company's business,
financial condition and operating results. The Company has no long term
agreements with its suppliers that require such 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.
Product Protection and Infringement
The Company's future success will depend in part upon its proprietary
technology. Although the Company has applied to the U.S. Patent and Trademark
Office for a patent related to certain aspects of the Vocal'Net technology, the
Company currently has no issued 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 patent, trademark or copyright
owned by the Company will not be invalidated, circumvented or challenged or that
the rights granted thereunder will provide meaningful protection or any
commercial competitive advantage 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 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, financial
condition 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. Any such litigation could require the Company to expend
significant sums, divert management's attention and require the Company to pay
significant damages, develop non-infringing technology or acquire licenses to
the technology which is the subject of the asserted infringement, any of which
could have a material adverse effect on the Company's business, financial
condition 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
18
<PAGE>
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 foreclosed.
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 exclusive agreements with any of its
dealers. 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, financial condition and
operating results.
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.
Risks of Providing Long Distance and Network Services
Inter-Tel depends on its 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 to provide
network services to the Company's customers and for billing information. Long
distance services are subject to extensive and uncertain governmental regulation
on both the federal and state level. There can be no assurance that the
promulgation of certain regulations will not materially and adversely affect the
Company's business, financial condition and operating results. Contracts with
the long distance carriers from which the Company currently resells services
typically have a one year term in which the Company's prices are relatively
fixed and have minimum use requirements. The market for long distance services
is currently experiencing and is expected to experience in the future
significant price competition, resulting in decreasing end-user rates. 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 services depends upon 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 provide telecommunications services
and billing information 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
19
<PAGE>
sold, mix of distribution channels, general economic conditions, patterns of
capital spending by customers, the timing of new product announcements and
releases by the Company and its competitors, pricing pressures, the cost and
effect of acquisitions, and the availability and cost of products and components
from the Company's suppliers. The Company's customers typically require
immediate shipment and installation of platforms and software. As a result, the
Company has historically operated with a relatively small backlog, and sales and
operating results in any quarter are principally dependent on orders booked and
shipped in that quarter. Historically, a substantial portion of the Company's
net sales in a given quarter have been recorded in the third month of the
quarter, with a concentration of such net sales in the last two weeks of the
quarter. Market demand for investment in capital equipment such as digital
communication platforms and associated call processing and voice processing
software applications is largely dependent on general economic conditions, and
can vary significantly as a result of changing conditions in the economy as a
whole. The Company's expense levels are based in part on expectations of future
sales and, if sales levels do not meet expectations, operating results could be
adversely affected. Because sales of digital communication platforms through the
Company's dealers produce lower gross margins than sales through the Company's
direct sales organization, operating results have varied, and will continue to
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, which have lower gross margins than the Company's core
business, have grown in recent periods at a faster rate than the Company's
overall net sales. As a result, gross margins could be adversely affected in the
event that long distance calling services continue to increase as a percentage
of net sales. In addition, the Company is subject to seasonality in its
operating results, as net sales for the first and third quarters are frequently
less than those experienced, in the fourth and second quarters, respectively. As
a result of these and other factors, the Company has in the past experienced,
and could in the future experience, fluctuations in sales and operating results
on a quarterly basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Volatility of Stock Price
The market price for the Company's Common Stock has been highly volatile.
The Company believes that factors such as announcements of developments relating
to the Company's business, fluctuations in the Company's operating results,
shortfalls in revenue or earnings relative to securities analysts' expectations,
announcements of technological innovations or new products or enhancements by
the Company or its competitors, general conditions in the telecommunications
industry or the worldwide economy, changes in legislation or regulation
affecting the telecommunications industry, an outbreak of hostilities,
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.
20
<PAGE>
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than three years, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. Although the Company currently offers software
products that are designed to be Year 2000 compliant, there can be no assurance
that the Company's software products contain all necessary date code changes.
The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues in a variety of ways.
Many companies are expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase software products such as those offered
by the Company. Many potential customers may also choose to defer purchasing
Year 2000 compliant products until they believe it is absolutely necessary, thus
resulting in potentially stalled market sales within the industry. Conversely,
Year 2000 issues may cause other companies to accelerate purchases, thereby
causing an increase in short-term demand and a consequent decrease in long-term
demand for software products. Additionally, Year 2000 issues could cause a
significant number of companies, including existing customers of the Company, to
reevaluate their current communications platform, IP network telephony or voice
processing software needs, and as a result consider switching to other systems
or suppliers. Any of the foregoing could result in a material adverse effect on
the Company's business, financial condition and operating results.
Concentration of Ownership
As of September 30, 1997, Steven G. Mihaylo, the Company's Chairman of the
Board of Directors and Chief Executive Officer beneficially owned approximately
23.4% of the outstanding shares of the Common Stock. As a result, he has the
ability to exercise significant influence over 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.
21
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM l. LEGAL PROCEEDINGS--Not Applicable
ITEM 2. CHANGES IN SECURITIES--Not Applicable
ITEM 3. DEFAULTS ON SENIOR SECURITIES--Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
HOLDERS - Not Applicable
ITEM 5. OTHER INFORMATION -- Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
Exhibit 11.1 - Computation of Earnings Per Share
Exhibit 27.1 - Financial Data Schedule for September 30, 1997
Reports on Form 8-K -- None
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 11-7-97 /s/ Steven G. Mihaylo
--------- ------------------------------------
Steven G. Mihaylo, Chairman of the
Board and Chief Executive Officer
Date 11-7-97 /s/ Kurt R. Kneip
--------- ------------------------------------
Kurt R. Kneip, Vice President and
Chief Financial Officer
22
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (1)
<TABLE>
<CAPTION>
(Thousands except Three Months Nine Months
per share amounts) Ended September 30, Ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 23,397 25,858 24,912 25,744
Net effect of dilutive stock
options--based on the
treasury stock method using
average market price 1,752 1,028 1,123 1,026
------- ------- ------- -------
TOTAL 25,149 26,886 26,035 26,770
======= ======= ======= =======
Net income $ 3,978 $ 2,689 $10,072 $ 8,372
======= ======= ======= =======
Per share amount $ 0.16 $ 0.10 $ 0.39 $ 0.31
======= ======= ======= =======
FULLY DILUTED
Average shares outstanding 23,397 25,858 24,912 25,744
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 2,243 1,052 2,243 1,052
------- ------- ------- -------
TOTAL 25,640 26,910 27,155 26,796
======= ======= ======= =======
Net income $ 3,978 $ 2,689 $10,072 $ 8,372
======= ======= ======= =======
Per share amount $ 0.16 $ 0.10 $ 0.37 $ 0.31
======= ======= ======= =======
</TABLE>
(1) All share and per share information in this schedule have been adjusted for
the Company's two for one stock split effected in the form of a stock dividend,
distributed on October 21, 1997 to shareholders of record on October 7, 1997.
23
<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, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 22188
<SECURITIES> 0
<RECEIVABLES> 34988
<ALLOWANCES> 3817
<INVENTORY> 24173
<CURRENT-ASSETS> 92981
<PP&E> 34166
<DEPRECIATION> 18032
<TOTAL-ASSETS> 125282
<CURRENT-LIABILITIES> 30775
<BONDS> 0
0
0
<COMMON> 60473
<OTHER-SE> 19070
<TOTAL-LIABILITY-AND-EQUITY> 125282
<SALES> 162061
<TOTAL-REVENUES> 162061
<CGS> 89191
<TOTAL-COSTS> 89191
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> 16870
<INCOME-TAX> 6798
<INCOME-CONTINUING> 10072
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10072
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.37
</TABLE>
