UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number:
December 31, 1996 0-10211
INTER-TEL, INCORPORATED
Incorporated in the State of Arizona I.R.S. No. 86-0220994
120 North 44th Street, Suite 200
Phoenix, Arizona 85034-1822
(602) 302-8900
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(12,951,163 shares outstanding as of March 14, 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 period 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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (S 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K - [ ].
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the last reported sales price in NASDAQ National
Market System on March 14, 1997, was approximately $149,000,000 Shares of Common
Stock held by each executive officer and director have been excluded in that
such persons may be deemed to be affiliates.
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Materials have been incorporated by reference into this Report from the
following documents: (1) materials from the registrant's Proxy Statement
relating to its 1997 Annual Meeting of Shareholders have been incorporated by
reference into Part III and Part IV and (2) documents from the registrant's Form
S-1 Registration Statements (Nos. 2-70437 and 33-70054), Form S-3 Registration
Statements (Nos. 33-58161, 33-61437, 333-01735 and 333-12433), Form S-8
Registration Statements (Nos. 2-94805, 33-40353 and 33-73620), Annual Reports on
Form 10-K for the years December 31, 1984, 1988 and 1994, and current reports on
Form 8-K dated July 17, 1987, August 3, 1988 have been incorporated by reference
into Part IV, Item 14. Portions of the Annual Report to Shareholders for the
year ended December 31, 1996 are incorporated by reference into Part II.
INTER-TEL, INCORPORATED
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
Item 1 Business 3
Item 2 Properties 20
Item 3 Legal Proceedings 21
Item 4 Submission of Matters to a Vote
of Security Holders 21
PART II
Item 5 Market for the Registrant's Common Stock
and Related Stockholder Matters 21
Item 6 Selected Financial Data 21
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
Item 8 Financial Statements and Supplementary Data 21
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 21
PART III
Item 10 Directors and Executive Officers of the Registrant 21
Item 11 Executive Compensation 22
Item 12 Security Ownership of Certain Beneficial Owners and Management 22
Item 13 Certain Relationships and Related Transactions 22
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 22
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PART I
ITEM 1. BUSINESS
The Company
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Readers are cautioned that such statements are only
predictions and involve risks and uncertainties. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the risk factors set forth under "Factors That May Affect Results of Future
Operations" below and elsewhere in this report.
Inter-Tel, incorporated in Arizona in 1969, is a single point of
contact, full service solutions integrator providing AXXESS and Axxent digital
business communication platforms, AXXESSORY Talk voice processing platforms,
call processing and voice processing software along with various other
productivity enhancing software applications, computer telephone integration,
and network services and long distance calling services, as well as maintenance,
leasing and support services. The Company's Common Stock is quoted on the Nasdaq
National Market System under the symbol INTL.
The Company has developed a distribution network of direct sales
offices, dealers and value added resellers (VARs) which sell the Company's
products to small-to-medium-size organizations and to divisions or departments
of larger organizations, including Fortune 500 companies, large service
organizations and governmental agencies. The Company has 29 direct sales offices
in the United States, one in the United Kingdom, one in Japan and a network of
hundreds of dealers and VARs who purchase directly from the Company. The Company
is also in the process of expanding its international dealer network.
The Company's strategy is to offer to its customers, through a broad
distribution network, the total solution for their communications needs--a
single source for their full range of telephony requirements, and to provide to
its market segment, on a cost-effective basis, advanced technologies that have
achieved acceptance in the market for larger systems.
Products and Services
The Company's current and planned products and services span the
following portions of its market segment:
o Digital Communication Platforms
o Computer Telephone Integration
o Voice Processing Software
o Internet Connectivity
o Networking Technologies
o Network and Long Distance Services
o Flexible Financing
The market for the Company's products and services is characterized by
rapid technological change and continuing demand for new products, features and
applications. See "Factors That May Affect Results of Future Operations -- Rapid
Technological Change and Dependence on New and Timely Product Introductions."
Digital Communication Platforms
Inter-Tel offers an extensive line of digital communication systems,
including hardware platforms and C++ software applications, which meet the
requirements of most businesses. Because these platforms are based upon open
architecture and conform to established computer
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and telephone industry standard programming interfaces and protocols (such as
TAPI, TSAPI and TCP/IP), customers can choose from a variety of either
system/server level or desktop applications. In addition, advanced digital
technology, such as T-1 and ISDN services, are used with Inter-Tel's platforms
to provide some of the best communication services available.
Inter-Tel's flagship product, the AXXESS platform, incorporates
advanced technology for computer and telephone integration providing businesses
with the ability to customize applications to enhance their operations and
increase productivity.
Future enhancements to the current AXXESS platform will allow the
system to accommodate virtually any size requirement. Through fully transparent
digital networking, two or more systems can operate as one, supporting several
thousand devices.
Another product reflective of Inter-Tel's evolution toward server-based
technologies is the Call Server. Designed as a Windows NT telephony server, it
incorporates AXXESS call processing software, with its powerful call processing
features and CTI potential, plus selected Internet services and unified
messaging software all in one computer industry standard X86 server. The
Vocal'Net will use both proprietary Inter-Tel digital terminals and single line
telephones. The Vocal'Net server is designed for medium to large businesses. It
allows for better management of data and telecommunications networks while
providing integrated TCP/IP intranet and Internet voice connectivity.
AXXESS
The Company commenced commercial shipments of the AXXESS system and
software in the fourth quarter of 1993. In 1996, the Company released AXXESS
version 4.1, which expanded the system to 512 ports and added such advanced
capabilities as primary rate ISDN support, integrated call recording, voice
prompts in multiple languages, and a Windows 95-based Attendants Console.
The system incorporates fully-digital processing and transmission to
the desktop and open architecture interfaces which allow the system to be
integrated with and controlled by attached computers such as PCs and
workstations. The system incorporates over one million lines of proprietary,
object-oriented C++ software developed by the Company, which facilitates
upgrades and incorporation of additional features and functionality.
AXXESS system telephones incorporate user-friendly, 6 by 16 character
LCD displays with menu keys that permit the user to select from multiple menu
choices or access additional menu screens. AXXESSORY Talk, the integrated voice
processing application, permits push-button selection of voice processing
commands to appear on the telephone's LCD display, as well as voice-prompted
selections through the telephone keypad. The AXXESS system is multi-lingual,
offering English or Japanese voice prompts and LCD displays and allowing the
user to switch from one language to the other. Additional languages can be added
in the future.
The open architecture interface permits tight integration with a PC or
workstation system bus, using several industry-standard interfaces to provide
efficient access to voice processing and other applications on the PC or
workstation. Applications include database look-up (which utilizes Caller-ID
information to retrieve customer information automatically from a computerized
database), automated attendant, interactive voice response, automatic call
distribution (which queues and prioritizes incoming calls), and call accounting
(which permits the monitoring of telephone usage and toll cost). The AXXESS
system is managed through a
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Microsoft Windows-based graphical user interface on a PC to facilitate
installation, system configuration and programming.
The AXXESS system utilizes advanced software to configure and utilize
real-time digital signal processing ("DSP") semiconductor components
incorporated into the system hardware. The use of DSPs and related software
lowers system costs, permits higher functionality and increases system
flexibility. For example, DSPs can be configured by the system manager for
different combinations of speakerphones, conference capabilities and other
DSP-based facilities. The system's speakerphones incorporate full-duplex
technology, which permits speakerphones to transmit in both directions at the
same time without the necessity to override one speaker's voice to prevent
feedback interference.
The AXXESS software is written in a high-level, object-oriented
language which can operate on many commonly used processors. Accordingly, the
software can be readily ported to other hardware platforms. The Company intends
to port the AXXESS software to faster microprocessors which will permit the
AXXESS to grow to a much larger size, in order to enhance the functionality and
performance of these larger systems and to permit a migration path from the
smaller AXXESS system as a customer's system requirements increase.
Inter-Tel Axxent
The Company introduced its newest product line, the Inter-Tel Axxent,
in the third quarter of 1995. The system originally supported 16 lines and 8
trunks. Software version 2.0, released in third quarter 1996, increased the
system capacity to 24 lines and 12 trunks. Small businesses are demanding
advanced telephony applications formerly reserved only for large corporations.
The Inter-Tel Axxent is designed to bring many of the advanced features and
functionality of the AXXESS system to smaller installations on a cost-effective
basis while enabling users to migrate to an AXXESS system as their
telecommunications needs evolve. The Inter-Tel Axxent provides capabilities such
as computer telephone integration, DSP technology, real-time ACD reporting, and
integrated voice processing. Housed in a compact PC type mid-tower, the
Inter-Tel Axxent platform also offers the convenience of a default database so
the system is fully operational as soon as it is plugged in. Basic database
programming can also be performed through the digital telephone terminals. The
system is sold through direct sales offices and direct dealers to professional
businesses such as doctors, lawyers, and architects.
In addition to its line of digital communication platforms, the Company
continues to have success in its direct sales offices and dealer distribution
channels with its traditional IMX and G-Series family of products. These
products economically bring advanced communication services to the Company's
customers, however, without the advantages of the open architecture capabilities
of the AXXESS and Inter-Tel Axxent. These products include:
o GLX and GLX+
o GMX-48
o IMX 1224/2448/2460
o IMX/GMX 256
o IMX/GMX 416/832
Inter-Tel also distributes other leading telecommunications products
from its Factored Products Division through its direct sales offices, dealers
and VARs. Factored Products represents products that Inter-Tel has endorsed as
the leading communications peripherals utilized in many day-to-day functions.
Businesses require telecommunications products to provide increased
productivity, ease of operations and reliability. Many of these products
interface with
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Inter-Tel telephone systems. Inter-Tel's product selection consists of
videoconferencing, battery backup, headsets, surge protection, paging equipment,
wireless communications and data multiplexers.
Computer Telephone Integration (CTI)
Through Computer Telephone Integration (CTI), two of the most important
business tools--the computer and the telephone--are linked into one environment
to provide streamlined business processes and enhanced customer service.
With CTI technology and Inter-Tel's industry-standard communication
platforms and C++, object oriented, call processing software, users can be
better prepared to answer incoming telephone calls. With Inter-Tel's AXXESSORY
Connect software for the AXXESS system and local Caller I.D. information, users
can accept phone calls through their desktop PC. Caller information can appear
on the screen even before the call is answered. On an individual desktop or a
company-wide network basis, Inter-Tel offers a variety of products, such as
AXXESSORY ACD, that can manage automatic call distribution at peak efficiency or
route incoming telephone calls, based on various parameters, to a specific
person. It can also collect, analyze and report real-time call processing
information for staff forecasting and analysis.
Certain of Inter-Tel's software applications can also integrate with
other "off-the-shelf" Windows applications such as personal information
managers, call routing or call management software that can further enhance
customer service while increasing call efficiency and employee productivity.
Inter-Tel has partnered with a number of third party software developers to
integrate with their existing applications to create a working environment for
database, personal organizer, or terminal emulation programs.
If these "off-the-shelf" applications do not completely meet the needs
of a customer, the open design of Inter-Tel's software allows independent
software developers to write custom applications through Inter-Tel's Developer's
Program. Or, Inter-Tel's CTI Solutions Group can provide professional consulting
services or development of individual customer applications, for either desktop
or Local Area Network ("LAN")-based applications.
Call management applications that were once reserved for large call
centers, such as airline reservation centers or banking operations, are now
available and affordable from Inter-Tel for most businesses. The Company intends
to design future enhancements to integrate LAN-based solutions on a Windows NT
Server.
Voice Processing Software
Inter-Tel's AXXESSORY Talk, Axxent Talk, and the IVX500 are all voice
processing platforms that work with Inter-Tel's communication platforms. All
three applications use the Multi-Vendor Interface Protocol (MVIP), an industry
standard for connecting multi-vendor PC-based boards in voice processing, data
switching and video systems.
Future enhancements to AXXESSORY Talk, the voice processing software
for the AXXESS platform are planned, including the ability to program and
schedule multiple voice mail greetings, cancel unheard messages, detect and
route incoming faxes to a specific extension and the ability to automatically
return a call from voice mail by using Caller I.D.
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As the need to merge different types of messages continues to evolve,
Inter-Tel is developing unified messaging software, scheduled for release in the
third quarter of 1997. By using standard electronic mail gateway technology,
Inter-Tel's unified messaging software will be designed to enable the
integration of all types of messages into a single user interface on a PC,
supporting internet e-mail and major electronic mail packages including
Microsoft Mail, Microsoft Exchange, Lotus Notes and cc:Mail. Integrating e-mail,
fax and voice mail through one message management interface at both the PC and
the phone could allow users to easily see and control all different types of
messages that have been received.
Inter-Tel is developing unified messaging software to work in
conjunction with the Microsoft Exchange messaging application, included with
Windows 95 as well as Microsoft's new Outlook product. Inter-Tel's unified
messaging 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.
Inter-Tel's unified messaging software should provide yet another means
for improving workplace productivity and retrieving messages anywhere from a
phone or a PC connected to a modem.
Internet Connectivity
With the advent of Internet telephony, more companies are relying on
the Internet for the delivery of streamlined marketing, sales and customer
support, as well as affordable alternatives to fax, express mail and other forms
of global communications. In 1996, Inter-Tel developed the Vocal'Net Server.
The Vocal'Net Server, scheduled for commercial release in the summer of
1997, is a stand-alone Internet telephony solution available for use with the
AXXESS system or virtually any business telephone system equipped with T-1
capability. It provides a gateway for bridging the public telephone network and
a company's intranet or the Internet. With the Vocal'Net Server, users will be
able to conduct real-time, full-duplex, high-quality, two-way voice
communications over the Internet, for potential savings compared to standard
long distance phone service. Designed to meet the needs of most businesses, the
Vocal'Net Server will be available in multiple port sizes.
The Vocal'Net Server does not require customized telephone sets or
specialized software and cards in each desktop computer. Furthermore, the
Vocal'Net Server does not rely on the central processing unit of the computer
for the compression or packetization of information. Therefore, the server may
be able to handle additional functions as well.
Because Internet telephony converts all transmissions to the same type
of packets, both voice and data can use the same data circuits, thereby reducing
backlog on the data circuits and increasing efficiency. Bandwidth is maximized
to a point that some users may be able to reduce the overall number of circuits
needed.
The Vocal'Net Server is designed to allow businesses to create virtual
offices, enabling traveling or off-site employees to connect to the main office
from anywhere in the country or the
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world. All that is needed is a laptop computer and the number of a local
Internet Service Provider to receive multimedia messages and to place calls over
the Internet. Another application is "Touch-To-Talk" telephony-enabled web
pages, which allows users to automatically connect over the Internet to talk to
customer service agents.
In its initial commercial release scheduled for mid-1997, the Vocal'Net
Server will be designed to work with business telephone systems that support E&M
signaling over T-1 lines and to handle up to 24 simultaneous calls, offering
advanced Internet telephony technology. Future planned enhancements will include
industry standard compatibility (H.323) for integration with PC-based software
applications and other types of gateways as well as a fax gateway to provide fax
and broadcast fax capabilities across the Internet.
Networking Technologies
To develop a solid foundation for state-of-the-art data and
telecommunications networking, customers require strategic network expertise
from their networking provider. Designing, installing and supporting the
complete integration of a customer's complex data and telecommunications
network, from land-based LANs to geographically dispersed Wide Area Networks
(WANs), is a key goal of Inter-Tel.
By forming alliances with major manufacturers of hardware and software
technologies, Inter-Tel is working to provide the routers, ATM, LAN and WAN
switches, file servers, intelligent hubs and any other device required for the
customer's intranet or for usage of the Internet. Pre-sale design support,
project coordination for implementation, and installation support are offered on
the full line of Inter-Tel server-based telephony products and services.
Network and Long Distance Services
The enactment of the Telecommunications Act of 1996 greatly impacted
both the telecommunications industry and NetSolutions, Inter-Tel's network and
long-distance services provider, by opening telecommunications markets to local
and private carriers.
Working with domestic and international carriers, Inter-Tel
NetSolutions offers a wide range of voice, data and video services. Using
state-of-the-art technology, such as digital fiber optics, NetSolutions offers
services that include domestic and international long distance, dedicated
services such as frame relay and private line circuits, and pre-paid and
traditional calling cards.
Call centers using T-1 access for incoming toll-free traffic, sales
offices using NetSolutions' switched long distance or companies linking multiple
offices throughout the country on a frame relay network are examples of the
applications currently supported by Inter-Tel NetSolutions. Whether it is
toll-free service or WAN design, Inter-Tel NetSolutions is capable of handling a
broad spectrum of telecommunications needs.
Inter-Tel NetSolutions intends to offer local service, Internet access
and wireless products, thus continuing Inter-Tel's evolution as a total solution
provider. However, these services are not currently provided, and there can be
no assurance that the Company will be able to provide these services in the
future.
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Flexible Financing
An integral part of bringing the total solution to the customer is to
provide a range of affordable financing programs in one flexible and convenient
package. With Inter-Tel, customers can acquire their telephony and computer
platforms, software applications and network services, as well as financing, all
from a single source.
Inter-Tel's Totalease program provides qualified customers with that
total solution for their telephony products. 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, all at a fixed
monthly cost. With Totalease, Inter-Tel manages the responsibilities and risks
associated with ownership of communications equipment.
Inter-Tel also offers a 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 will customize financing packages to
suit customers with special financial needs. By offering this type of financing
to acquire Inter-Tel products and services, Inter-Tel provides the customer with
the comfort of predictable monthly costs and the security of a direct, long term
relationship with Inter-Tel.
Sales and Distribution
The Company has developed a broad distribution network of direct sales
offices, dealers and value added resellers (VARs) which market the Company's
products to small to medium size organizations and divisions or departments of
larger organizations. In the United States, the Company has 29 direct sales
offices and a network of hundreds of dealers who purchase systems directly from
the Company. Direct dealers are typically located in geographic areas in which
the Company does not maintain direct sales offices. The Company is additionally
pursuing distribution of its products through value added resellers (VARs).
These resellers have traditionally sold complex data solutions to customers, and
the Company is seeking to leverage this distribution network to capitalize on
the merging of the computer and telephony industries. The Company maintains a
dealer support office and direct sales office in the United Kingdom and has a
network of approximately 20 dealers in the United Kingdom and Europe. In
addition, in 1993 the Company opened a dealer support office and direct sales
office in Japan and is in the process of establishing dealers in Asia.
The Company believes that its success depends in part upon the strength
of its distribution channels and the ability of the Company to maintain close
access to its end user customers. In recent periods, the Company has sought to
improve its access to end user customers by effecting strategic acquisitions of
resellers of telephony products and services in markets in which the Company has
existing direct sales offices and in other strategic markets. To this end, in
1996 the Company acquired Florida Telephone Systems, Inc. and NTL Corporation
(dba ComNet of Ohio). The Company has expanded its direct sales office personnel
from a total of 332 persons at December 31, 1992 to a total of 795 at December
31, 1996.
The Company's sales through its direct sales offices as a percentage of
total sales have decreased from 62.1% of net sales in 1993 to 56.4% of net sales
in 1996. Sales to distributors, dealers, and VARs have increased from 29.6% of
net sales in 1993 to 31.5% of net sales in 1996. Sales through the Company's
long distance and network services operation have increased from 0.7% of net
sales in 1993 to 6.5% of net sales in 1996.
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Sales of systems through the Company's direct dealers typically
generate lower gross margins than sales through the Company's direct sales
organization, although direct sales typically require higher levels of sales,
marketing, general and administrative expenses. Accordingly, the Company's
margins may vary from period to period depending upon the mix of dealer and
direct sales. Direct dealers and VARs typically enter into non-exclusive
reseller contracts for a term of one or more years. The Company generally
provides support and other services to the reseller pursuant to the terms of the
agreement. The agreements often include requirements that the reseller meet or
use its best efforts to meet minimum annual purchase quotas. The Company's
experience is that dealers and VARs maintain low inventories of the Company's
products and, accordingly, the Company has experienced insignificant stock
rotation returns and price protection credits to date.
International sales, which to date have been made through the Company's
United Kingdom and Japan subsidiaries, accounted for approximately 1.5%, of net
sales in 1996. In order to sell its products to customers in other countries,
the Company must comply with local telecommunications standards. The Company's
AXXESS system can be readily altered through software modifications, which the
Company believes will facilitate compliance with these local regulations. The
Company had previously experienced delays in the United Kingdom in achieving
final regulatory approval of its products; however, approvals were received
during 1996 to market and sell the Company's digital product lines. In addition,
the AXXESS system has been designed to support multi-lingual functionality, and
currently supports English and Japanese. The Company is presently establishing
dealer networks in Japan and Asia and is working to expand its dealer network in
the United Kingdom and Europe.
Research and Development
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, the development of an
Internet voice server (Vocal'Net server), and the development of a LAN-based
Communications Server incorporating the Company's Call Processing and Voice
Processing software. New applications under development also include Basic Rate
ISDN, telecommunications networking, and unified messaging software. The
software-based architecture of the AXXESS system facilitates maintenance and
support, upgrades, and incorporation of additional features and functionality.
The Company had a total of 95 personnel engaged in research and
development as of December 31, 1996. Research and development expenses were
$6,581,711, $5,763,517 and $4,536,882 for 1996, 1995 and 1994, respectively.
Manufacturing
The Company manufactures substantially all of its systems through third
party subcontractors located in the United States, China and the Philippines.
These subcontractors use both standard and proprietary integrated circuits and
other electronic devices and components to produce telephone switches,
telephones and printed circuit boards to the Company's engineering
specifications and designs. The suppliers also inspect and test the equipment
before delivering them to the Company, which in some cases then performs systems
integration, software loading, final testing and shipment. The Company maintains
written
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agreements with its principal suppliers. The Company provides a forecast
schedule to its suppliers and revises the forecast on a periodic basis.
Foreign manufacturing facilities are subject to changes in governmental
policies, imposition of tariffs and import restrictions, and other factors
beyond the Company's control. Certain of the microprocessors, integrated
circuits and voice processing interface cards used in the Company's systems are
currently available from a single or limited sources of supply. From time to
time, the Company experiences delays in the supply of components and finished
goods. Delay or lack of supply from existing sources or the inability to develop
alternative sources if and when required in the future could materially and
adversely affect operating results.
Customer Service and Support
The Company believes that customer service and support is a critical
component of customer satisfaction and the success of the Company's business.
The Company operates a Technical Support "hotline" to provide a range of
telephone support to its distributors, dealers and end user customers through a
toll-free number. The Company also provides on-site customer support and,
through remote diagnostic procedures, has the ability to detect and correct
system problems from its Technical Support facilities.
Information taken from customer call records allows feedback into
Inter-Tel's Quality First continuous improvement process, thus providing a road
map for continuous product and service enhancements. Each direct sales office is
given a periodic service activity report summarizing the reasons that
technicians are asking for assistance and common issues that give rise to
technical inquiries. This allows them to analyze trends in their service
operations and provide better customer service.
Quality
The Company believes that the quality of its systems, customer service
and support, and other aspects of its organization is a critical element of
meeting the needs of its customers. Through its Quality First continuous
improvement process initiated in 1991, Inter-Tel implements quality processes
throughout its business operations. The Company has established formal
procedures to ensure responsiveness to customer requests, to monitor response
times and to measure customer satisfaction. The Company has also established
means by which all end users, including customers of the Company's resellers,
can make product enhancement requests directly to the Company. The Company
supports its dealers and VARs through an extensive training program at the
Company's facility and at dealer sites, a toll-free telephone number for sales
and technical support, and the provision of end user marketing materials. The
Company typically provides a one year warranty on its systems to end users. In
manufacturing, the Company continuously monitors the quality of the products
produced on its behalf by the Company's manufacturing subcontractors, and is
extending the Company's Quality First continuous improvement process to its
suppliers.
Competition
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 (formerly
AT&T) and NorTel (formerly Northern Telecom), as well as Comdial, Executone,
Iwatsu, Mitel, NEC, Nitsuko, Panasonic, ROLM, Toshiba and others. Many of these
competitors have significantly greater financial, marketing and technical
resources than the Company. The Company also competes against the
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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 Telecommunication Act of 1996 and AT&T's announcement to divide
itself into three enterprises has had an impact on competition in the
communication industry. The Telecommunication Act of 1996 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 companies can offer telephone services and Internet
access. These changes will increase competition in the communication industry
and will create additional competition and opportunities in customer premise
equipment as these new services and interfaces become available.
In the market for voice processing applications, including voice mail,
the Company competes against Centigram Communications Corporation, Octel
Corporation, AVT 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, US Sprint and other competitors, many of
which have significantly greater resources than the Company. With the recent
Telecommunications Act, the Company will also compete with RBOCs and cable
companies for long distance business. Key competitive factors in the sale of
telephone systems and related applications include performance, features,
reliability, service and support, name recognition, distribution capability and
price. The Company believes that it competes favorably in its markets with
respect to the performance, features and price 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, although the Company believes that
it has developed a competitive distribution presence in certain markets,
particularly those where the Company has direct sales offices. 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.
As the Company enters the markets for local telephone service and
Internet 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.
To the extent that Inter-Tel develops more server-based
telecommunications products, Inter-Tel's competition will be the large computer
software companies, such as IBM (Lotus), and Microsoft. In addition, the
server-based telephony market has shown increasing competition from small
software start-up companies.
Intellectual Property Rights
In addition to the factors discussed above, the Company's ability to
compete successfully depends on its ability to protect the proprietary
technology contained in its products. The Company relies principally upon a
combination of copyright and trade secret laws and contractual provisions to
establish and protect its proprietary rights in its systems. The Company
generally enters into confidentiality agreements with its employees and
suppliers, and limits access to its proprietary information. There can be no
assurance that these protections will be adequate to deter misappropriation of
the Company's technologies or independent third party development of similar
technologies or product features.
12
<PAGE>
From time to time, the Company is subject to assertions that the
Company's products infringe the intellectual property rights of third parties.
Such claims could require the Company to expend significant sums in litigation,
could require the Company to pay damages, and could require the Company to
develop non-infringing technology or to acquire licenses to the technology which
is the subject of the claimed infringement.
Employees
As of December 31, 1996, the Company had a total of 1,193 employees, of
whom 972 were engaged in sales, marketing and customer support, 58 in quality,
manufacturing and related operations, 95 in research and development, and 68 in
finance and administration. The Company's future success will depend upon its
ability to attract, retain and motivate highly qualified employees, who are in
great demand. The Company believes that its employee relations are excellent.
Factors That May Affect Results of Future Operations
In evaluating the Company's business, prospective investors should
carefully consider the following factors in addition to the other information
presented in this Form 10-K.
Rapid Technological Change and Dependence on New and Timely Product
Introductions
The market for the Company's software, products and services is
characterized by rapid technological change and continuing demand for new
products, features and applications. Current competitors or new market entrants
may develop new products or product features that could adversely affect the
competitive position of the Company's products. Accordingly, the timely
introduction of new products and product features, as well as new
telecommunications applications, will be a key factor in the Company's future
success. Occasionally, new products contain undetected errors or "bugs" when
released. Such bugs may result from defects contained in software products
offered by the Company's suppliers or other third parties that are intended to
be compatible with the Company's products, over which the Company has little or
no control. Although the Company seeks to minimize the number of bugs in its
products by its test procedures and strict quality control, there can be no
assurance that its new products will be error free when introduced. Any
significant delay in the commercial introduction of the Company's products due
to bugs, any design modifications required to correct bugs or any impairment of
customer satisfaction as a result of bugs could have a material adverse effect
on the Company's business and operating results. In addition, new products often
take several months before their manufacturing costs stabilize, which may
adversely affect operating results for a period of time following introduction.
During the past twelve months, the Company introduced ISDN on its AXXESS digital
communication platform, expanded the size of the AXXESS and Inter-Tel Axxent
platforms, introduced a number of upgrades to its existing AXXESSORY Talk and
IVX-500 voice processing platforms and announced the introduction of the
Vocal'Net Server product. 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.
Additionally, there can be no guaranty that future costs of accessibility, lack
of capacity or voice transmission quality of the Internet will not adversely
affect the ability of the Company to deliver all Internet products and services
on a cost effective basis. There can be no assurance that the Company will be
able to successfully develop new software, products, services, technologies and
applications on a timely basis as required by changing market needs or that new
software or products or enhancements
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<PAGE>
thereto, including its recently announced products and upgrades, when introduced
by the Company, will achieve market acceptance.
The Company has recently developed and continues to develop products
designed to address the emerging market for the convergence of voice and data
applications, or computer telephony integration. If the computer telephony
integration ("CTI") market fails to develop or grows more slowly than the
Company anticipates, or if the Company is unable for any reason to capitalize on
this emerging market opportunity, the Company's business and operating results
could be materially adversely affected.
Dependence Upon Contract Manufacturers and Component Suppliers
Certain components used in the Company's digital communication
platforms, including certain microprocessors, integrated circuits, power
supplies and voice processing interface cards, are currently available from a
single source or limited sources of supply, and product availability could be
limited. In addition, the Company currently manufactures its products through a
limited number of contract manufacturers located in the United States, the
Philippines and the People's Republic of China. Foreign manufacturing facilities
are subject to changes in governmental policies, imposition of tariffs and
import restrictions and other factors beyond the Company's control. Varian
Associates, Inc. ("Varian") currently manufactures a significant portion of the
Company's products at Varian's Tempe, Arizona facility, including substantially
all of the printed circuit boards used in the AXXESS and Inter-Tel Axxent
digital communications platforms. From time to time, the Company has experienced
delays in the supply of components and finished goods, and there can be no
assurance that the Company will not experience such delays in the future. The
Company's reliance on third party manufacturers involves a number of additional
risks, including reduced control over delivery schedules, quality assurance and
costs. Any delay in delivery or shortage of supply of components or finished
goods from Varian or any other supplier, or the Company's inability to develop
in a timely manner alternative or additional sources if and when required, could
damage the Company's relationships with current and prospective customers and
could materially and adversely affect the Company's business and operating
results. The Company has no long term agreements with its suppliers that require
the suppliers to provide fixed quantities of components or finished goods at set
prices. There can be no assurance that the Company will be able to continue to
obtain components or finished goods in sufficient quantities or quality or on
favorable pricing and delivery terms in the future.
Competition
The market for the Company's digital communications platforms is highly
competitive and in recent periods has been characterized by pricing pressures
and business consolidations. The Company's competitors include Lucent
Technologies and Northern Telecom Limited ("NorTel"), as well as Comdial
Corporation ("Comdial"), EXECUTONE Information Systems, Inc. ("Executone"),
Mitel Corporation ("Mitel"), Panasonic, Siemens ROLM Communications Inc.
("ROLM"), Toshiba and others. The Company also competes against the regional
Bell operating companies ("RBOCS"), which offer systems produced by one or more
of the aforementioned competitors and also offer Centrex systems in which call
processing facilities are provided through equipment located in the telephone
company's central office. Competition by the RBOCs may increase significantly in
the future, as the RBOCs have been granted the right to manufacture telephone
systems and equipment themselves and/or to bundle the sale of equipment with
telephone calling services.
The Telecommunication Act of 1996 and AT&T's announcement to divide
itself into three enterprises has had an impact on competition in the
communication industry. The
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Telecommunication Act of 1996 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 companies can offer telephone services and Internet access. These changes
will increase competition in the communication industry and will create
additional competition and opportunities in customer premise equipment as these
new services and interfaces become available. As the Company enters the markets
for local telephone service and Internet 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.
In the market for voice processing applications, including voice mail,
the Company competes against Centigram Communications Corporation ("Centigram"),
Octel Communications Corporation ("Octel"), Active Voice Corporation ("Active
Voice"), Applied Voice Technology, Inc. ("AVT") and other competitors, including
telephone systems manufacturers such as Lucent Technologies, NorTel and ROLM,
which offer integrated voice processing systems under their own label as well as
through various OEM arrangements. Certain of the Company's competitors may
achieve marketing advantages by bundling their voice processing equipment with
sales of telephone systems, or by designing their telephone systems so that they
do not readily integrate with independent voice processing systems. Inter-Tel
expects that the development of industry standards and the acceptance of open
systems architectures in the voice processing market will reduce technical
barriers to market entry and lead to increased competition.
In the market for long distance services, the Company competes against
AT&T Corp., MCI Telecommunications Corporation, Sprint Corporation and other
suppliers, certain of which also supply the long distance calling and network
services that the Company resells. Although the Company acquires a variety of
long distance calling services in bulk from certain long distance carriers,
there can be no assurance that the Company will be able to purchase long
distance calling services on favorable terms from one or more of such providers
in the future. In addition, a substantial majority of prospective new long
distance customers for the Company currently purchase long distance calling
services from the Company's competitors. The Company believes that it is likely
to face increased competition in the long distance calling services market as a
result of telecommunications deregulation, which enables RBOCs to supply long
distance calling and network services, and enables RBOCs and others to bundle
long distance, local telephone and wireless services. Moreover, the Company
expects to face increased competition in the future because low technical
barriers to entry will allow new market entrants.
As Inter-Tel develops more server-based and CTI telecommunications
products, Inter-Tel's competition will be the large computer software companies,
such as IBM (Lotus), and Microsoft. In addition, the server-based telephony and
CTI markets have shown increasing competition from small software start-up
companies.
Many of the Company's competitors are substantially larger, and have
significantly greater financial and technical resources, name recognition and
marketing and distribution capabilities, than the Company. The Company expects
that competition will continue to be intense in the markets addressed by its
products and services, and there can be no assurance that the Company will be
able to compete successfully in the future.
Management of Growth; Implementation of New Management Information Systems
The growth in the Company's business has placed, and is expected to
continue to place, a significant strain on the Company's personnel, management
and other resources. The
15
<PAGE>
Company's ability to manage any future growth effectively will require it to
attract, train, motivate and manage new employees successfully, to integrate new
employees into its overall operations and to continue to improve its
operational, financial and management information systems.
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. Since the
date of implementation, the Company has experienced difficulty with the new MIS
system 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.
During the fourth quarter of 1996, the Company decided to replace its
MIS system software with an integrated solution from a more established vendor
and accordingly has written off the software license and implementation costs
relating to the system software being replaced. Inter-Tel has signed an
agreement with a large, established software and database vendor to implement,
maintain and support alternate MIS system software to be utilized throughout the
Company. Inter-Tel believes that such action was necessary to allow for the
stability and growth of Inter-Tel.
The actions to replace the MIS system software could result in additional
costs and probable delays in obtaining a fully functional MIS system, including
but not limited to additional or alternate hardware and software required, but
not available in the current system configuration, and additional personnel,
which could have a material adverse effect on the company's business 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 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 their respective
suppliers or customers. Further, there can be no assurance that the Company will
successfully integrate the acquired operations or achieve any of the intended
benefits of an acquisition. The Company's failure to manage its growth
effectively could have a material adverse effect on its business and operating
results.
Product Protection and Infringement
The Company's future success is dependent in part upon its proprietary
technology. The Company has no patents and relies principally on copyright and
trade secret law and contractual provisions to protect its intellectual
property. There can be no assurance that any copyright owned by the Company will
not be invalidated, circumvented or challenged or that the rights granted
thereunder will provide competitive advantages to the Company. Further, there
can be no assurance that others will not develop technologies that are similar
or superior to the Company's technology or that duplicate the Company's
technology.
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<PAGE>
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 or delays in product introductions or decisions to discontinue
development, manufacture or sale of such products, could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business and operating results.
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 and operating results.
Risks of Providing Long Distance and Network Services
Inter-Tel depends on a reliable supply of telecommunications services
and information from several long distance carriers. Because it does not own
transmission facilities, the Company relies on long distance carriers for the
provision of network services to the Company's customers and for billing
information. Long 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 adversely affect
the Company's business and operating results. Contracts with the long distance
carriers from which the Company currently resells services typically have a
multi-year term in which the Company's prices are relatively fixed and have
minimum use requirements. There can be no assurance that the Company will meet
minimum use commitments, will be able to negotiate lower rates with carriers in
the event of any decrease in end user rates or will be able to extend its
contracts with long distance carriers at prices favorable to the Company. The
Company's ability to continue to expand its long distance service operations
will depend on its ability to continue to secure reliable long distance services
from a number of long distance carriers and the willingness of such carriers to
continue to make telecommunications services and billing information available
to the Company on favorable terms.
Dependence on Key Personnel
The Company is dependent on the continued service of, and its ability
to attract and retain, qualified technical, marketing, sales and managerial
personnel. The competition for such personnel is intense, and the loss of any of
such persons, as well as the failure to recruit additional key technical and
sales personnel in a timely manner, would have a material adverse effect on the
Company's business and operating results. There can be no assurance that the
Company will be able to continue to attract and retain the qualified personnel
necessary for the development of its business.
Possible Volatility of Stock Price
The Company believes that factors such as announcements of
developments relating to the Company's business, fluctuations in the Company's
operating results, general conditions in
17
<PAGE>
the telecommunications industry or the worldwide economy, changes in legislation
or regulation affecting the telecommunications industry, an outbreak of
hostilities, a shortfall in revenue or earnings from securities analysts'
expectations, announcements of technological innovations or new products or
enhancements by the Company or its competitors, developments in intellectual
property rights and developments in the Company's relationships with its
customers and suppliers could cause the price of the Company's Common Stock to
fluctuate, perhaps substantially. Many of such factors are beyond the Company's
control. In addition, in recent years the stock market in general, and the
market for shares of technology stocks in particular, have experienced extreme
price fluctuations, which have often been unrelated to the operating performance
of affected companies. There can be no assurance that the market price of the
Company's Common Stock will not experience significant fluctuations in the
future, including fluctuations that are unrelated to the Company's performance.
Concentration of Ownership
As of December 31, 1996, the Company's Chairman of the Board of Directors and
Chief Executive Officer beneficially owned approximately 21% of the outstanding
shares of the Common Stock. As a result, he has the ability to exercise
significant influence over all matters requiring shareholder approval. In
addition, the concentration of ownership could have the effect of delaying or
preventing a change in control of the Company.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
- - ---- --- --------
Steven G. Mihaylo 53 Chairman of the Board of
Directors and Chief
Executive Officer
Thomas C. Parise 42 President and Chief
Operating Officer
Craig W. Rauchle 41 Executive Vice President
Ross McAlpine 45 President of Inter-Tel
Leasing, Inc.
Kurt R. Kneip 34 Vice President, Chief
Financial Officer, Secretary
and Assistant Treasurer
J. Robert Anderson 60 Director
Gary Edens 55 Director
Maurice H. Esperseth 71 Director
C. Roland Haden 56 Director
Norman Stout 39 Director
MR. MIHAYLO, the founder of the Company, has served as Chairman of the
Board of Directors of the Company since September 1983, as President from March
1984 until December 1994, and as Chief Executive Officer of the Company since
its formation in July 1969. Mr. Mihaylo also served as President of the Company
from July 1969 until September 1983 and as Chairman of the Board of Directors
from July 1969 to October 1982. Mr. Mihaylo also is a director of MicroAge, Inc.
and Microtest, Inc.
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<PAGE>
MR. PARISE was elected President of the Company in December 1994. He
has been Senior Vice President of the Company since 1986. He is also President
of Inter-Tel Integrated Services, Inc., a wholly owned research and development,
manufacturing and distribution subsidiary of the Company. Mr. Parise joined the
Company in 1981 and became Branch General Manager of the Phoenix Direct Sales
Office in 1982. In 1983, he became the Mountain Regional Vice President, and in
January 1985 he was appointed Vice President of Operations and Sales Support.
Mr. Parise also is a director of Globe Business Resources, Inc.
MR. RAUCHLE was elected Executive Vice President in December 1994. He
had been Senior Vice President of the Company and continues as President of
Inter-Tel DataCom, Inc., a wholly owned sales subsidiary of the Company. In
addition, he currently serves the Company and all subsidiaries in corporate
strategic planning and mergers and acquisitions activities. Mr. Rauchle joined
the Company in 1979 as Branch General Manager of the Denver Direct Sales Office
and in 1983 was appointed the Central Region Vice President and subsequently the
Western Regional Vice President. From 1990 to 1992, Mr. Rauchle served as
President of Inter-Tel Communications, Inc.
MR. MCALPINE has served as President of Inter-Tel Leasing, Inc., a
wholly-owned subsidiary of the Company, since April 1993. He also served as Vice
President of Inter-Tel Communications, Inc. from April 1991 to April 1992 and
Treasurer since April 1992. He joined the Company in July 1991 when Inter-Tel
acquired Telecommunications Specialists, Inc. Prior to joining Inter-Tel, Mr.
McAlpine worked 17 years in the leasing and financial services industry. Mr.
McAlpine holds an undergraduate degree in Accounting from Southwest Texas State
University.
MR. KNEIP has served as Vice President and Chief Financial Officer of
the Company since September 1993. He was elected Secretary and Treasurer in
October 1994. In May 1996 he was elected Assistant Treasurer, as John Abbott was
elected Treasurer. He joined the Company in May 1992 as Director of Corporate
Tax, after seven years with the accounting firm of Ernst & Young. Mr. Kneip is a
Certified Public Accountant, and holds an undergraduate degree in Commercial
Economics from South Dakota State University and a Masters Degree in
Professional Accountancy from the University of South Dakota.
MR. ANDERSON was elected as a director of the Company in February 1997.
Mr. Anderson worked for Ford Motor Company from 1963 to 1983, serving from 1978
to 1983 as President of the Ford Motor Land Development Corporation. He served
as Senior Vice President,
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<PAGE>
CFO and a member of the Board of Directors of The Firestone Tire and Rubber
Company from 1983 to 1989, and as Vice Chairman of Bridgestone/Firestone, Inc.
from 1989 through 1991. He most recently served as Vice Chairman, CFO and a
member of the Board of Directors of the Grumman Corporation from 1991 to 1994.
Mr. Anderson is currently semi-retired, and he is an active leader in various
business, civic and philanthropic organizations.
MR. EDENS was elected as a director of the Company in October 1994. He
has been a broadcasting media executive from 1970 to 1994, serving as Chairman
and Chief Executive Officer of Edens Broadcasting, Inc. from 1984 to 1994 when
that corporation's nine radio stations were sold. He presently is President of
The Hanover Companies, Inc., an investment firm. He is an active leader in
various business, civic and philanthropic organizations.
MR. ESPERSETH has been a director of the Company since October 1986.
Mr. Esperseth joined the Company in January 1983 as Senior Vice
President-Research and Development, after a 32-year career with GTE, and served
as Executive Vice President of Inter-Tel from 1986 to 1988. Mr. Esperseth
retired as an officer of the Company on December 31, 1989.
DR. HADEN has been a director of the Company since 1983. Dr. Haden has
been Vice Chancellor and Dean of Engineering of Texas A&M University since 1993.
Previously, he served as Vice Chancellor of Louisiana State University from 1991
to 1993, Dean of the College of Engineering and Applied Sciences at Arizona
State University from 1989 to 1991, Vice President for Academic Affairs at
Arizona State University from 1987 to 1988, and Dean of the College of
Engineering and Applied Sciences from 1978 to 1987. Dr. Haden holds a doctoral
degree in Electrical Engineering from the University of Texas and has served on
the faculties of the University of Oklahoma and Texas A & M University.
MR. STOUT was elected a director of the Company in October 1994. Mr.
Stout has been President of Superlite Block, a manufacturer of concrete block
since February 1993. Prior thereto he was employed by Bouhem-Fields, Inc. of
Dallas, Texas, a manufacturer of crushed stone, as Chief Executive Officer from
1990 to 1993 and as Chief Financial Officer from 1986 to 1990. Previously, Mr.
Stout was a Certified Public Accountant with Coopers & Lybrand.
The Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee, consisting of Directors Anderson, Stout and
Esperseth, is charged with reviewing the Company's annual audit and meets with
the Company's independent auditors to review the Company's internal controls and
financial management practices. The Compensation Committee, consisting of
Messrs. Esperseth, Edens and Stout, recommends to the Board of Directors
compensation for the Company's key employees and administers the Company's stock
option plans.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters at 120 North 44th
Street, Suite 200, Phoenix, Arizona pursuant to a lease that expires in 2000. It
also maintains its distribution and support operations in an 85,000 square foot
building located in Chandler, Arizona pursuant to a lease that expires in 2008.
In addition, the Company leases sales and support offices in a total of 29
direct sales offices in the United States and two locations overseas. The
Company's aggregate monthly payments under these leases are currently $239,092.
The Company believes that its existing facilities are adequate to meet its
current needs and that additional or alternative space will be available as
necessary in the future on commercially reasonable terms.
20
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company has no legal proceedings in process or pending for which it
believes an unfavorable outcome would have a material adverse impact on the
financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference
to Exhibit 13.0 and Page 38 of the Company's 1996 Annual Report to
Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference
to Exhibit 13.0 and Page 18 of the Company's 1996 Annual Report to
Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference
to Exhibit 13.0 and Pages 30 through 37 of the Company's 1996
Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference
to Exhibit 13.0 and Pages 19 through 29 of the Company's 1996
Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and the information included therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors and executive officers is
included at the end of Part I, Item 1 on Pages 18 to 20 of this
report under the caption "Directors and Executive Officers of the
Registrant."
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
to Pages 8 to 11 of the Company's Proxy Statement relating to its
1997 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference
to Pages 5 and 6 of the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
The following consolidated financial statements of Inter-Tel,
Incorporated, and subsidiaries, are incorporated by reference to
Exhibit 13.0 and Pages 19 to 29 of the Company's Annual Report:
Report of Ernst & Young LLP, Independent Auditors
Consolidated balance sheets--December 31, 1996 and 1995
Consolidated statements of income--years ended December 31, 1996,
1995 and 1994
Consolidated statements of shareholders' equity--years ended December
31, 1996, 1995 and 1994
Consolidated statements of cash flows--years ended December 31,
1996, 1995 and 1994
Notes to consolidated financial statements
2. Financial Statement Schedules
The following consolidated financial statement schedule of Inter-Tel,
Incorporated, and subsidiaries is filed as part of this Report and
should be read in conjunction with the Consolidated Financial
Statements of Inter-Tel, Incorporated and subsidiaries, and the notes
thereto.
22
<PAGE>
Schedule for the three years ended December 31, 1996:
Page No.
--------
Schedule II--Valuation and Qualifying Accounts 25
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or notes thereto.
3. Exhibits
3.1(10) Articles of Incorporation, as amended.
3.2(16) By-Laws, as amended.
10.15(1) Registrant's form of standard Distributor Agreement.
10.16(1) Registrant's form of standard Service Agreement.
10.34(2) 1984 Incentive Stock Option Plan and forms of Stock
Option Agreement.
10.35(3) Agreement between Registrant and Samsung Semiconductor
and Telecommunications Company, Ltd. dated October 17,
1984.
10.37(3) Tax Deferred Savings Plan.
10.51(11) 1990 Directors' Stock Option Plan and form of Stock
Option Agreement.
10.52(15) Inter-Tel, Incorporated Long-Term Incentive Plan and
forms of Stock Option Agreements.
10.53(12) Agreement between Registrant and Maxon Systems, Inc.
dated February 27, 1990.
10.54(12) Agreement between Registrant and Varian Tempe
Electronics Center dated February 26, 1991.
10.55(12) Agreement between Registrant and Jetcrown Industrial
Ltd. dated February 18, 1993.
10.56(13) Employee Stock Ownership Plan.
10.57(14) Loan and Security Agreement dated December 16, 1994
between Bank One, Arizona, N.A. and Registrant.
10.58(16) Development, Supply and License Agreement between
Registrant and QUALCOMM dated January 17, 1996.
- - ---------------------
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<PAGE>
(1) Previously filed with Registrant's Registration Statement on Form S-1 (File
No. 2-70437).
(2) Previously filed with Registrant's Registration Statement on Form S-8 (File
No. 2-94805).
(3) Previously filed with Registrant's Annual Report on Form 10-K for the year
ended November 30, 1984 (File No. 0-10211).
(10) Previously filed with Registrant's Annual Report on Form 10-K for the year
ended December 31, 1988 (File No. 0-10211).
(11) Previously filed with Registrant's Registration Statement on Form S-8 (File
No. 33-40353).
(12) Previously filed with Registrant's Registration Statement on Form S-1 (File
No. 33-70054).
(13) Previously filed with Registrant's Registration Statement on Form S-8 (File
No. 33-73620).
(14) Previously filed with Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994 (File No. 0-10211).
(15) Previously filed with Registrant's Proxy Statement dated March 23, 1994.
(16) Previously filed with Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 0-10211).
(17) Filed herewith.
(b) Reports on Form 8-K.
None
(c) Exhibits.
11.1 Statement re: Computation of Per Share Earnings.
13.0 Excerpts from Annual Report to Security Holders.
22.1 List of Subsidiaries.
23.0 Consent of Independent Auditors.
24.1 Power of Attorney.
27 Financial Data Schedule
See Item 14(a) (3) also.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report. See Item 8.
24
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- - -----------------------------------------------------------------------------------------------------------
ADDITIONS
- - -----------------------------------------------------------------------------------------------------------
Charged Charged to
Balance at to Other Charged to Balance
Beginning Costs & Accounts Deductions at End of
DESCRIPTION of Period Expenses Describe Describe Period
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Deducted from asset accounts:
Allowance for doubtful
accounts (4) $1,822 $1,801 $ 87(3) $ 614(1) $3,096
------ ------ -------- -------- ------
Allowance for lease
accounts $1,513 $1,945 $ (87)(3) $ 665(1) $2,706
------ ------ -------- -------- ------
Inventory allowance (4) $2,499 $ 609 $ 175(5) $ 304(2) $2,979
------ ------ -------- -------- ------
Year ended December 31, 1995
Deducted from asset accounts:
Allowance for doubtful
accounts (4) $1,181 $ 814 $ 71(3) $ 244(1) $1,822
------ ------ -------- -------- ------
Allowance for lease
accounts $1,198 $ 780 $ (71)(3) $ 394(1) $1,513
------ ------ -------- -------- ------
Inventory allowance (4) $1,795 $1,109 -- $ 405(2) $2,499
------ ------ -------- -------- ------
Year ended December 31, 1994
Deducted from asset accounts:
Allowance for doubtful
accounts (4) $ 708 $ 721 $ (105)(3) $ 143(1) $1,181
------ ------ -------- -------- ------
Allowance for lease
accounts $ 911 $ 236 $ 105(3) $ 54(1) $1,198
------ ------ -------- -------- ------
Inventory allowance (4) $1,237 $ 561 -- $ 3(2) $1,795
------ ------ -------- -------- ------
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Inventory written off.
(3) Reclassed between appropriate valuation and qualifying accounts.
(4) Adjusted for pooling of Florida Telephone Systems, Inc.
(5) Acquired in purchase of NTL Corporation (dba ComNet of Ohio).
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Inter-Tel, Incorporated, has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTER-TEL, INCORPORATED
BY: /S/ Steven G. Mihaylo
------------------------------------
Steven G. Mihaylo
Chairman and Chief Executive Officer
Dated: March 21, 1997
26
<PAGE>
INDEX OF ATTACHED EXHIBITS
11.1 Statement re: Computation of Per Share Earnings (included on Page 28)
13.0 Excerpts from Annual Report to Security Holders (pages 29 to 50)
22.1 List of Subsidiaries (included on Page 51)
23.0 Consent of Independent Auditors (included on Page 52)
24.1 Power of Attorney (included on Page 53)
27 Financial Data Schedule (Page 54)
27
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Years Ended December 31,
1996 1995 1994
---- ---- ----
(In thousands, except per share amounts)
PRIMARY
Average shares outstanding 12,890 11,528 10,671
Net effect of dilutive stock options--
based on the treasury stock method
using average market price 505 473 229
------- ------- -------
TOTAL 13,395 12,001 10,900
======= ======= =======
Net income $ 9,042 $ 8,499 $ 5,940
======= ======= =======
Net income per share $ .68 $ .71 $ .54
======= ======= =======
FULLY DILUTED
Average shares outstanding 12,890 11,528 10,671
Net effect of dilutive stock options--
based on the treasury stock method
using the year-end market price,
if higher than the average market
price 507 496 229
------- ------- -------
TOTAL 13,397 12,024 10,900
======= ======= =======
Net income $ 9,042 $ 8,499 $ 5,940
======= ======= =======
Net income per share $ .68 $ .71 $ .54
======= ======= =======
- - --------------------------------------------------------------------------------
The Computation of Per Share Earnings for all periods has been restated to
reflect the acquisition of Florida Telephone Systems, Inc. in May 1996,
accounted for as a pooling of interests, in which 48,193 shares of common stock
were issued.
28
MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
Inter-Tel common stock is traded over-the-counter (symbol INTL) and
since February 1983 has been included in the Nasdaq National Market System. As
of February 1, 1997 there were of record approximately 1,000 shareholders of the
Company's common stock. The Company believes there are approximately 2,000
additional beneficial holders of the Company's common stock. The following table
sets forth high and low closing prices reported by Nasdaq.
Inter-Tel has never paid a cash dividend on its common stock and
presently does not intend to do so. Future dividend policy will depend on
Company earnings, capital requirements for growth, financial conditions and
other factors.
1996 High Low
First Quarter 18 1/2 11 3/8
Second Quarter 28 3/8 17 1/2
Third Quarter 26 5/8 16
Fourth Quarter 24 1/2 12
1995 High Low
First Quarter 13 6 7/8
Second Quarter 16 1/8 11 9/16
Third Quarter 19 3/4 14 7/8
Fourth Quarter 17 3/8 13 7/8
29
<PAGE>
SELECTED FINANCIAL DATA
Financial Summary (1)
<TABLE>
<CAPTION>
(In thousands, except
per share amounts and ratios) For the years ended December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net sales $185,884 $150,533 $123,878 $103,373 $88,120
Cost of sales 104,966 87,696 74,033 63,088 54,031
Research & development 6,581 5,764 4,537 4,114 3,928
Selling, general and
administrative 56,386 43,578 36,502 29,682 25,040
Special charge 4,542 (2) 1,315 (3) -- -- --
- - ----------------------------------------------------------------------------------------------------------
Operating income 13,409 (2) 12,180 (3) 8,806 6,489 5,121
- - ----------------------------------------------------------------------------------------------------------
Interest and other income 1,974 1,674 904 282 680
Interest expense (77) (106) (122) (449) (736)
- - ----------------------------------------------------------------------------------------------------------
Income before income taxes 15,306 (2) 13,748 (3) 9,588 6,322 5,065
Income taxes 6,264 5,249 3,648 2,381 1,901
- - ----------------------------------------------------------------------------------------------------------
Net income $9,042 (2) $8,499 (3) $5,940 $3,941 $3,164
- - ----------------------------------------------------------------------------------------------------------
Net income per share $0.68 (2) $0.71 (3) $0.54 $0.44 $0.37
- - ----------------------------------------------------------------------------------------------------------
Average shares outstanding 13,395 12,001 10,900 9,030 8,660
- - ----------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $132,611 $118,767 $67,748 $57,467 $37,838
Working capital 79,709 75,623 37,220 34,244 12,484
Long-term debt -- -- -- 188 2,184
Shareholders' equity 94,934 85,117 45,122 38,605 19,375
- - ----------------------------------------------------------------------------------------------------------
KEY RATIOS
Current ratio 4.09 4.36 3.25 3.32 1.87
Term debt/equity -- -- -- -- 0.11
Return on equity-continuing operations 0.11 0.19 0.15 0.20 0.19
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Financial data for all periods have been restated to reflect the acquisition
of Florida Telephone Systems, Inc. in May 1996 accounted for as a pooling of
interests.
(2) Operating income includes a special charge of $4.5 million, which reduced
net income by $2.7 million or $.20 per share. This special charge reflects the
decision by the Company to replace its MIS system software. Without this special
charge, the Company would have reported operating income of approximately $18.0
million and net income of approximately $11.8 million, or $.88 per share in the
year ended December 31, 1996.
(3) Operating income includes a special charge of $1.3 million, which reduced
net income by $815,000, or $.07 per share. This special charge reflects the
costs associated with integrating the operations of entities acquired in May
1995. Without this special charge, the Company would have reported operating
income of approximately $13.5 million and net income of approximately $9.3
million, or $.78 per share, in the year ended December 31, 1995.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Inter-Tel is a single point of contact, full service solutions
integrator providing AXXESS and Axxent digital business communication platforms,
AXXESSORY Talk voice processing platforms, call processing and voice processing
software along with various other productivity enhancing software applications,
computer telephone integration, and network services and long distance calling
services, as well as maintenance, leasing and support services. The Company's
Common Stock is quoted on the NASDAQ National Market System under the symbol
INTL.
The Company has developed networks of direct sales offices, dealers and
value added resellers (VARs) which 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
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 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
such as the Inter-Tel Axxent system, enhancing the CTI capabilities of the
AXXESS digital communications platform, 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, the development of an internet voice server
(Vocal'Net), and the development of a LAN-based Communications Server
incorporating the Company's Call Processing and Voice Processing software. New
applications under development include Basic Rate ISDN,
31
<PAGE>
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 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 lease
rental streams to financial institutions.
Net sales of the Company have increased substantially in each of the
past three years. Such increases were 23.5%, 21.5% and 19.8% in 1996, 1995 and
1994, respectively, over the preceding year. All periods have been restated to
reflect the acquisition of Florida Telephone Systems, Inc. in May 1996, which
was accounted for as a pooling of interests.
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:
Year Ended December 31
1996 1995 1994
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 56.5 58.3 59.8
----- ----- -----
Gross margin 43.5 41.7 40.2
Research and development 3.5 3.8 3.6
Selling, general and administrative 30.3 28.9 29.5
Special charge 2.5 0.9 0.0
----- ----- -----
Operating income 7.2 8.1 7.1
Other income 1.1 1.1 0.7
Interest expense 0.0 0.1 0.1
Income taxes 3.4 3.5 2.9
----- ----- -----
Net income 4.9% 5.6% 4.8%
----- ----- -----
Year Ended December 31, 1996 Versus Year Ended December 31, 1995
Net sales increased 23.5% to $185.9 million in 1996 from $150.5 million
in 1995. Sales from direct sales offices accounted for approximately $14.7
million of the increase, and increased sales from wholesale distribution
accounted for approximately $12.2 million of the increase. The remaining
increases occurred in long distance sales and other operations.
Gross profit increased to $80.9 million, or 43.5% of net sales in 1996
from $62.8 million, or 41.7% of net sales in 1995. This reflected the continuing
transition to the dealer network and the expansion of AXXESS software and
systems sales.
Research and development expenses increased to $6.6 million, or 3.5% of
net sales in 1996 from $5.8 million, or 3.8% of net sales, in 1995. These
expenses in both 1996 and 1995 were directed principally to the continued
development of the AXXESS and Inter-Tel Axxent software and systems, unified
messaging and voice processing software, Vocal'Net
32
<PAGE>
and Vocal'Net server, 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 increased to $56.4
million, or 30.3% of net sales in 1996, from $43.6 million, or 28.9% of net
sales, in 1995. This reflected increased incentive and other compensation, costs
associated with the implementation of the Company's information systems,
additional personnel to support the direct dealer network and expanded long
distance operations, and expenses associated with the expansion of international
operations. The Company expects that selling, general and administrative
expenses will increase in absolute dollars, but may vary as a percentage of net
sales.
During the fourth quarter of 1996, the Company decided to replace its
MIS system software with an integrated solution from a more established vendor
and accordingly wrote off the software license and implementation costs relating
to the system software being replaced. The special pre-tax charge of $4.5
million ($.20 per share after tax), reflects the costs associated with the
Company's decision to abandon its current MIS software in favor of different
system software.
Other income increased in 1996 principally from the investment of the
funds received from the August 1995 public offering and funds generated through
operating cash flow.
Net income increased 6.4% to $9.0 million, or $.68 per share, in 1996
including the special charge recognized in the fourth quarter, compared to $8.5
million, or $.71 per share, in 1995. Excluding the special charges in both
periods, net income would have been $11.8 million, or $.88 per share, for 1996
compared to $9.3 million, or $.78 per share for 1995. In addition, net income
per share in 1996 is based on an additional 2.0 million average shares
outstanding in 1996, reflecting the August 1995 public stock offering.
Year Ended December 31, 1995 Versus Year Ended December 31, 1994
Net sales increased 21.5% to $150.5 million in 1995 from $123.9 million
in 1994. Sales from direct sales offices accounted for approximately $9.5
million of the increase, with wholesale distribution sales increasing
approximately $11.2 million. The remaining increases occurred in long distance
sales and other operations.
Gross profit increased to $62.8 million, or 41.7% of net sales in 1995
from $49.8 million, or 40.2% 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 3.8% of
net sales in 1995 from $4.5 million, or 3.6% 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 $43.6
million, or 28.9% of net sales in 1995, from $36.5 million, or 29.5% of net
sales, in 1994. This reflected
33
<PAGE>
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.
The special pre-tax charge of $1.3 million ($.07 per share after tax),
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.
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 43.1% to $8.5 million, or $.71 per share, in 1995
after a special charge recognized in the second quarter, from $5.9 million, or
$.54 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.
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 and direct sales network,
which has required and is expected to require working capital for increased
accounts receivable and inventories. During 1996, receivables and inventories
increased approximately $909,000. This increase was principally funded by cash
flow from operations and existing cash balances. The Company also expended
approximately $7.0 million during 1996 for property and equipment, which was
principally funded by operating cash flow. At December 31, 1996, the Company had
$38.9 million in cash and equivalents, which represents a decrease of
approximately $704,000 from December 31, 1995.
The Company has a loan agreement with Bank One, Arizona, NA which
provides for a $5.0 million, unsecured revolving line of credit. The credit
facility is annually renewable and is available through April 30, 1997. Under
the credit facility, the Company has the option to borrow at a prime rate or
adjusted LIBOR interest rate. During the year ended December 31, 1996, the
credit facility was used primarily to support international letters of credit to
suppliers. In August 1995, the Company received approximately $30.7 million from
a public offering. The proceeds were used to finance acquisitions, for working
capital, capital expenditures and other general corporate purposes.
34
<PAGE>
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 $66.0 million remain unbilled at December 31, 1996. 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 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 cash acquisitions which the Company may
consider and provide adequate working capital for the foreseeable future.
However, to the extent that additional funds are required in the future to
address working capital needs and to provide funding for capital expenditures,
expansion of the business or additional acquisitions, the Company will seek
additional financing. There can be no assurance that additional financing will
be available when required or on acceptable terms.
35
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/Ernst & Young LLP
Phoenix, Arizona
February 28, 1997
36
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
(In thousands)
- - ------------------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 38,936 $ 39,640
Accounts receivable, less allowances of
$3,096 in 1996 and $1,822 in 1995 29,998 29,789
Inventories, less allowances of $2,979 in
1996 and $2,499 in 1995 21,280 20,580
Net investment in sales-leases 8,243 3,629
Prepaid expenses and other assets 7,008 4,501
- - ------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 105,465 98,139
PROPERTY, PLANT & EQUIPMENT 11,189 11,813
OTHER ASSETS` 15,957 8,815
- - ------------------------------------------------------------------------------------------------------
$ 132,611 $ 118,767
- - ------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,915 $ 11,262
Other current liabilities 16,841 11,254
- - ------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 25,756 22,516
DEFERRED TAX LIABILITY 8,635 7,228
OTHER LIABILITIES 3,286 3,906
SHAREHOLDERS' EQUITY
Common stock, no par value - authorized 30,000,000
shares, issued and outstanding -- 12,944,286 shares
in 1996 and 12,812,874 shares in 1995 59,875 58,966
Retained earnings 35,464 26,422
Currency translation adjustment (359) (112)
- - ------------------------------------------------------------------------------------------------------
94,980 85,276
Less receivable from Employee Stock Ownership Trust (46) (159)
- - ------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 94,934 85,117
- - ------------------------------------------------------------------------------------------------------
$ 132,611 $ 118,767
- - ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
37
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands, except per share data)
- - ------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
NET SALES $185,884 $150,533 $123,878
Cost of sales 104,966 87,696 74,033
- - ------------------------------------------------------------------------------------------------------
GROSS PROFIT 80,918 62,837 49,845
Research and development 6,581 5,764 4,537
Selling, general and administrative 56,386 43,578 36,502
Special charge 4,542 1,315 --
- - ------------------------------------------------------------------------------------------------------
OPERATING INCOME 13,409 12,180 8,806
- - ------------------------------------------------------------------------------------------------------
Other income 1,974 1,674 904
Interest expense (77) (106) (122)
- - ------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 15,306 13,748 9,588
INCOME TAXES
Current 3,480 1,007 2,929
Deferred 2,784 4,242 719
- - ------------------------------------------------------------------------------------------------------
6,264 5,249 3,648
- - ------------------------------------------------------------------------------------------------------
NET INCOME $9,042 $8,499 $5,940
- - ------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.68 $ 0.71 $ 0.54
- - ------------------------------------------------------------------------------------------------------
Average number of common
shares outstanding 13,395 12,001 10,900
- - ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
38
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<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, 1993 $ 27,254 $ 11,983 $ (293) $ (369) $ 38,575
Exercise of stock options 187 187
Tax benefit from stock options 103 103
Stock issued in acquisition 41 41
Net income 5,940 5,940
Gain on currency translation 171 171
Collection from ESOP 105 105
- - ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 27,585 17,923 (122) (264) 45,122
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 8,499 8,499
Gain on currency translation 10 10
Collection from ESOP 105 105
- - ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 58,966 26,422 (112) (159) 85,117
- - ----------------------------------------------------------------------------------------------------------------------
Exercise of stock options 611 611
Tax benefit from stock options 417 417
Escrow share cancellation from
prior stock acquisition (119) (119)
Net income 9,042 9,042
Loss on currency translation (247) (247)
Collection from ESOP 113 113
- - ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 59,875 $ 35,464 $ (359) $ (46) $ 94,934
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
39
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands)
- - -----------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 9,042 $ 8,499 $ 5,940
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 4,097 2,267 1,663
Provision for losses on receivables 3,746 1,594 957
Provision for inventory valuation 609 1,109 561
Net contribution to ESOP 113 105 105
(Decrease)/increase in other liabilities (604) 1,111 603
Loss/(Gain) on sale of property and equipment 3,421 16 (18)
Deferred income taxes 2,784 4,242 719
Effect of exchange rate changes (247) 10 171
Changes in operating assets and liabilities (15,704) (18,141) (5,911)
- - -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 7,257 812 4,790
- - -----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Additions to property and equipment (6,951) (7,921) (3,882)
Proceeds from sale of property and equipment 159 9 63
Cash used in acquisitions (1,780) -- (131)
- - -----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING
ACTIVITIES (8,572) (7,912) (3,950)
- - -----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Payments on long-term debt -- -- (172)
Net proceeds from stock offering -- 30,670 --
Proceeds from exercise of stock options 611 503 187
- - -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 611 31,173 15
- - -----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE)
IN CASH AND EQUIVALENTS (704) 24,073 855
CASH AND EQUIVALENTS AT BEGINNING
OF YEAR 39,640 15,567 14,712
- - -----------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $ 38,936 $ 39,640 $ 15,567
- - -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
40
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- - --------------------------------------------------------------------------------
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Description of Business: The Company is in the business of developing
and providing telephone systems, voice processing CTI, and network 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 values on the
respective acquisition dates. Based on these values, the excess purchase prices
over the fair value of the net assets acquired are being amortized over 3 to 40
years. Accumulated amortization through December 31, 1996 was $571,390.
Sales-Leases: The discounted present values of minimum rental payments
under sales-type leases are recorded as sales, net of provisions for 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 $437,000; $318,000; and $431,000 in advertising costs during
1996, 1995 and 1994, respectively.
41
<PAGE>
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," ("APB 25") and accordingly,
recognizes no compensation expense for these stock option grants.
In 1996 the Company adopted Financial Accounting Standards Board
("FASB") 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 adopted Statement 121 in the first
quarter of 1996 and the adoption did not have a material impact to the
operations of the Company. During the fourth quarter of 1996, the Company
decided to replace its MIS system software with an integrated solution from a
more established vendor and accordingly wrote off the software license and
implementation costs relating to the system software being replaced. The special
pre-tax charge of $4.5 million reflects the costs associated with the Company's
decision to abandon its current MIS software in favor of different system
software.
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.
Net Income Per Share: Net income per 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 1995
and 1994 financial statements to conform to the 1996 presentation.
NOTE B -- ACQUISITIONS
Pooling of Interests: The financial statements for periods prior to
1996 have been restated to include the accounts of Florida Telephone Systems,
Inc. ("Florida Telephone"). This corporation was acquired by the Company in a
pooling of interests transaction in May 1996, in which 48,193 shares of
Inter-Tel common stock were issued. Florida Telephone did not constitute a
significant subsidiary as defined by the Securities and Exchange Commission. In
the consolidated statements of income, net sales and net income
increased/(decreased) as a result of the restatement as follows:
42
<PAGE>
(In thousands, except per share amounts) Year Ended December 31
1995 1994
Net sales $ 1,687 $ 1,261
Net income $ 48 $ (9)
Net income per share $ 0.00 $ 0.00
Total shareholders' equity was increased by $63,000 as of January 1,
1994 as a result of the restatement.
Purchase Transaction: Effective November 29, 1996, the Company acquired
100% of the stock of NTL Corporation ("ComNet") for cash and a short-term note.
The transaction has been accounted for as a purchase transaction, and
accordingly the results of its operations have been included in the consolidated
results of operations since the transaction date. The purchase price has been
allocated to the assets and liabilities based on fair values at acquisition. The
purchase price over net assets acquired (goodwill) is being amortized over 5 to
10 years, based on the lives of the underlying assets. The acquisition did not
include certain components of ComNet's business. Accordingly, separate operating
results for ComNet's telecommunications business are not available. ComNet's
telecom revenues for 1996 and 1995 were approximately $9.0 million and $7.5
million, respectively.
NOTE C -- 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:
(In thousands) Year Ended December 31
1996 1995 1994
Sales of rental income $ 42,985 $ 25,106 $ 12,423
Sold income remaining
unbilled at end of year $ 65,970 $ 37,256 $ 19,894
Allowance for uncollectible
minimum lease payments
and recourse liability at
end of year $ 2,706 $ 1,513 $ 1,198
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.
43
<PAGE>
NOTE D -- PROPERTY, PLANT & EQUIPMENT
December 31
(In thousands) 1996 1995
Computer systems and equipment $20,236 $19,261
Transportation equipment 1,737 1,910
Furniture and fixtures 3,301 2,722
Leasehold improvements 1,037 724
Land 321 130
------- -------
26,632 24,747
Less: Accumulated depreciation
and amortization 15,443 12,934
------- -------
$11,189 $11,813
======= =======
NOTE E -- OTHER ASSETS
December 31
(In thousands) 1996 1995
Net investment in sales-leases $11,497 $6,108
Excess of purchase price over net
assets acquired, net 4,334 1,217
Other assets 126 1,490
------- ------
$15,957 $8,815
======= ======
NOTE F-- OTHER CURRENT LIABILITIES
December 31
(In thousands) 1996 1995
Compensation and employee benefits $ 6,176 $ 5,528
Deferred revenues 2,889 2,136
Other accrued expenses 7,776 3,590
------- -------
$16,841 $11,254
======= =======
NOTE G -- CREDIT LINE
The Company maintains a $5,000,000 unsecured bank credit line at prime
rate to cover international letters of credit and for other purposes. The credit
agreement matures April 30, 1997 and contains certain restrictions and financial
covenants. At December 31, 1996, $2,528,131 of the credit line was committed
under letter of credit arrangements.
NOTE H -- LEASES
Rental expense amounted to $3,538,221; $2,994,895; and $2,555,298 in
1996, 1995 and 1994, respectively. Noncancellable operating leases are primarily
for buildings. Certain of the leases contain provisions for renewal options and
scheduled rent increases. At December 31, 1996, future minimum commitments under
noncancellable leases, including a five year lease for its headquarters facility
and a 15 year lease for its distribution and support facility, are: 1997 --
$2,823,397; 1998 -- $2,420,669; 1999 -- $1,923,048; 2000 -- $1,447,318; 2001 --
$845,154; thereafter -- $2,248,287.
44
<PAGE>
NOTE I -- INCOME TAXES
The Company accounts for income taxes under Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes" ("Statement
109"). Under Statement 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined (and classified as current or long-term) based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of December
31, are as follows:
(In thousands) 1996 1995
Deferred tax liabilities:
Lease--sales and reserves $ 12,502 $ 8,927
Accelerated depreciation 179 161
-------- -------
Total deferred tax liabilities 12,681 9,088
-------- -------
Deferred tax assets:
Inventory basis differences 1,553 1,614
Accounts receivable reserves 1,135 611
Maintenance reserve 317 316
Accrued vacation pay 557 424
Foreign loss carryforwards 794 546
Other -- net 1,223 1,011
-------- -------
Deferred tax assets 5,579 4,522
Less valuation reserve 794 546
-------- -------
Net deferred tax assets 4,785 3,976
-------- -------
Net deferred tax liabilities $ 7,896 $ 5,112
-------- -------
During 1996 and 1995, the Company incurred losses of $730,000 and
$857,000 with respect to foreign operations. At December 31, 1996, the Company
had foreign loss carryforwards of approximately $2,400,000 which will begin to
expire in 1999. The valuation allowance increased by $248,000 in 1996 and
$191,000 in 1995 due to increases in foreign loss carryforward benefits.
Federal and state income taxes consisted of the following:
(In thousands) 1996 1995 1994
Federal $ 5,414 $ 4,789 $ 3,045
State 850 460 603
------- ------- -------
$ 6,264 $ 5,249 $ 3,648
------- ------- -------
The principal reasons for the difference between total income tax
expense and the amount computed by applying the statutory federal income tax
rate to income before taxes are as follows:
45
<PAGE>
1996 1995 1994
Federal tax at statutory rates
applied to pre-tax income 34% 34% 34%
State tax net of federal benefit 4 2 3
Valuation reserve increase
for foreign losses 2 2 3
Other - net 1 -- (2)
--- ----- ----
41% 38% 38%
--- ----- ----
NOTE J -- EQUITY TRANSACTIONS
In a public offering in August 1995, the Company sold 2,000,000 shares
of previously unissued common stock.
Under the Company's Long-Term Incentive Plan, selected officers and key
employees are granted options to purchase common stock of the Company at not
less than fair market value at date of grant. The options are exercisable at the
end of their ten year term, but may become exercisable in annual installments if
predetermined performance goals and share market value increases are met. During
1994, previously granted options to purchase 420,000 shares at prices of $7.50
to $9.25 per share were canceled and options to purchase 605,000 shares were
granted to an expanded group of optionees at the then fair market value of $6.00
per share.
Under other previous stock option plans, directors, officers and key
employees may purchase common stock of the Company at amounts not less than the
fair market value at the date of grant. These options generally have a term of
five to ten years and are exercisable over four to five years commencing one
year from the date of grant, except for director stock option grants, which are
exercisable commencing six months from the date of grant.
On November 19, 1993, the Board of Directors authorized the Inter-Tel,
Incorporated Long-Term Incentive Plan ("the Long Term Plan"). A total of
1,000,000 shares of common stock has been reserved for issuance under the Long
Term Plan. Options must be granted at not less than 100% of the fair market
value of the Company's stock at the dates of grant. Options generally vest over
four years and expire five to ten years from the date of grant.
On July 26, 1990, the Company adopted the Director Stock Option Plan
("the Director Plan") and reserved a total of 250,000 shares of common stock for
issuance thereunder. Commencing with the adoption of the Plan, each Eligible
Director received a one-time automatic grant of an option to purchase 2,500
shares of the Company's common stock. In addition, each Eligible Director shall
be granted an option to purchase 2,500 shares upon the date five (5) days after
such person became Director, and an additional option to purchase 2,500 shares
five (5) days after the date of annual reelection as Director. All options
granted have a five year term and fully vest at the end of six months from the
grant date. Option activity for the past three years under all plans is as
follows:
46
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
1996 1995 1994
<S> <C> <C> <C>
Outstanding at beginning of year 847,500 824,500 720,250
Granted 394,000 160,512 627,000
Exercised (102,500) (108,887) (98,750)
Expired or canceled (42,850) (28,625) (424,000)
-------- -------- --------
Outstanding at end of year 1,096,150 847,500 824,500
--------- ------- -------
Exercise price range $5.75-$20.44 $2.25-$14.50 $1.12-$9.63
Exercisable at end of year 289,350 167,083 75,000
Weighted-average fair value of
options granted during 1996 and 1995 $4.71 $3.43 N/A
</TABLE>
At December 31, 1996, the Company has reserved 1,257,238 shares of
Common Stock for issuance in connection with the stock option plans.
For the stock option plans discussed above, the Company has adopted the
disclosure only provisions of Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation." Accordingly, no
compensation cost has been recognized in the accompanying financial statements
for the stock option plans.
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Number Number
Outstanding at Weighted-Average Weighted Exercisable at Weighted
Range of December 31, Remaining Average Exercise December 31, Average Exercise
Exercise Price 1996 Contractual Life Price 1996 Price
<S> <C> <C> <C> <C> <C>
$5.75 - $8.63 589,200 4 years $5.97 247,900 $5.99
$9.63 - $14.13 209,450 6 years $12.72 24,950 $12.17
$14.50 - $20.44 297,500 5 years $16.91 16,500 $17.35
</TABLE>
During 1996, the weighted average exercise price of options granted,
exercised, and expired or canceled was $16.27, $7.63 and $11.33, respectively.
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1995 and 1996
consistent with the provisions of SFAS 123, the estimated fair value of the
options would be amortized to expense over the option's vesting period and the
Company's net income and net income per share would have been decreased to the
pro forma amounts indicated below for the year ended December 31:
1996 1995
Net income as reported $9,042 $8,499
Pro forma net income $8,815 $8,420
Pro forma earnings per share $0.66 $0.70
Pro forma results disclosed are based on the provisions of SFAS 123
using the Black-Scholes option valuation model and are not likely to be
representative of the effects on pro forma net income for future years. In
addition, The Black-Sholes option valuation model
47
<PAGE>
was developed for use in estimating the fair value of traded options which have
no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. Because the company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the estimating models
do not necessarily provide a reliable single measure of the fair value of its
employee stock options.
The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model using the low end of reasonable
assumptions for input variables rather than attempting to identify a best-point
estimate. The option pricing model utilized the following weighted average
assumptions for 1996 and 1995, respectively: risk free interest rates of 5.0% in
each year; dividend yields of 0% in each year; volatility factors of the
expected market price of the Company's stock varied among the individual option
grants under the plan due to the date of the grant and the stock and exercise
price at the time of the grant and ranged from .367 to .449; and a weighted
average expected life of the option of 2.5 years for employee stock options
which vest over a four year period with a weighted average vesting period of 2.5
years, and 1.5 years for Company director options which vest at the end of six
months from the grant date.
NOTE K -- RETIREMENT PLANS
The Company has two retirement plans for the benefit of all of its
employees. Under its 401(k) Retirement Plan, participants may contribute an
amount not exceeding 15 percent of compensation received during participation in
the Plan. The Company makes voluntary annual contributions to the Plan based on
a percentage of contributions made by Plan participants of up to 10 percent of
compensation. Contributions to the Plan totaled $394,000; $328,000 and $248,000
in 1996, 1995 and 1994, respectively.
In 1992, the Company initiated an Employee Stock Ownership Plan (ESOP),
advancing $500,000 to the ESOP Trust for the purpose of purchasing common stock
of the Company. The Trust purchased 153,500 shares of the Company's common stock
in July 1992. The loan is to be repaid over 5 years with 7.5% interest. As the
principal amount of the loan is repaid to the Company through Company annual
contributions, the equivalent number of shares released are allocated to
employees' accounts to be held until retirement. Total shares so allocated were
34,712; 32,290; and 30,037; in 1996, 1995 and 1994, respectively. Contributions
to the ESOP totaled $125,000 each in 1996, 1995 and 1994 and are based upon the
historic cost of the shares purchased by the ESOP.
NOTE L -- FINANCIAL INSTRUMENTS
Concentration of Credit Risk: Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash investments, trade accounts receivable, and net investment
in sales-leases. The Company maintains cash and equivalents not invested in
money market funds with a major bank in its marketplace. The Company performs
periodic evaluations of the relative credit standing of the financial
institution. Concentrations of credit risk with respect to trade accounts
receivable and net investment in sales-leases are limited due to the large
number of entities comprising the Company's customer base.
48
<PAGE>
Fair Value of Financial Instruments: The carrying amount of cash and
equivalents, accounts receivable, net investment in sales-leases, and accounts
payable reported in the consolidated balance sheets approximate their fair
value.
NOTE M -- SUPPLEMENTAL CASH FLOW
<TABLE>
<CAPTION>
(In thousands)
1996 1995 1994
<S> <C> <C> <C>
Cash paid for:
Interest $ 77 $ 106 $ 122
Income taxes $ 4,213 $ 1,885 $ 1,673
-------- -------- -------
Changes in operating assets and liabilities:
Increase in receivables $ (8,569) $(16,368) $ (4,258)
Increase in inventories (1,309) (5,997) (1,984)
(Increase) decrease in prepaid
expenses and other assets (6,268) (500) 1,131
Increase in long-term
other assets (4,024) (1,676) (2,402)
Increase in accounts
payable and other current
liabilities 4,466 6,400 1,602
-------- -------- -------
$(15,704) $(18,141) $(5,911)
======== ======== =======
</TABLE>
49
<PAGE>
NOTE N -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the quarterly results of operations for the years ended
December 31, 1996 and 1995 follows:
(In thousands, except per share amounts)
1996 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Net sales $42,213 $43,736 $47,435 $52,500
Gross margin 19,312 19,108 19,616 22,882
Net income 2,899 2,784 2,689 670
Net income per share $.22 $.21 $.20 $.05
Average number of
shares outstanding 13,293 13,431 13,443 13,429
1995 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Net sales $35,018 $36,924 $38,132 $40,459
Gross margin 14,274 15,259 15,919 17,385
Net income 1,834 1,342 2,500 2,823
Net income per share $.17 $.12 $.20 $.21
Average number of
shares outstanding 11,116 11,239 12,343 13,306
The 1995 quarterly results for net income per share, when totaled, do
not equal the net income per share for the year ended December 31, 1995. The
1995 sum of quarterly results for net income per share total $.70, although the
total net income per share was actually $.71 per share. See note A for more
information regarding the 1996 fourth quarter special charge.
50
EXHIBIT 22.1
SUBSIDIARIES OF INTER-TEL, INCORPORATED
Listed below are all the subsidiaries of Inter-Tel, Incorporated, as
well as the jurisdiction under the laws of which each was organized, and the
percentage of the outstanding voting stock of each owned by Inter-Tel,
Incorporated.
Percentage State or
of Voting Jurisdiction
Name Stock Owned of Organization
- - ---- ----------- ---------------
Inter-Tel Integrated Systems, Inc. 100% Arizona
Inter-Tel Communications, Inc. 100% Arizona
Inter-Tel Leasing, Inc. 100% Arizona
Inter-Tel Midwest, Inc. 100% Delaware
Inter-Tel Incorporated-New Jersey 100% Delaware
Inter-Tel NetSolutions, Inc. 100% Texas
Inter-Tel DataCom, Inc. 100% Delaware
Southwest Telephone Systems, Inc. 100% New Mexico
American Telcom Corp. of Georgia, Inc. 100% Georgia
Access West, Inc. 100% Delaware
Inter-Tel Equipment (UK), Ltd. 100% United Kingdom
Inter-Tel Japan, Inc. 100% Japan
Florida Telephone Systems, Inc. 100% Florida
NTL Corporation dba ComNet of Ohio 100% Ohio
51
EXHIBIT 23.0--CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference on page 21 in this Annual
Report (Form 10-K) of our report dated February 28, 1997 included in the 1996
Annual Report to Shareholders of Inter-Tel, Incorporated.
Our audit also included the financial statement schedule of Inter-Tel,
Incorporated listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based upon our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in Registration
Statement (Form S-3 No. 33-58161), Registration Statement (Form S-3 No.
33-61437), Registration Statement (Form S-3 No. 333-01735), ), Registration
Statement (Form S-3 No. 333-12433), Registration Statement (Form S-8 No.
2-94805), Registration Statement (Form S-8 No. 33-40353), and in Registration
Statement (Form S-8 No. 33-73620) of our report dated February 28, 1997, with
respect to the consolidated financial statements incorporated herein by
reference and our report included in the preceding paragraph with respect to the
financial statement schedule included in this Annual Report (Form 10-K) of
Inter-Tel, Incorporated.
Phoenix, Arizona /S/ ERNST & YOUNG LLP
March 21, 1997
52
EXHIBIT 24.1--POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Steven G. Mihaylo and Kurt R. Kneip,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ Steven G. Mihaylo Chairman and Chief March 21, 1997
- - --------------------- Executive Officer
Steven G. Mihaylo
/S/ Kurt R. Kneip Vice President and March 21, 1997
- - ----------------- Chief Financial Officer
Kurt R. Kneip
/S/ J. Robert Anderson Director March 21, 1997
- - -----------------------
J. Robert Anderson
/S/ Gary D. Edens Director March 21, 1997
- - -----------------
Gary D. Edens
/S/ Maurice H. Esperseth Director March 21, 1997
- - ------------------------
Maurice H. Esperseth
/S/ C. Roland Haden Director March 21, 1997
- - -------------------
C. Roland Haden
/S/ Norman Stout Director March 21, 1997
- - ----------------
Norman Stout
53
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE INTER-TEL,
INCORPORATED AND SUBSIDIARIES FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 38936
<SECURITIES> 0
<RECEIVABLES> 33094
<ALLOWANCES> 3096
<INVENTORY> 21280
<CURRENT-ASSETS> 105465
<PP&E> 26632
<DEPRECIATION> 15443
<TOTAL-ASSETS> 132611
<CURRENT-LIABILITIES> 25756
<BONDS> 0
0
0
<COMMON> 59875
<OTHER-SE> 35059
<TOTAL-LIABILITY-AND-EQUITY> 132611
<SALES> 185884
<TOTAL-REVENUES> 185884
<CGS> 104966
<TOTAL-COSTS> 104966
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77
<INCOME-PRETAX> 15306
<INCOME-TAX> 6264
<INCOME-CONTINUING> 9042
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9042
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
</TABLE>
