UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File Number:
June 30, 1997 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
Common Stock
(12,995,478 shares outstanding as of June 30, 1997)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
<PAGE>
INDEX
INTER-TEL, INCORPORATED AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--June 30, 3
1997 and December 31, 1996
Condensed consolidated statements of income--Three 4
and six months ended June 30, 1997 and June 30, 1996
Condensed consolidated statements of cash flows 5
--Three and six months ended June 30, 1997 and
June 30, 1996
Notes to condensed consolidated financial 6
statements--June 30, 1997
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II. OTHER INFORMATION 17
SIGNATURES 17
EXHIBIT 11.1 18
2
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PART I. FINANCIAL INFORMATION
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands) June 30, December 31,
1997 1996
---- ----
ASSETS
CURRENT ASSETS
Cash and equivalents $25,673 $38,936
Accounts receivable - net 29,035 29,998
Inventories 23,001 21,280
Net investment in sales-leases 8,103 8,243
Prepaid expenses and other assets 5,005 7,008
-------- --------
TOTAL CURRENT ASSETS 90,817 105,465
PROPERTY & EQUIPMENT 15,660 11,189
OTHER ASSETS 17,071 15,957
-------- --------
$123,548 $132,611
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 10,814 $8,915
Other current liabilities 15,330 16,841
-------- --------
TOTAL CURRENT LIABILITIES 26,144 25,756
DEFERRED TAXES AND OTHER LIABILITIES 13,637 11,921
SHAREHOLDERS' EQUITY
Common stock 60,115 59,875
Retained earnings 39,630 35,464
Equity adjustment for foreign
currency translation (520) (359)
-------- --------
99,225 94,980
Less:
Treasury stock at cost (15,458) --
Receivable from Employee
Stock Ownership Trust -- (46)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 83,767 94,934
-------- --------
$123,548 $132,611
======== ========
3
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
(In thousands, except Three Months Six Months
per share amounts) Ended June 30, Ended June 30,
1997 1996 1997 1996
------- ------- -------- -------
<S> <C> <C> <C> <C>
NET SALES $54,823 $43,736 $105,145 $85,949
Cost of sales 30,422 24,628 58,574 47,529
------- ------- -------- -------
GROSS PROFIT 24,401 19,108 46,571 38,420
Research & development 2,134 1,661 3,979 3,365
Selling, general and administrative 17,139 13,138 33,191 26,338
------- ------- -------- -------
19,273 14,799 37,170 29,703
OPERATING INCOME 5,128 4,309 9,401 8,717
Interest and other income 595 517 818 963
Interest expense (17) (29) (24) (33)
------- ------- -------- -------
INCOME BEFORE TAXES 5,706 4,797 10,195 9,647
Income taxes 2,282 2,013 4,101 3,964
------- ------- -------- -------
NET INCOME $3,424 $2,784 $6,094 $5,683
======= ======= ======== =======
NET INCOME PER SHARE $.26 $ .21 $.46 $ .43
======= ======= ======== =======
Average number of shares
outstanding 13,132 13,431 13,239 13,358
======= ======= ======== =======
</TABLE>
4
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
(In thousands, except Three Months Six Months
per share amounts) Ended June 30, Ended June 30,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME $3,424 $2,784 $6,094 $5,683
Adjustments to reflect operating activities:
Depreciation and amortization 1,171 973 2,240 1,894
Changes in operating assets and liabilities (1,279) (8,906) (1,445) (16,136)
Other 2,439 565 4,234 2,695
------- ------- ------- -------
NET CASH PROVIDED BY/(USED IN)
OPERATING ACTIVITIES 5,755 (4,584) 11,123 (5,864)
INVESTING ACTIVITIES
Proceeds from disposal of property
and equipment 5 132 5 132
Cash used in acquisition -- -- (825) --
Additions to property and equipment (4,711) (873) (6,420) (2,470)
------- ------- ------- -------
NET CASH USED IN INVESTING
ACTIVITIES (4,706) (741) (7,240) (2,338)
FINANCING ACTIVITIES
Payments for repurchase of common stock (17,493) -- (17,493) --
Proceeds from exercise of stock options 274 397 347 486
------- ------- ------- -------
NET CASH (USED IN)/PROVIDED BY
FINANCING ACTIVITIES (17,219) 397 (17,146) 486
DECREASE IN CASH AND EQUIVALENTS (16,170) (4,928) (13,263) (7,716)
CASH AND EQUIVALENTS
AT BEGINNING OF PERIOD 41,843 36,852 38,936 39,640
------- ------- ------- -------
CASH AND EQUIVALENTS
AT END OF PERIOD $25,673 $31,924 $25,673 $31,924
======= ======= ======= =======
</TABLE>
5
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 1997
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the results for the interim periods presented have been included. Operating
results for the three and six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1996.
NOTE B--INCOME PER SHARE
Primary earnings per share assume that outstanding common shares were increased
by shares issuable upon the exercise of all outstanding stock options to which
market price exceeds exercise price less shares which could have been purchased
with related proceeds.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in an increase
in primary earnings per share for both the second quarter and six months ended
June 30, 1997 and June 30, 1996 of $.01 and $.01 per share, respectively. The
impact of Statement 128 on the calculation of fully diluted earnings per share
for these quarters is not expected to be material.
NOTE C--TREASURY STOCK
During the second quarter of 1997, the Company initiated a stock repurchase
program under which the Board of Directors authorized the repurchase of up to
1,470,000 shares of the Company's common stock. The Company expended
approximately $17.5 million for stock repurchases in the second quarter of 1997,
which was funded primarily by existing cash balances. The Company reissued
treasury shares with a cost basis of approximately $2.0 million relating to
stock option exercises and issuances. The proceeds received for the treasury
stock reissued was less than its cost basis. Accordingly, the difference has
been recorded as a reduction to retained earnings.
6
<PAGE>
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Inter-Tel is a single point of contact, full service solutions integrator
providing AXXESS and Axxent digital communication platforms, AxxessoryTalk voice
processing platforms, call processing software and voice processing software
along with various other productivity enhancing software applications,
computer-telephony integration ("CTI"), 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 under the symbol
INTL.
This Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of many risk
factors, including, without limitation, those set forth under "Factors That May
Affect Future Results Of Operations" below.
Results of Operations
Net sales for the second quarter of 1997 increased 25.3% to $54.8
million from $43.7 million in the second quarter of 1996. Net sales increased
22.3% to $105.1 million in the first six months of 1997 from $85.9 million in
the first six months of 1996. For the quarter and six months ended June 30,
1997, sales from wholesale distribution and direct sales offices accounted for
approximately $8.2 million and $13.4 million of the increases, respectively. The
remaining increases occurred in long distance sales and other 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:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 55.5 56.3 55.7 55.3
---- ---- ---- ----
Gross profit 44.5 43.7 44.3 44.7
Research and development 3.9 3.8 3.8 3.9
Selling, general and
administrative 31.3 30.0 31.6 30.7
---- ---- ---- ----
Operating income 9.3 9.9 8.9 10.1
Interest and other income 1.1 1.2 0.8 1.1
Interest expense 0.0 0.1 0.0 --
Income taxes 4.2 4.6 3.9 4.6
---- ---- ---- ----
Net income 6.2% 6.4% 5.8% 6.6%
==== ==== ==== ====
7
<PAGE>
Gross profit for the second quarter of 1997 increased 27.7% to $24.4
million, or 44.5% of net sales, from $19.1 million, or 43.7% of net sales, for
the second quarter of 1996. Gross profit increased to $46.6 million, or 44.3% of
net sales, in the first six months of 1997 from $38.4 million, or 44.7% of net
sales, in the first six months of 1996. Gross margin increased in the second
quarter of 1997 primarily as a result of higher sales of AXXESS digital
communication platforms, call processing software and voice processing software
as a percentage of net sales, which was offset in part by a higher percentage of
sales through dealers and increased sales of the Company's network services and
long distance calling services, which generally have a lower gross margin than
sales of the Company's other products.
Research and development expenses for the second quarter of 1997
increased to $2.1 million, or 3.9% of net sales, from $1.7 million, or 3.8% of
net sales, for the second quarter of 1996. Research and development expenses
increased to $4.0 million, or 3.8% of net sales, in the first six months of 1997
from $3.4 million, or 3.9% of net sales, in the first six months of 1996. The
increases in absolute dollars in both periods were primarily attributable to
expenses relating to the development and introduction of new products, including
continuing development and improvement of AXXESS digital communication
platforms, call processing and voice processing software, CTI products, unified
messaging, and TCP/IP intranet and internet voice solutions (Vocal'Net and
Inter-Tel.net). The Company expects that research and development expenses will
continue to increase in absolute dollars as the Company continues to develop new
software and to enhance existing technologies and products. These expenses may
vary, however, as a percentage of net sales.
Selling, general and administrative expenses for the second quarter of
1997 increased to $17.1 million, or 31.3% of net sales, from $13.1 million, or
30.0% of net sales, for the second quarter of 1996. Selling, general and
administrative expenses increased to $33.2 million, or 31.6% of net sales, in
the first six months of 1997 from $26.3 million, or 30.6% of net sales, in the
first six months of 1996. The increases, both in dollars and as a percentage of
sales, for the quarter and six months ended June 30, 1997, were attributable in
part to cost associated with increases in sales from the direct sales offices,
which typically generate higher selling, general and administrative expenses
compared to sales through dealer channels. The Company also has expanded its
technical training staff, increased its receivables reserves, and continues to
hire and train additional sales personnel throughout Inter-Tel's direct sales
offices and to provide additional marketing resources and sales personnel for
the expanded dealer network and for network services and long distance services.
Higher sales commissions were also paid based upon increased levels of net
sales. The Company expects that selling, general and administrative expenses
will continue to increase in absolute dollars, but may vary as a percentage of
net sales.
Other income in both periods consisted primarily of interest income and
foreign exchange rate gains and losses. Income from interest decreased slightly
in both comparable periods of 1997 based on lower invested funds. Other changes
are primarily due to differences in net foreign exchange rate gains and losses.
Net income for the second quarter increased 23.0% to $3.4 million ($.26
per share) compared to net income of $2.8 million ($.21 per share) for the
second quarter of 1996. Net income increased 7.2% to $6.1 million, or $.46 per
share, in the first six months of 1997 from $5.7 million, or $.43 per share, in
the first six months of 1996.
8
<PAGE>
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 moved to domestic sources. The expansion of
international operations in the United Kingdom and Europe and increased sales,
if any, 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
At June 30, 1997, the Company had $25.7 million in cash and
equivalents, which represents a decrease of approximately $13.3 million from
December 31, 1996. The Company maintains a $7.0 million, unsecured revolving
line of credit with Bank One, Arizona, NA. The credit facility is annually
renewable and is available through July 31, 1998. Under the credit facility, the
Company has the option to borrow at a prime rate or adjusted LIBOR interest
rate. Historically, the credit facility has been used primarily to support
international letters of credit to suppliers.
Net cash provided by operating activities totaled $11.1 for the six
months ended June 30, 1997, compared to net cash used by operating activities of
$5.9 million for the same period in 1996. The increase in cash generated was
primarily the result of profitable operations and reduced accounts receivable,
which were partially offset by higher inventory levels. During the first six
months of 1997, accounts receivable decreased approximately $963,000, while
inventories increased approximately $1.7 million. Inventories increased in part
due to higher revenues and related requirements to support additional sales
locations. The Company continues to expand its dealer network, which has
required and is expected to continue to require working capital for increased
accounts receivable and inventories.
Net cash used in investing activities, primarily in the form of capital
expenditures, was $7.2 million and $2.3 million for the six months ended June
30, 1997 and 1996, respectively. Capital expenditures and cash used in an
acquisition totaled approximately $6.4 million and $825,000, respectively, in
the first six months of 1997. The Company anticipates additional capital
expenditures during 1997, principally relating to expansion of facilities,
equipment and management information systems used in operations.
Net cash used in financing activities totaled $17.1 million compared to
net cash generated of $486,000 for the same period in 1996. During the second
quarter of 1997, the Company initiated a stock repurchase program under which
the Board of Directors authorized the repurchase of up to 1,470,000 shares of
the Company's common stock. The Company expended approximately $17.5 million for
stock repurchases in the second quarter of 1997, which was funded primarily by
existing cash balances. The Company reissued treasury shares with a cost basis
of approximately $2.0 million relating to stock option exercises and issuances.
The proceeds received for the treasury stock reissued was less than its cost
basis. Accordingly, the difference has been recorded as a reduction to retained
earnings.
9
<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 these programs in part through the sale to financial institutions
of rental income streams under the leases. Resold lease rentals totaling $84.7
million and $66.0 million remain unbilled at June 30, 1997 and December 31,
1996, respectively. The Company is obligated to repurchase such income streams
in the event of defaults by lease customers and, accordingly, maintains reserves
based upon loss experience and past due accounts. Although the Company to date
has been able to resell the rental streams from leases under its lease programs
profitably and on a substantially current basis, the timing and profitability of
lease resales could impact the Company's business and operating results,
particularly in an environment of fluctuating interest rates and economic
uncertainty. If the Company is required to repurchase rental streams and realize
losses thereon in amounts exceeding its reserves, its operating results will be
adversely affected.
The Company believes that its existing working capital, anticipated
cash flows from operations and credit facilities will be sufficient to fund
purchases of capital equipment, finance cash acquisitions, repurchase shares of
the Company's common stock 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, stock repurchases, expansion of the
business or additional acquisitions, the Company will seek additional financing.
There can be no assurance that additional financing will be available when
required or on acceptable terms.
Factors That May Affect Results of Future Operations
In evaluating the Company's business, shareholders should carefully consider the
following factors in addition to the other information presented in this Form
10-Q.
Rapid Technological Change And Dependence On New And Timely Product
Introductions
The market for the Company's software, products and services is
characterized by rapid technological change and continuing demand for new
products, features and applications. Current competitors or new market entrants
may develop new products or product features that could adversely affect the
competitive position of the Company's products. Accordingly, the timely
introduction of new products and product features, as well as new
telecommunications applications, will be a key factor in the Company's future
success. Occasionally, new products contain undetected errors or "bugs" when
released. Such bugs may result from defects contained in software products
offered by the Company's suppliers or other third parties that are intended to
be compatible with the Company's products, over which the Company has little or
no control. Although the Company seeks to minimize the number of bugs in its
products by its test procedures and strict quality control, there can be no
assurance that its new products will be error free when introduced. Any
significant delay in the commercial introduction of the Company's products due
to bugs, any design modifications required to correct bugs or any impairment of
customer satisfaction as a result of bugs could have a material adverse effect
on the Company's business and operating results. In addition, new products often
take several months before their manufacturing costs stabilize, which may
adversely affect operating results for a period of time following introduction.
10
<PAGE>
During the past twelve months, the Company introduced ISDN on its
AXXESS digital communication platform, expanded the size of the Inter-Tel Axxent
platform, 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 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.
11
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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 the division of AT&T's operations
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 television operators can now 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 (which has agreed to
acquire Octel), 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
12
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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 will face competition from large computer software
companies, including IBM (Lotus), and Microsoft. In addition, the server-based
telephony, internet telephony and CTI markets have shown increasing competition
from small start-up software 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 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. Following the
date of implementation, the Company 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.
As a result, 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. Inter-Tel
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.
13
<PAGE>
The actions to replace the MIS system software could result in
additional costs and 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 relies principally on copyright and trade secret law and
contractual provisions to protect its intellectual property. There can be no
assurance that any copyright owned by the Company will not be invalidated,
circumvented or challenged or that the rights granted thereunder will provide
competitive advantages to the Company. Further, there can be no assurance that
others will not develop technologies that are similar or superior to the
Company's technology or that duplicate the Company's technology.
As the Company expands its international operations, effective
intellectual property protection may be unavailable or limited in certain
foreign countries. There can be no assurance that the steps 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
14
<PAGE>
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 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.
15
<PAGE>
Potential Fluctuations In Quarterly Results; Limited Backlog
The Company's quarterly operating results depend upon a variety of
factors, including the volume and timing of orders received during the quarter,
the mix of products sold, mix of distribution channels, general economic
conditions, patterns of capital spending by customers, the timing of new product
announcements and releases by the Company and its competitors, pricing pressures
and the availability and cost of products and components from the Company's
suppliers. The Company's customers typically require immediate shipment and
installation of platforms and software. As a result, the Company has
historically operated with a relatively small backlog, and sales and operating
results in any quarter are principally dependent on orders booked and shipped in
that quarter. Moreover, market demand for investment in capital equipment such
as digital communication platforms and associated call processing and voice
processing software applications is largely dependent on general economic
conditions, and can vary significantly as a result of changing conditions in the
economy as a whole. The Company's expense levels are based in part on
expectations of future sales and, if sales levels do not meet expectations,
operating results could be adversely affected. Because sales of digital
communication platforms through the Company's dealers produce lower gross
margins than sales through the Company's direct sales organization, operating
results have varied, and will continue to vary based upon the mix of sales
through direct and indirect channels. Although the Company to date has been able
to resell the rental streams from leases under its Totalease program profitably
and on a substantially current basis, the timing and profitability of lease
resales from quarter to quarter could impact operating results, particularly in
an environment of fluctuating interest rates. Long distance sales have, in
recent periods, grown at a faster rate than the Company's overall net sales and
such sales have lower gross margins than the Company's core business. As a
result, gross margins could be adversely affected in the event that long
distance calling services continue to increase as a percentage of net sales. In
addition, the Company is subject to seasonality in its operating results, as net
sales for the first and third quarters are frequently less than those
experienced in the fourth and second quarters, respectively. As a result of
these and other factors, the Company has in the past and could in the future
experience fluctuations in sales and operating results on a quarterly basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Concentration of Ownership
As of June 30, 1997, the Company's Chairman of the Board of Directors and Chief
Executive Officer beneficially owned approximately 23% 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.
16
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM l. LEGAL PROCEEDINGS--Not Applicable
ITEM 2. CHANGES IN SECURITIES--Not Applicable
ITEM 3. DEFAULTS ON SENIOR SECURITIES--Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
HOLDERS - Not Applicable
ITEM 5. OTHER INFORMATION -- Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
Exhibit 11.1 - Computation of Earnings Per Share
Exhibit 27.1 - Financial Data Schedule for June 30, 1997
Reports on Form 8-K -- None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTER-TEL, INCORPORATED
Date 8/14/97 /s/ Steven G. Mihaylo,
--------- ----------------------------
Steven G. Mihaylo,
Chairman of the Board
and Chief Executive Officer
Date 8/14/97 /s/ Kurt R. Kneip,
--------- ----------------------------
Kurt R. Kneip,
Vice President
and Chief Financial Officer
17
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
(Thousands except Three Months Six Months
per share amounts) Ended June 30, Ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 12,719 12,874 12,835 12,843
Net effect of dilutive stock
options--based on the
treasury stock method
using average market price 413 557 404 515
------ -------- ------ --------
TOTAL 13,132 13,431 13,239 13,358
====== ====== ====== ======
Net Income $3,424 $2,784 $6,094 $5,683
====== ====== ====== ======
Per share amount $.26 $.21 $.46 $.43
==== ==== ==== ====
FULLY DILUTED
Average shares outstanding 12,719 12,874 12,835 12,843
Net effect of dilutive stock
options--based on the treasury
stock method using the quarter-
end market price, if higher than
the average market price 742 609 742 609
------- -------- ------ --------
TOTAL 13,461 13,483 13,577 13,452
====== ====== ====== ======
Net income $3,424 $2,784 $6,094 $5,683
====== ====== ====== ======
Per share amount $.25 $.21 $.45 $.42
==== ==== ==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
INTER-TEL, INCORPORATED AND SUBSIDIARIES FINANCIAL
DATA SCHEDULE (EXHIBIT 27.1) THIS SCHEDULE
CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE INTER-TEL, INCORPORATED AND SUBSIDIARIES
FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 25673
<SECURITIES> 0
<RECEIVABLES> 32456
<ALLOWANCES> 3421
<INVENTORY> 23001
<CURRENT-ASSETS> 90817
<PP&E> 33143
<DEPRECIATION> 17483
<TOTAL-ASSETS> 123548
<CURRENT-LIABILITIES> 26144
<BONDS> 0
0
0
<COMMON> 60115
<OTHER-SE> (520)
<TOTAL-LIABILITY-AND-EQUITY> 123548
<SALES> 105145
<TOTAL-REVENUES> 105145
<CGS> 58574
<TOTAL-COSTS> 58574
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> 10195
<INCOME-TAX> 4101
<INCOME-CONTINUING> 6094
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6094
<EPS-PRIMARY> .46
<EPS-DILUTED> .45
</TABLE>
