As filed with the Securities and Exchange Commission on October 31, 1997
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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INTER-TEL, INCORPORATED
(Exact name of Registrant as specified in its charter)
Arizona 86-0220994
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(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification No.)
120 North 44th Street, Suite 200
Phoenix, Arizona 85304-1822
(602) 302-8900
(Address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
---------------
STEVEN G. MIHAYLO
Chairman of the Board of Directors
and Chief Executive Officer
Inter-Tel, Incorporated
120 North 44th Street, Suite 200
Phoenix, Arizona 85034-1822
(602) 302-8900
(Name, address, including zip code and telephone number, including area code,
of agent for service)
---------------
Copies to:
Jeffrey D. Saper, Esq. Stanton D. Wong, Esq.
Patrick J. Schultheis, Esq. Karen A. Dempsey, Esq.
Robert G. Day, Esq. Shannon M. Hernandez, Esq.
Caine T. Moss, Esq. Pillsbury Madison & Sutro LLP
Wilson Sonsini Goodrich & Rosati P. O. Box 7880
Professional Corporation San Francisco, California 94120
650 Page Mill Road (415) 983-1000
Palo Alto, California 94304-1050
(650) 493-9300
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
---------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<TABLE>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
<CAPTION>
Title of each class of securities Amount to be Proposed maximum offering Proposed maximum agregate Amount of
to be registered registered(1) price per share(2) offering price(2) registration fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value ........ 3,530,500 shares $22.25 $78,553,625 $23,805
====================================================================================================================================
<FN>
(1) Includes 460,500 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee, based on the average of the high and low prices for the
Common Stock as reported on the Nasdaq National Market on October 27, 1997,
in accordance with Rule 457(c) promulgated under the Securities Act of
1933, as amended.
</FN>
</TABLE>
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securuties and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED OCTOBER 31, 1997
3,070,000 Shares
[GRAPHIC OMITTED]
Common Stock
Of the 3,070,000 shares of Common Stock offered hereby, 3,000,000 shares
are being sold by Inter-Tel, Incorporated ("Inter-Tel" or the "Company") and
70,000 shares are being sold by the Selling Shareholders. The Company will not
receive any of the proceeds from the sale of shares by the Selling Shareholders.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol INTL. On October 29, 1997, the last reported sale price of the Common
Stock on the Nasdaq National Market was $24.375 per share. See "Price Range of
Common Stock."
This offering involves a high degree of risk. See "Risk Factors" commencing
on page 5 for a discussion of certain factors that should be considered by
prospective purchasers of the Common Stock offered hereby.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
====================================================================================================================================
Price to Underwriting Proceeds to Proceeds to Selling
Public Discount(1) Company(2) Shareholders
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<S> <C> <C> <C> <C>
Per Share ............................. $ $ $ $
Total(3) ............................. $ $ $ $
====================================================================================================================================
<FN>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $700,000.
(3) The Selling Shareholders have granted to the Underwriters a 30-day option
to purchase up to 460,500 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $ , the Underwriting Discount will total $
and the Proceeds to Selling Shareholders will total $ . See "Underwriting."
</FN>
</TABLE>
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of NationsBanc Montgomery Securities, Inc. on or about ,
1997.
----------------
NATIONSBANC MONTGOMERY SECURITIES, INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
JEFFERIES & COMPANY, INC.
, 1997
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information may be inspected and copied (at prescribed
rates) at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices located at 75 Park Place, 14th Floor, New York, New York 10047
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material also can be obtained from the Public Reference Branch of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a World Wide Web site at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that are filed electronically with the Commission.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement.
INFORMATION INCORPORATED BY REFERENCE
The following documents filed with the Commission (File No. 0-10211)
pursuant to the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31 and June 30, 1997.
3. The description of the Company's Common Stock contained in its
Registration Statement on Form 8-A filed with the Commission on
February 26, 1982 pursuant to Section 12(g) of the Exchange Act.
4. All reports and other documents subsequently filed by the Company
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this Prospectus and prior to the termination of this
offering.
Any statement incorporated herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein, in a Prospectus Supplement or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of the Registration Statement or this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any and all of the documents which are
incorporated herein by reference (other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference into such document).
Requests for such documents should be directed to Inter-Tel, Incorporated, 120
North 44th Street, Suite 200, Phoenix, Arizona 85034-1822, or by calling (602)
302-8900.
-----------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF
COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M.
SEE "UNDERWRITING."
-----------
"Inter-Tel," "AXXESS," "AXXESSORY Talk," "AXXESSORY ACD," "AXXESSORY
Connect," "Inter-Tel.net," "Visual Mail" and "Vocal'Net" are trademarks of the
Company. This Prospectus also includes trademarks of other companies.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and consolidated financial statements and
notes thereto, appearing elsewhere in, or incorporated by reference into, this
Prospectus. In this Prospectus, the words "expects," "anticipates," "believes,"
"intends," "will" and similar expressions identify forward-looking statements,
which speak only as of the date hereof, and are subject to certain risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in such forward-looking statements. Factors that may cause
such a difference include, but are not limited to, those discussed in "Risk
Factors." Unless otherwise indicated, (i) all share and per share data in this
Prospectus have been adjusted to give effect to the Company's two-for-one stock
split, effected in the form of a 100% stock dividend, paid to shareholders on
October 21, 1997 (the "Stock Split"), (ii) the information contained in this
Prospectus assumes no exercise of the Underwriters' over-allotment option and
(iii) references in this Prospectus to "Inter-Tel"and the "Company" refer to
Inter-Tel, Incorporated and its subsidiaries.
The Company
Inter-Tel is a single point of contact, full service provider of digital
business telephone systems, Internet protocol ("IP") telephony products,
computer-telephone integration ("CTI") applications, voice processing software
and long distance calling services. Inter-Tel's products and services include
the AXXESS and Inter-Tel Axxent digital business communication platforms, the
AXXESSORY Talk voice processing platform, the Vocal'Net IP telephony gateway and
the Inter-Tel.net private IP telephony network. The Company also provides
maintenance, leasing and support services for its products. The Company believes
that it is a leading supplier of small to medium size business telephone
systems.
The Company's strategy is to offer its customers, through a broad
distribution network, a single source for their full range of
telecommunications requirements and to provide its targeted market segment
advanced technologies on a cost-effective basis. The Company believes that its
customers prefer to purchase telecommunications equipment and services from a
single source because of the convenience, consistency of service, ease of
upgrade and confidence in the performance of integrated systems and services.
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 and medium size organizations and to divisions or departments of larger
organizations, such as 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.
In September 1997, the Company released Vocal'Net, a stand-alone IP
telephony gateway that can be used with the AXXESS system or virtually any
business telephone system equipped with T-1/E-1, ISDN or analog capability.
Vocal'Net provides a gateway for bridging traditional circuit switched
telephone networks and IP packet switched networks such as the Internet and
corporate intranets. With Vocal'Net, users can conduct real-time, two-way voice
communications over IP networks and realize potential savings compared to
standard long distance phone service. In addition to targeting private
enterprises for their independent use of the Vocal'Net gateway, the Company
seeks to enter into relationships with Internet service providers ("ISPs"),
cable television companies, telephone service providers and companies with
extensive IP data networks to build IP telephony networks. Inter-Tel is
developing and implementing Inter-Tel.net, a private IP network designed to
carry long distance telephone traffic. To date, the Inter-Tel.net network has
established points of presence in the San Francisco Bay Area, Washington, D.C.,
Chicago, New York, Phoenix and Los Angeles.
Inter-Tel was founded in 1969 and is incorporated in Arizona. The
Company's principal offices are located at 120 North 44th Street, Suite 200,
Phoenix, Arizona 85034-1822, and its telephone number at that address is (602)
302-8900.
3
<PAGE>
<TABLE>
The Offering
<CAPTION>
<S> <C>
Common Stock offered by the Company .................. 3,000,000 shares
Common Stock offered by the Selling Shareholders ...... 70,000 shares
Common Stock to be outstanding after the Offering ..... 26,553,942 shares(1)
Use of Proceeds .................................... To develop and expand Inter-Tel.net and for
potential acquisitions, strategic alliances,
working capital and general corporate
purposes
Nasdaq National Market Symbol ........................ INTL
</TABLE>
<TABLE>
Summary Consolidated Financial Data
(in thousands, except per share data)
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1997
--------- ----------- ----------- ----------------- ----------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ..................... $88,120 $ 103,373 $ 123,878 $ 150,533 $ 185,884 $ 133,384 $ 162,061
Gross profit .................. 34,089 40,285 49,845 62,837 80,918 58,036 72,870
Operating income ............... 5,121 6,489 8,806 12,180(2) 13,409(3) 12,870 15,983
Net income ..................... $ 3,164 $ 3,941 $ 5,940 $ 8,499(2) $ 9,042(3) $ 8,372 $ 10,072
======== ========== ========== =========== =========== ========== ==========
Net income per share(4):
Primary ..................... $ 0.18 $ 0.22 $ 0.27 $ 0.35(2) $ 0.34(3) $ 0.31 $ 0.39
======== ========== ========== =========== =========== ========== ==========
Fully diluted ............... $ 0.18 $ 0.22 $ 0.27 $ 0.35(2) $ 0.34(3) $ 0.31 $ 0.37
======== ========== ========== =========== =========== ========== ==========
Weighted average shares and share
equivalents(4):
Primary ..................... 17,320 18,060 21,800 24,002 26,790 26,720 26,035
Fully diluted ............... 17,320 18,132 21,800 24,048 26,794 26,796 27,155
</TABLE>
September 30, 1997
----------------------------
Actual As Adjusted(5)
---------- ---------------
Working capital ............ $ 62,206 $130,975
Total assets ............... 125,282 194,051
Shareholders' equity ...... 79,543 148,312
- ------------
(1) Based upon shares outstanding as of September 30, 1997. Excludes (i)
3,018,150 shares reserved for issuance upon exercise of outstanding stock
options as of September 30, 1997 and (ii) 1,994,776 additional shares
reserved for future issuance pursuant to the Company's stock option and
employee stock purchase plans.
(2) Operating income in the year ended December 31, 1995 includes a special
charge of $1,315,000, which reduced net income by $815,000, or $0.03 per
share after tax. This special charge reflects the costs associated with
integrating the operations of American Telcom Corp. of Georgia, Inc. and
Access West, Inc. 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 $0.39 per share for such period.
(3) Operating income in the year ended December 31, 1996 includes a special
charge of $4,542,000, which reduced net income by $2,725,000, or $0.10 per
share after tax. This special charge reflects the decision by the Company
to replace its MIS 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 $0.44 per share for such period.
(4) Financial data for all periods have been restated to reflect the Stock
Split.
(5) Adjusted to give effect to the sale of 3,000,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of
$24.375 per share and the receipt of the estimated net proceeds therefrom.
See "Use of Proceeds" and "Capitalization."
4
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Prospectus that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, including without limitation statements
regarding the Company's expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in this document
are based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements.
The cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus. In evaluating the Company's business, prospective investors
should consider carefully the following factors in addition to the other
information set forth in this Prospectus.
Rapid Technological Change; Dependence On Recently Introduced Products
The market for the Company's software, products and services is
characterized by rapid technological change and continuing demand for new
products, features and applications. Current competitors or new market entrants
may develop new products or product features that could adversely affect the
competitive position of the Company's products. Accordingly, the timely
introduction of new products and product features, as well as new
telecommunications applications, will be key factors in the Company's future
success.
During the past twelve months, the Company introduced unified messaging on
its AXXESSORY Talk platform, developed a number of enhancements to its existing
AXXESS and AXXESSORY Talk platforms and introduced Vocal'Net. The Company is
also currently in the later stages of developing the AXXESS 5.0 platform, a
significant software upgrade and enhancement to its AXXESS and AXXESSORY Talk
platforms. The Company's future success will depend, in large part, upon the
timely and successful introduction of the AXXESS 5.0 platform. The Company's
future success will also depend upon market acceptance of the Company's other
new products or enhancements, including Vocal'Net. There can be no assurance
that these introduced products and enhancements will be successful. In the
event that the Company were to fail to successfully introduce new software,
products or services or upgrades to its existing systems or products on a
regular and timely basis, demand for the Company's existing software, products
and services could decline, which could have a material adverse effect on the
Company's business and operating results. Further, if the markets for IP
network products or CTI applications fail to develop or grow more slowly than
the Company anticipates, or if the Company is unable for any reason to
capitalize on either of these emerging market opportunities, the Company's
business, financial condition and results of operations could be materially
adversely affected.
Occasionally, new products contain undetected program errors or "bugs"
when released. Such bugs may result from defects contained in software products
offered by the Company's suppliers or other third parties that are intended to
be compatible with the Company's products, over which the Company has little or
no control. For example, in the third quarter of 1996, the Company's operating
results were adversely impacted by a recall of the Inter-Tel Axxent digital
communication platform. Although the Company seeks to minimize the number of
bugs in its products by its test procedures and quality control, there can be
no assurance that its new products will be error free when introduced. Any
significant delay in the commercial introduction of the Company's products due
to bugs, any design modifications required to correct bugs or any impairment of
customer satisfaction as a result of bugs could have a material adverse effect
on the Company's business and operating results. In addition, new products
often take several months before their manufacturing costs stabilize, which may
adversely affect operating results for a period of time following introduction.
Developing Market for IP Network Telephony; Uncertain Regulatory Environment
The market for IP network voice communications products has only recently
begun to develop, is rapidly evolving and is characterized by an increasing
number of market entrants who have introduced or
5
<PAGE>
developed products and services for Internet or other IP network voice
communications. As is typical in the case of a new and rapidly evolving
industry, the demand for and market acceptance of recently introduced IP
network products and services are subject to a high degree of uncertainty.
There can be no assurance that voice communications over IP networks will
become widespread. Further, even if voice communications over IP networks
achieve broad market acceptance, there can be no assurance that the Company's
products, in particular Vocal'Net, will achieve market acceptance.
The adoption of voice communications over IP networks generally requires
the acceptance of a new way of exchanging information. In particular,
enterprises that have already invested substantial resources in other means of
communicating information may be reluctant or slow to adopt a new approach to
communications. The lack of control over IP network infrastructure and each
user's system configuration may cause users of IP network voice communications
delays in the transmission of speech, loss of voice packets and inferior sound
quality relative to standard telephony networks. If these factors cause the
market for IP network voice communications to fail to develop or to develop
more slowly than the Company anticipates, the Company's IP network telephony
products could fail to achieve market acceptance, which in turn could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The regulatory environment for IP network telephony is subject to
substantial uncertainty. There can be no assurance that the sale and use of IP
network telephony products such as Vocal'Net will not violate
telecommunications or other regulations in any of the countries in which such
products are or will be marketed and used. In the United States, the Company
believes that there are currently few laws or regulations directly applicable
to voice communications over IP networks or to access to, or commerce on, IP
networks generally. However, changes in the regulatory environment,
particularly in regulations relating to the telecommunications industry, could
have a material adverse effect on the Company's business. The increased
commercial acceptance of voice communications over IP networks could result in
intervention by governmental regulatory agencies in the United States or
elsewhere in the world under existing or newly enacted legislation and in the
imposition of fees, charges or taxes on users and providers of products and
services in this area. There can be no assurance that such intervention or
imposition of fees, charges or taxes would not have a material adverse effect
upon the acceptance and attractiveness of IP network voice communications.
Moreover, legislative proposals from international, federal and state
government bodies could impose additional regulations and obligations upon
on-line service providers. The growing popularity and use of the Internet has
increased public focus and could lead to increased pressure on legislatures to
impose such regulations. While the Company is not aware of any other proposed
legislation or regulation directly affecting its business, the Company cannot
predict the likelihood that any future legislation or regulation will be
enacted, nor the financial impact, if any, of such resulting legislation or
regulation. In the future, the Company may also develop and introduce other
products with new or additional telecommunications capabilities or services,
which could be subject to existing federal government regulations or result in
the imposition of new government regulations, either in the United States or
elsewhere.
Risks Associated with Vocal'Net; Dependence upon IP Network Infrastructures;
Risk of System Failure; Security Risks
In September 1997, the Company began commercial shipment of Vocal'Net, its
stand-alone IP telephony gateway product and, to date, revenues from the sale
of this product have not been significant. To achieve market acceptance,
Vocal'Net will be required to demonstrate its functionality, scalability and
reliability, of which there can be no assurance. In addition, there can be no
assurance that Vocal'Net will comply with industry standards or that industry
standards will not change and render Vocal'Net obsolete. In the event that
Vocal'Net fails to achieve market acceptance, the Company's business, financial
condition and results of operations could be materially and adversely affected.
The success of Vocal'Net will also depend upon, among other things, the
continued expansion of the Internet and other IP networks and their network
infrastructures. There can be no assurance that the infrastructure or
complementary products necessary to make the Internet a viable commercial
network will continue to be developed. In addition, there can be no assurance
that IP networks will retain their
6
<PAGE>
current volume, distance and time-of-day-independent pricing structure, or that
the costs of access to IP networks, lack of capacity or poor voice transmission
quality of IP networks will not adversely affect the market for IP network
products and services. Moreover, critical issues concerning the commercial use
of the Internet (including security, reliability, cost, ease of use and access
and quality of service) remain unresolved and may affect the growth of IP
network use. There can be no assurance that the Internet will be able to meet
additional demand or its users' changing requirements on a timely basis, at a
commercially reasonable cost, or at all.
The Vocal'Net gateway can be vulnerable to computer viruses or similar
disruptive problems. Computer viruses or problems caused by third parties could
lead to interruptions, delays or cessation of service. Further, inappropriate
use of the Internet or other IP networks by third parties could potentially
jeopardize the security of confidential information, such as credit card or
bank account information or the content of conversations over the IP network,
which may deter certain persons from ordering and using the Company's products.
Until more comprehensive security technologies are developed, the security and
privacy concerns of existing and potential users may inhibit the growth of IP
networks in general and the market for the Company's IP network products in
particular.
Development and Maintenance of Inter-Tel.net Network
The Company is currently utilizing its Vocal'Net technology to develop and
expand its own IP network, Inter-Tel.net, to carry telephone traffic. The
Inter-Tel.net network is in its initial stages of deployment and, accordingly,
is subject to a high degree of risk. To date, the Inter-Tel.net network has
established points of presence in the San Francisco Bay Area, Washington, D.C.,
Chicago, New York, Phoenix and Los Angeles. If the market for IP network
products fails to develop or develops more slowly than the Company anticipates,
the Company's Inter-Tel.net network could become financially burdensome to
maintain or obsolete, either of which could materially and adversely affect the
Company's business, financial condition and results of operations.
The Company is dependent on third-party suppliers of telecommunications
and Internet network transmission services for implementation of Inter-Tel.net
and does not currently have long-term contracts with such suppliers. The
Company's ability to expand Inter-Tel.net is dependent upon its ability to
obtain services from such suppliers. Certain of these third party suppliers are
or may become competitors of the Company, and such suppliers generally are not
subject to restrictions upon their ability to compete with the Company. To the
extent that any of these suppliers raise their rates or change their pricing
structure, the Company may be materially adversely affected. Also, the Company
faces the risk that there will be a disruption in the service provided by these
suppliers, and can give no assurance that there will not be a significant
disruption in such service in the future, thereby causing a disruption in the
services provided by the Company to its customers.
Moreover, although the Company has devoted, and intends to continue to
devote, substantial resources to improve the quality of telephone conversations
using Vocal'Net and the Inter-Tel.net network, there can be no assurance that
the problems of voice communications over the Inter-Tel.net network that exist
today, including delays in the transmission of speech, loss of voice packets
and sound quality inferior to that of standard telephony networks, will be
eliminated or reduced. In the event that the Company is unable to improve upon
the sound quality and other limitations of voice communications over the
Inter-Tel.net network and to offer such improvements to its customers on a
cost-effective basis, the Inter-Tel.net network could fail to achieve market
acceptance, and the Company's business, financial condition and results of
operations could be materially and adversely affected.
Highly Competitive Industry
The market for the Company's products is highly competitive and in recent
periods has been characterized by pricing pressures and business
consolidations. The Company's competitors include Lucent Technologies, Inc.
("Lucent") and Northern Telecom Limited ("NorTel"), as well as Comdial
Corporation ("Comdial"), EXECUTONE Information Systems, Inc. ("Executone"),
Iwatsu America, Inc.
7
<PAGE>
("Iwatsu"), Mitel Corporation ("Mitel"), NEC Corporation ("NEC"), Nitsuko
Corporation ("Nitsuko"), Matsushita Electric Industrial Co., Ltd.
("Panasonic"), Siemens Rolm Communications, Inc. ("Siemens"), Toshiba America,
Inc. ("Toshiba") and others. Many of these competitors have significantly
greater financial, marketing and technical resources than the Company. The
Company also competes against the regional Bell operating companies ("RBOCs"),
which offer systems produced by one or more of the aforementioned competitors
and also offer Centrex systems in which automatic calling facilities are
provided through equipment located in the telephone company's central office.
The Telecommunications Act of 1996 (the "Telecommunications Act") and AT&T
Corporation's ("AT&T") announcement to divide itself into three enterprises has
had an impact on competition in the communications industry. The
Telecommunications Act opened the market for telephone and cable television
services, forcing telephone companies to open their networks to competitors and
giving consumers a choice of local phone carriers. Conversely, local phone
companies are now able to offer long distance services. In addition, cable
television companies can offer telephone services and Internet access. These
changes have increased competition in the communications industry and have
created additional competition and opportunities in customer premise equipment,
as these new services and interfaces have become available.
In the market for voice processing applications, including voice mail, the
Company competes against Applied Voice Technology, Inc. ("AVT"), Active Voice
Corporation ("Active Voice"), Centigram Communications Corporation
("Centigram"), Lucent and other competitors, certain of which have
significantly greater resources than the Company. In the market for long
distance services, the Company competes against AT&T, MCI Communication
Corporation, Sprint Corporation and other competitors, many of which have
significantly greater resources than the Company. The Company also expects to
compete with RBOCs, cable television companies, satellite and other wireless
broadband service providers and others for long distance business as those
companies gradually respond to the Telecommunications Act. Key competitive
factors in the sale of telephone systems and related applications include
price, performance, features, reliability, service and support, name
recognition and distribution capability. The Company believes that it competes
favorably in its markets with respect to the price, performance and features of
its systems, as well as the level of service and support that the Company
provides to its customers. Certain of the Company's competitors have
significantly greater name recognition and distribution capabilities than the
Company. The Company expects that competition will continue to be intense in
the markets addressed by the Company, and there can be no assurance that the
Company will be able to continue to compete successfully.
In the market for IP telephony products, the Company competes against
existing IP telephony gateway providers such as Lucent, NetSpeak Corporation,
VocalTec Communications Ltd., Vienna Systems Corporation and others. Several of
these competitors have been active in developing and marketing IP telephony
products for a greater period of time than the Company and have already
established relationships with customers within their market. In addition, the
Company could face significant competition from vendors such as Cisco Systems,
Inc., Bay Networks, Inc., 3Com Corporation, Motorola, Inc. and MICOM
Communications Corp., should such established data vendors choose to enter the
market for IP telephony products. Such companies currently produce products
that, if equipped with voice capabilities, could represent a considerable
threat to the Company within that market. Moreover, should the market for IP
telephony products become fully developed or develop at a rapid rate, large
companies such as IBM Corporation ("IBM") and Microsoft Corporation
("Microsoft") could choose to develop proprietary software designed to
facilitate voice communication over an IP network.
As the Company enters the markets for local telephone service and IP
network access, it will face additional competition from RBOCs and other
providers, which have larger marketing and sales organizations, significantly
greater financial and technical resources and a larger and more established
customer base than the Company. In addition, RBOCs and other providers have
greater name recognition, more established positions in the market and long
standing relationships with customers. Therefore, there can be no assurance
that the Company will compete successfully in these markets.
8
<PAGE>
Many of the Company's current and potential competitors have longer
operating histories, are substantially larger, and have greater financial,
manufacturing, marketing, technical and other resources. A number also have
greater name recognition and a larger installed base of products than the
Company. Competition in the Company's markets may result in significant price
reductions. As a result of their greater resources, many current and potential
competitors may be better able than the Company to initiate and withstand
significant price competition or downturns in the economy. There can be no
assurance that the Company will be able to continue to compete effectively, and
any failure to do so would have a material adverse effect on the Company's
business, financial condition and operating results.
Management of Growth; Implementation of New Management Information Systems
The growth in the Company's business has placed, and is expected to
continue to place, a significant strain on the Company's personnel, management
and other resources. The Company's ability to manage any future growth
effectively will require it to attract, train, motivate and manage new
employees successfully, to integrate new employees into its overall operations
and to continue to improve its operational, financial and management
information systems.
The Company implemented a new MIS system late in 1995. The MIS system
significantly affected many aspects of the Company's business, including its
accounting, operations, purchasing, sales and marketing functions. Following
the date of implementation, the Company experienced difficulty with the new MIS
software, which increased the Company's costs, had an adverse effect on the
Company's ability to provide products and services to its customers on a timely
basis and caused delays in coordinating accounting and financial results.
During the fourth quarter of 1996, the Company determined that the limitations
of the existing system software would prevent Inter-Tel from establishing an
integrated and centralized dispatch and telemarketing center. As a result, the
Company signed an agreement with a large, established software and database
vendor to replace its existing MIS software and implement, maintain and support
alternate MIS software to be utilized throughout the Company. Accordingly,
during the fourth quarter of 1996, the Company wrote off the software license
and implementation costs relating to the system software being replaced.
The actions to replace the MIS software could result in additional costs
and delays associated with obtaining a fully functional MIS system, including
but not limited to the costs of procuring additional or alternate hardware and
software required but not available in the current system configuration, and
additional personnel. Any such cost or delay could have a material adverse
effect on the Company's business, financial condition and operating results. In
addition, implementation of this system software and the transition from the
current system software to the new information system software will require
substantial financial resources, time and personnel.
The Company has made strategic acquisitions in the past and expects to
continue to do so in the future. Acquisitions require a significant amount of
the Company's management attention and financial and operational resources, all
of which are limited. The integration of acquired entities may also result in
unexpected costs and disruptions and significant fluctuations in, or reduced
predictability of, operating results from period to period. There can be no
assurance that an acquisition will not adversely affect the business
relationships of the Company or the acquired entity with its respective
suppliers or customers. Further, there can be no assurance that the Company
will be able to successfully integrate any acquired operations or achieve any
of the intended benefits of an acquisition. The Company's failure to manage its
growth effectively could have a material adverse effect on its business,
financial condition and operating results.
Dependence Upon Contract Manufacturers and Component Suppliers
The Company currently procures certain components used in its digital
communication platforms, including certain microprocessors, integrated
circuits, power supplies, voice processing interface cards and IP telephony
cards from a single source or limited sources of supply and, accordingly,
product availability could be limited. As the Company deploys its IP telephony
products and the Inter-Tel.net network, the Company expects that it will be
required to increasingly rely upon third party software and hardware
9
<PAGE>
suppliers. The Company currently manufactures its products through a limited
number of contract manufacturers located in the United States, the Philippines
and the People's Republic of China. Foreign manufacturing facilities are
subject to changes in governmental policies, imposition of tariffs and import
restrictions and other factors beyond the Company's control. Varian Associates,
Inc. ("Varian") currently manufactures a significant portion of the Company's
products at Varian's Tempe, Arizona facility, including substantially all of
the printed circuit boards used in the AXXESS and Inter-Tel Axxent digital
communication platforms. From time to time, the Company has experienced delays
in the supply of components and finished goods, and there can be no assurance
that the Company will not experience such delays in the future. The Company's
reliance on third party manufacturers involves a number of additional risks,
including reduced control over delivery schedules, quality assurance and costs.
Any delay in delivery or shortage of supply of components or finished goods
from Varian or any other supplier, or the Company's inability to develop in a
timely manner alternative or additional sources if and when required, could
damage the Company's relationships with current and prospective customers and
could materially and adversely affect the Company's business, financial
condition and operating results. The Company has no long term agreements with
its suppliers that require such suppliers to provide fixed quantities of
components or finished goods at set prices. There can be no assurance that the
Company will be able to continue to obtain components or finished goods in
sufficient quantities or quality or on favorable pricing and delivery terms in
the future.
Product Protection and Infringement
The Company's future success will depend in part upon its proprietary
technology. Although the Company has applied to the U.S. Patent and Trademark
Office for a patent related to certain aspects of the Vocal'Net technology, the
Company currently has no issued patents and relies principally on copyright and
trade secret law and contractual provisions to protect its intellectual
property. There can be no assurance that any patent, trademark or copyright
owned by the Company will not be invalidated, circumvented or challenged or that
the rights granted thereunder will provide meaningful protection or any
commercial competitive advantage to the Company. Further, there can be no
assurance that others will not develop technologies that are similar or superior
to the Company's technology or that duplicate the Company's technology. As the
Company expands its international operations, effective intellectual property
protection may be unavailable or limited in certain foreign countries. There can
be no assurance that the steps taken by the Company will prevent
misappropriation of its technology. Litigation may be necessary in the future to
enforce the Company's intellectual property rights, to protect the Company's
trade secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and operating results.
From time to time, the Company is subject to proceedings alleging
infringement by the Company of intellectual property rights of others. If any
such claim is asserted against the Company, the Company may seek to obtain a
license under the third party's intellectual property rights. There can be no
assurance that a license will be available on terms acceptable to the Company
or at all. In the alternative, the Company could resort to litigation to
challenge any such claim. Any such litigation could require the Company to
expend significant sums, divert management's attention and require the Company
to pay significant damages, develop non-infringing technology or acquire
licenses to the technology which is the subject of the asserted infringement,
any of which could have a material adverse effect on the Company's business,
financial condition and operating results. In the event that the Company is
unable or chooses not to license such technology or decides not to challenge
such third party's rights, the Company could encounter substantial and costly
delays in product introductions while attempting to design around such third
party rights, or could find that the development, manufacture or sale of
products requiring such licenses could be foreclosed.
10
<PAGE>
Reliance on Dealer Network
A substantial portion of the Company's net sales are made through its
network of independent dealers. The Company faces intense competition from
other telephone system and voice processing system manufacturers for such
dealers' business, as most of the Company's dealers carry products which
compete with the Company's products. The Company has no exclusive agreements
with any of its dealers. The loss of any significant dealer or group of
dealers, or any event or condition adversely affecting the Company's dealer
network, could have a material adverse effect on the Company's business,
financial condition and operating results.
Dependence on Key Personnel
The Company is dependent on the continued service of, and its ability to
attract and retain, qualified technical, marketing, sales and managerial
personnel. The competition for such personnel is intense, and the loss of any
of such persons, as well as the failure to recruit additional key technical and
sales personnel in a timely manner, would have a material adverse effect on the
Company's business and operating results. There can be no assurance that the
Company will be able to continue to attract and retain the qualified personnel
necessary for the development of its business.
Risks of Providing Long Distance and Network Services
Inter-Tel depends on its supply of telecommunications services and
information from several long distance carriers. Because it does not own
transmission facilities, the Company relies on long distance carriers to provide
network services to the Company's customers and for billing information. Long
distance services are subject to extensive and uncertain governmental regulation
on both the federal and state level. There can be no assurance that the
promulgation of certain regulations will not materially and adversely affect the
Company's business, financial condition and operating results. Contracts with
the long distance carriers from which the Company currently resells services
typically have a one year term in which the Company's prices are relatively
fixed and have minimum use requirements. The market for long distance services
is currently experiencing and is expected to experience in the future
significant price competition, resulting in decreasing end-user rates. There can
be no assurance that the Company will meet minimum use commitments, will be able
to negotiate lower rates with carriers in the event of any decrease in end user
rates or will be able to extend its contracts with long distance carriers at
prices favorable to the Company. The Company's ability to continue to expand its
long distance services depends upon its ability to continue to secure reliable
long distance services from a number of long distance carriers and the
willingness of such carriers to continue to provide telecommunications services
and billing information to the Company on favorable terms.
Potential Fluctuations In Quarterly Results; Limited Backlog
The Company's quarterly operating results depend upon a variety of
factors, including the volume and timing of orders received during the quarter,
the mix of products sold, mix of distribution channels, general economic
conditions, patterns of capital spending by customers, the timing of new
product announcements and releases by the Company and its competitors, pricing
pressures, the cost and effect of acquisitions, and the availability and cost
of products and components from the Company's suppliers. The Company's
customers typically require immediate shipment and installation of platforms
and software. As a result, the Company has historically operated with a
relatively small backlog, and sales and operating results in any quarter are
principally dependent on orders booked and shipped in that quarter.
Historically, a substantial portion of the Company's net sales in a given
quarter have been recorded in the third month of the quarter, with a
concentration of such net sales in the last two weeks of the quarter. Market
demand for investment in capital equipment such as digital communication
platforms and associated call processing and voice processing software
applications is largely dependent on general economic conditions, and can vary
significantly as a result of changing conditions in the economy as a whole. The
Company's expense levels are based in part on expectations of future sales and,
if sales levels do not meet expectations, operating results could be adversely
affected. Because sales of digital communication platforms through the
Company's dealers produce lower gross margins than sales through the Company's
11
<PAGE>
direct sales organization, operating results have varied, and will continue to
vary based upon the mix of sales through direct and indirect channels. Although
the Company to date has been able to resell the rental streams from leases
under its Totalease program profitably and on a substantially current basis,
the timing and profitability of lease resales from quarter to quarter could
impact operating results, particularly in an environment of fluctuating
interest rates. Long distance sales, which have lower gross margins than the
Company's core business, have grown in recent periods at a faster rate than the
Company's overall net sales. As a result, gross margins could be adversely
affected in the event that long distance calling services continue to increase
as a percentage of net sales. In addition, the Company is subject to
seasonality in its operating results, as net sales for the first and third
quarters are frequently less than those experienced, in the fourth and second
quarters, respectively. As a result of these and other factors, the Company has
in the past experienced, and could in the future experience, fluctuations in
sales and operating results on a quarterly basis. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Volatility of Stock Price
The market price for the Company's Common Stock has been highly volatile.
The Company believes that factors such as announcements of developments
relating to the Company's business, fluctuations in the Company's operating
results, shortfalls in revenue or earnings relative to securities analysts'
expectations, announcements of technological innovations or new products or
enhancements by the Company or its competitors, general conditions in the
telecommunications industry or the worldwide economy, changes in legislation or
regulation affecting the telecommunications industry, an outbreak of
hostilities, developments in intellectual property rights and developments in
the Company's relationships with its customers and suppliers could cause the
price of the Company's Common Stock to fluctuate, perhaps substantially. Many
of such factors are beyond the Company's control. In addition, in recent years
the stock market in general, and the market for shares of technology stocks in
particular, have experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. There can be no
assurance that the market price of the Company's Common Stock will not
experience significant fluctuations in the future, including fluctuations that
are unrelated to the Company's performance.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than three years, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. Although the Company currently offers software
products that are designed to be Year 2000 compliant, there can be no assurance
that the Company's software products contain all necessary date code changes.
The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues in a variety of ways.
Many companies are expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase software products such as those
offered by the Company. Many potential customers may also choose to defer
purchasing Year 2000 compliant products until they believe it is absolutely
necessary, thus resulting in potentially stalled market sales within the
industry. Conversely, Year 2000 issues may cause other companies to accelerate
purchases, thereby causing an increase in short-term demand and a consequent
decrease in long-term demand for software products. Additionally, Year 2000
issues could cause a significant number of companies, including existing
customers of the Company, to reevaluate their current communications platform,
IP network telephony or voice processing software needs, and as a result
consider switching to other systems or suppliers.
12
<PAGE>
Any of the foregoing could result in a material adverse effect on the Company's
business, financial condition and operating results.
Concentration of Ownership
As of September 30, 1997, Steven G. Mihaylo, the Company's Chairman of the
Board of Directors and Chief Executive Officer beneficially owned approximately
23.4% of the outstanding shares of the Common Stock. As a result, he has the
ability to exercise significant influence over matters requiring shareholder
approval. In addition, the concentration of ownership could have the effect of
delaying or preventing a change in control of the Company.
13
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 3,000,000 shares of Common Stock
offered by the Company hereby are estimated to be $68.8 million, based on an
assumed public offering price of $24.375 per share and after deduction of the
estimated underwriting discount and offering expenses. The Company intends to
use a portion of the net proceeds of this offering to develop and expand its
Inter-Tel.net network. The Company may use another portion of the net proceeds
to finance acquisitions of additional resellers of telephony products, other
strategic acquisitions or corporate alliances. The Company considers such
acquisitions on an ongoing basis but has no current commitments for any
acquisition which would have a material impact on the Company's results of
operations or financial condition. The Company intends to use the balance of the
net proceeds primarily for working capital and other general corporate purposes.
Pending such uses, the Company will invest the net proceeds in investment grade
short or medium term income producing investments. The Company will not receive
any proceeds from the sale of shares by the Selling Shareholders.
DIVIDEND POLICY
On September 24, 1997, the Company's Board of Directors declared a cash
dividend (the "Cash Dividend") of $0.01 for every share of Common Stock,
payable to shareholders of record as of December 31, 1997, with dividend
payments to commence on or about January 15, 1997. Prior to the Cash Dividend,
the Company had declared no cash dividends on its Common Stock since
incorporation.
14
<PAGE>
<TABLE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol INTL. The following table sets forth, for the periods indicated,
high and low sale prices for the Common Stock as reported on the Nasdaq
National Market.
<CAPTION>
High Low
-------- -------
<S> <C> <C>
1995
First Quarter ................................. $ 6.50 $3.44
Second Quarter ................................. 8.06 5.78
Third Quarter ................................. 9.88 7.44
Fourth Quarter ................................. 8.69 6.94
1996
First Quarter ................................. 9.25 5.69
Second Quarter ................................. 14.19 8.75
Third Quarter ................................. 13.31 8.00
Fourth Quarter ................................. 12.25 6.00
1997
First Quarter ................................. 9.75 5.69
Second Quarter ................................. 11.00 4.75
Third Quarter ................................. 26.75 9.88
Fourth Quarter (through October 29, 1997) ...... 32.38 18.50
</TABLE>
On October 29, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $24.375 per share. As of October 22, 1997, the
Company had approximately 590 holders of record of its Common Stock.
15
<PAGE>
<TABLE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company at September 30, 1997 and as adjusted to give effect to the
issuance and sale by the Company of 3,000,000 shares of Common Stock offered
hereby at an assumed public offering price of $24.375 per share and the receipt
of the estimated net proceeds therefrom.
<CAPTION>
September 30, 1997
---------------------------
Actual As Adjusted
------------ ------------
(in thousands)
<S> <C> <C>
Short-term debt ............................................. $ -- $ --
========= ========
Long-term debt ............................................. $ -- $ --
Shareholders' equity:
Common Stock, no par value, 30,000,000 shares authorized,
actual, 100,000,000 shares authorized, as adjusted;
23,553,942 shares issued and outstanding, actual, 26,553,942
shares issued and outstanding, as adjusted(1) ............ 60,473 106,185
Retained earnings .......................................... 42,441 42,441
Equity adjustment for foreign currency translation ......... (314) (314)
--------- --------
102,600 148,312
Less treasury stock at cost ................................. (23,057) --
--------- --------
Total shareholders' equity .............................. 79,543 148,312
--------- --------
Total capitalization .................................... $ 79,543 $148,312
========= ========
<FN>
- ------------
(1) As adjusted authorized shares reflect the approval of the amendment of the
Company's articles of incorporation as of November 12, 1997 to increase
the authorized number of shares of Common Stock from 30,000,000 to
100,000,000. Shares issued and outstanding exclude (i) 3,018,150 shares
reserved for issuance upon exercise of stock options as of September 30,
1997 and (ii) 1,994,776 additional shares reserved for future issuance
pursuant to the Company's stock option and employee stock purchase plans.
</FN>
</TABLE>
16
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data
of the Company and its subsidiaries. The selected consolidated financial data as
of December 31, 1995 and 1996 and for each of the three years in the period
ended December 31, 1996 are derived from consolidated financial statements that
have been audited by Ernst & Young LLP, independent auditors, which are
incorporated by reference in this Prospectus. The selected consolidated
financial data as of December 31, 1992, 1993 and 1994 and for each of the two
years in the period ended December 31, 1993 are derived from consolidated
financial statements that have been audited by Ernst & Young LLP, independent
auditors, which are not included or incorporated by reference in this
Prospectus. The selected consolidated financial data for the nine month periods
ended September 30, 1996 and 1997 and as of September 30, 1997 are derived from
unaudited consolidated financial statements which are incorporated by reference
into this Prospectus. The unaudited consolidated financial statements include
all adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the entire fiscal year ending December 31, 1997 or for future
periods. The data presented below should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and other financial
information incorporated by reference into this Prospectus.
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
------------------------------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1997
--------- ----------- ----------- ---------------- ---------------- ----------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ..................... $88,120 $ 103,373 $ 123,878 $ 150,533 $ 185,884 $ 133,384 $ 162,061
Cost of sales .................. 54,031 63,088 74,033 87,696 104,966 75,348 89,191
-------- ---------- ---------- ----------- ----------- ---------- ----------
Gross profit .................. 34,089 40,285 49,845 62,837 80,918 58,036 72,870
Research and development ...... 3,928 4,114 4,537 5,764 6,581 4,933 5,852
Selling, general and
administrative ................. 25,040 29,682 36,502 43,578 56,386 40,233 51,035
Special charge ............... -- -- -- 1,315 (1) 4,542 (2) -- --
-------- ---------- ---------- ----------- ----------- ---------- ----------
Operating income ............... 5,121 6,489 8,806 12,180 (1) 13,409 (2) 12,870 15,983
Interest and other income ...... 680 282 904 1,674 1,974 1,356 924
Interest expense ............... 736 449 122 106 77 43 37
Income taxes .................. 1,901 2,381 3,648 5,249 6,264 5,811 6,798
-------- ---------- ---------- ----------- ----------- ---------- ----------
Net income .................. $ 3,164 $ 3,941 $ 5,940 $ 8,499 (1) $ 9,042 (2) $ 8,372 $ 10,072
======== ========== ========== =========== =========== ========== ==========
Net income per share(3):
Primary ..................... $ 0.18 $ 0.22 $ 0.27 $ 0.35 (1) $ 0.34 (2) $ 0.31 $ 0.39
======== ========== ========== =========== =========== ========== ==========
Fully diluted ............... $ 0.18 $ 0.22 $ 0.27 $ 0.35 (1) $ 0.34 (2) $ 0.31 $ 0.37
======== ========== ========== =========== =========== ========== ==========
Weighted average shares and
share equivalents(3):
Primary ..................... 17,320 18,060 21,800 24,002 26,790 26,720 26,035
Fully diluted ............... 17,320 18,132 21,800 24,048 26,794 26,796 27,155
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------- September 30,
1992 1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ---------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ............ $ 12,484 $ 34,244 $ 37,220 $ 75,623 $ 79,709 $ 62,206
Total assets ............... 37,838 57,467 67,748 118,767 132,611 125,282
Shareholders' equity ...... 19,375 38,605 45,122 85,117 94,934 79,543
<FN>
- ------------
(1) Operating income in the year ended December 31, 1995 includes a special
charge of $1,315,000, which reduced net income by $815,000, or $0.03 per
share after tax. This special charge reflects the costs associated with
integrating the operations of American Telcom Corp. of Georgia, Inc. and
Access West, Inc. 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 $0.39 per share, for such period.
(2) Operating income in the year ended December 31, 1996 includes a special
charge of $4,542,000, which reduced net income by $2,725,000, or $0.10 per
share after tax. This special charge reflects the decision by the Company
to replace its MIS 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 $0.44 per share, for such
period.
(3) Financial data for all periods have been restated to reflect the Stock
Split.
</FN>
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Prospectus contain
forward-looking statements that involve risks and uncertainties. The words
"expects," "anticipates," "believes," "intends," "will" and similar expressions
identify forward-looking statements which are based on information available to
the Company on the date hereof, and the Company assumes no obligation to update
any such forward-looking statements. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in "Risk Factors" and
elsewhere in this Prospectus.
General
Inter-Tel is a single point of contact, full service provider of digital
business telephone systems, IP telephony products, CTI applications, voice
processing software and long distance calling services. Inter-Tel's products
and services include the AXXESS and Inter-Tel Axxent digital business
communication platforms, the AXXESSORY Talk voice processing platform, the
Vocal'Net IP telephony gateway and the Inter-Tel.net private IP telephony
network. The Company also provides maintenance, leasing and support services
for its products.
The Company has developed networks of direct sales offices, dealers and
VARs that sell the Company's products. In recent periods, the Company has
focused on expanding its direct sales capabilities and its dealer and VAR
network. The Company has acquired a number of resellers of telephony products
and integrated these operations with its existing direct sales operations in
the same geographic areas and in other strategic markets.
Sales of systems through the Company's dealers and VARs typically generate
lower gross margins than sales through the Company's direct sales organization,
although direct sales typically require higher levels of selling, general and
administrative expenses. In addition, the Company's long distance and network
services typically generate lower gross margins than sales of software and
system products. Accordingly, the Company's margins may vary from period to
period depending upon distribution channel and product mix. In the event that
sales through dealers or sales of long distance services increase as a
percentage of net sales, the Company's overall gross margin could decline.
The Company's operating results depend upon a variety of factors,
including the volume and timing of orders received during a period, the mix of
products sold and mix of distribution channels, general economic conditions,
patterns of capital spending by customers, the timing of new product
announcements and releases by the Company and its competitors, pricing
pressures, the cost and effect of acquisitions and the availability and cost of
products and components from the Company's suppliers. Historically, a
substantial portion of the Company's net sales in a given quarter have been
recorded in the third month of the quarter, with a concentration of such net
sales in the last two weeks of the quarter. In addition, the Company is subject
to seasonality in its operating results, as net sales for the first and third
quarters are frequently less than those experienced during the fourth and
second quarters, respectively. See "Risk Factors--Potential Fluctuations in
Quarterly Results; Limited Backlog."
The Company offers to its customers a package of lease financing and other
services under the name Totalease. Totalease provides to customers lease
financing, maintenance and support services, fixed price upgrades and other
benefits. The Company finances this program through the periodic resale of
monthly lease payments to financial institutions.
18
<PAGE>
<TABLE>
Results of Operations
The following table sets forth certain statement of operations data
expressed as a percentage of net sales:
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales ........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................ 59.8 58.3 56.5 56.5 55.0
------- ------- ------- ------- -------
Gross profit ........................ 40.2 41.7 43.5 43.5 45.0
Research and development ............ 3.6 3.8 3.5 3.7 3.6
Selling, general and administrative . 29.5 28.9 30.3 30.2 31.5
Special charge ..................... -- 0.9 2.5 -- --
------- ------- ------- ------- -------
Operating income ..................... 7.1 8.1 7.2 9.6 9.9
Interest and other income ............ 0.7 1.1 1.1 1.0 0.5
Interest expense ..................... 0.1 0.1 0.0 0.0 0.0
Income taxes ........................ 2.9 3.5 3.4 4.3 4.2
------- ------- ------- ------- -------
Net income ........................... 4.8% 5.6% 4.9% 6.3% 6.2%
======= ======= ======= ======= =======
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Net Sales. Net sales increased 21.5% to $162.1 million in the first nine
months of 1996 from $133.4 million in the first nine months of 1996. Sales from
the Company's direct sales offices and wholesale distribution accounted for
approximately $19.6 million of the increase. The remaining increases occurred
in network and long distance sales and other operations.
Gross Profit. Gross profit increased to $72.9 million, or 45.0% of net
sales, in the first nine months of 1997 from $58.0 million, or 43.5% of net
sales, in the first nine months of 1996. This increase was primarily a result
of higher sales, as a percentage of total net sales, of AXXESS digital
communication platforms, call processing software and voice processing
software. In addition, gross margin increased based on a percentage increase in
sales through the Company's direct sales offices compared to its dealer
network.
Research and Development. Research and development expenses increased to
$5.9 million, or 3.6% of net sales, in the first nine months of 1997 from $4.9
million, or 3.7% of net sales, for the first nine months of 1996. This dollar
increase was primarily attributable to expenses relating to the continued
development of the AXXESS software and systems, unified messaging and voice
processing software, Vocal'Net and CTI applications. The Company expects that
research and development expenses will continue to increase in absolute dollars
as the Company continues to develop and enhance existing and new technologies
and products. These expenses may vary, however, as a percentage of net sales.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $51.0 million, or 31.5% of net sales, for the first nine
months of 1997 from $40.2 million, or 30.2% of net sales, for the first nine
months of 1996. This reflected increased selling, incentive, training and other
compensation costs attributable to the increased sales through the Company's
direct sales offices, additional personnel to support the direct dealer network
and the expansion of long distance operations, development of the Inter-Tel.net
network and expenses associated with the expansion of international operations.
In addition, the Company increased its sales and technical training staff,
expanded its credit management group and made increases in reserves for
accounts receivable. The Company expects that selling, general and
administrative expenses will increase in absolute dollars, but may vary as a
percentage of net sales.
Interest and Other Income. Interest and other income decreased
approximately $400,000 in 1997 principally as a result of lower levels of cash
available for investment.
Net Income. Net income increased 20.3% to $10.1 million, or $0.39 per
share, for the first nine months of 1997 compared to net income of $8.4
million, or $0.31 per share, for the first nine months of 1996.
19
<PAGE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales. 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. 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. 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 and CTI
applications.
Selling, General and Administrative. 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.
Special Charge. During the fourth quarter of 1996, the Company decided to
replace its MIS 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 ($0.10 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. 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. Net income increased 6.4% to $9.0 million, or $0.34 per share,
in 1996 including the special charge recognized in the fourth quarter, compared
to $8.5 million, or $0.35 per share, in 1995. Excluding the special charges in
both periods, net income would have been $11.8 million, or $0.44 per share, for
1996 compared to $9.3 million, or $0.39 per share for 1995. In addition, net
income per share in 1996 was based on additional average shares outstanding in
1996, primarily reflecting the public offering of 4.0 million shares in August
1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net Sales. 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. 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. 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. 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 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.
20
<PAGE>
Special Charge. The special pre-tax charge of $1.3 million ($0.03 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. 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. Net income increased 43.1% to $8.5 million, or $0.35 per
share, in 1995 after a special charge recognized in the second quarter, from
$5.9 million, or $0.27 per share, in 1994. Without the special charge, net
income would have been $9.3 million, or $0.39 per share, for the year. In
addition, net income per share in 1995 was based on additional average shares
outstanding, primarily reflecting the public offering of 4.0 million shares in
August 1995.
Inflation/Currency Fluctuation
Inflation and currency fluctuations have not previously had a material
impact on Inter-Tel's operations. International procurement agreements have
traditionally been denominated in U.S. currency. Moreover, a significant amount
of contract manufacturing has been or is expected to be moved to domestic
sources. The expansion of international operations in the United Kingdom and
Europe and increased sales, if any, in Japan and other parts of Asia and
elsewhere could result in higher international sales as a percentage of total
revenues; however, international revenues are currently not significant.
Liquidity and Capital Resources
At September 30, 1997, the Company had $22.2 million in cash and
equivalents, which represents a decrease of approximately $16.7 million from
December 31, 1996. The Company maintains a $7.0 million unsecured revolving
line of credit with Bank One, Arizona, NA. This credit facility is annually
renewable and is available through July 31, 1998. Under the credit facility,
the Company has the option to borrow at a prime rate or adjusted LIBOR interest
rate. Historically, the credit facility has been used primarily to support
international letters of credit to suppliers.
Net cash provided by operating activities totaled $17.6 million for the
nine months ended September 30, 1997, compared to net cash used by operating
activities of $722,000 for the same period in 1996. The increase in cash
generated in 1997 was primarily the result of profitable operations plus non
cash depreciation charges and a slightly improved net working capital position.
Net working capital improved principally due to a $5.0 million increase in
current liabilities, which was largely offset by accounts receivable and
inventory increases of $4.9 million due to higher revenues and operations. The
Company continues to expand its dealer network, which has required and is
expected to continue to require working capital for increased accounts
receivable and inventories.
Net cash used in investing activities, primarily in the form of capital
expenditures, was $8.8 million and $4.6 million for the nine months ended
September 30, 1997 and 1996, respectively. Capital expenditures and cash used
in an acquisition totaled approximately $8.1 million and $825,000,
respectively, in the first nine months of 1997. The Company anticipates making
additional capital expenditures during the remainder of 1997, which will relate
to the expansion of facilities, equipment and management information systems
used in operations.
Net cash used in financing activities totaled $25.6 million for the nine
months ended September 30, 1997 compared to net cash generated of $591,000 for
the same period in 1996. During the second quarter of 1997, the Company
initiated a stock repurchase program under which the Board of Directors
authorized the repurchase of up to 1,470,000 shares (on a pre-Stock Split basis)
of the Common Stock. The Company expended approximately $7.6 million and $25.1
million for stock repurchases in the third quarter and the nine months ended
September 30, 1997, respectively, which were funded primarily through existing
cash balances. The Company reissued shares with a cost basis of approximately
$2.1 million and $4.1 million in the third quarter and nine months ended
September 30, 1997, respectively,
21
<PAGE>
relating to stock option exercises and issuances. The proceeds received for the
stock reissued was less than its cost basis. Accordingly, the difference has
been recorded as a reduction to retained earnings.
The Company offers to its customers lease financing and other services,
including its Totalease program. The Company funds these programs in part
through the sale to financial institutions of rental income streams under the
leases. Resold lease rentals totaling $92.0 million and $66.0 million remain
unbilled at September 30, 1997 and December 31, 1996, respectively. The Company
is obligated to repurchase such income streams in the event of defaults by
lease customers and, accordingly, maintains reserves based upon loss experience
and past due accounts. Although the Company to date has been able to resell the
rental streams from leases under its lease programs profitably and on a
substantially current basis, the timing and profitability of lease resales
could impact the Company's business and operating results, particularly in an
environment of fluctuating interest rates and economic uncertainty. If the
Company is required to repurchase rental streams and realize losses thereon in
amounts exceeding its reserves, its operating results will be adversely
affected.
The Company believes that the net proceeds from this offering and its
working capital and credit facilities, together with cash generated from
operations, will be sufficient to develop and expand its Inter-Tel.net network,
to finance acquisitions of additional resellers of telephony products and other
strategic acquisitions or corporate alliances, and to provide adequate working
capital for at least the next twelve months. However, to the extent that
additional funds are required in the future to address working capital needs
and to provide funding for capital expenditures, expansion of the business or
the Inter-Tel.net network or additional acquisitions, the Company will seek
additional financing. There can be no assurance that additional financing will
be available when required or on acceptable terms.
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"), which is required
to be adopted on December 31, 1997. At that time, the Company will be required
to change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options will be excluded. The
impact is expected to result in an increase in primary earnings per share for
the third quarter ended September 30, 1997 and September 30, 1996 of $0.01 and
$0.00 per share respectively. The impact is expected to result in an increase
in primary earnings per share for the nine months ended September 30, 1997 and
September 30, 1996 of $0.01 and $0.02 per share respectively. The impact of
SFAS No. 128 on the calculation of fully diluted earnings per share for these
quarters is not expected to be material.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. The adoption of
SFAS 131 will have no impact on the Company's consolidated results of
operations, financial position or cash flows.
22
<PAGE>
BUSINESS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the 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 factors set
forth under "Risk Factors" and elsewhere in this Prospectus.
Inter-Tel is a single point of contact, full service provider of digital
business telephone systems. IP telephony products, CTI applications, voice
processing software and long distance calling services. Inter-Tel's products
and services include the AXXESS and Inter-Tel Axxent digital business
communication platforms, the AXXESSORY Talk voice processing platform, the
Vocal'Net IP telephony gateway and the Inter-Tel.net private IP telephony
network. The Company also provides maintenance, leasing and support services
for its products. Because of the modular design and high level of software
content in the Company's products, including its AXXESS and Inter-Tel Axxent
systems, customers can readily increase the size and functionality of their
systems as their future telecommunications needs change. The Company believes
that it is a leading supplier of small to medium size business telephone
systems.
The Company has developed a distribution network of direct sales offices,
dealers and VARs which sell the Company's products to small and medium size
organizations and to divisions or departments of larger organizations such as
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 in the process of
expanding its international dealer network.
Industry Background
In recent years, advances in telecommunications technologies have
facilitated the development of increasingly sophisticated telephone systems and
applications. Users rely upon a variety of applications, including conference
calling, speaker phones, automated attendant, voice processing and unified
messaging (the integration of voice mail, facsimile and electronic mail), to
improve communications within their organizations and with customers and
vendors. Digital technology has facilitated the integration of computing and
telecommunications technologies, which has made possible a number of new
applications that further enhance productivity. Examples of these applications
include automatic call distribution (which provides for queuing and
prioritization of incoming calls), call accounting (which permits accounting for
telephone usage and toll calls), unified messaging, electronic data interchange
between customers and vendors and the use of automatic number identification
coupled with database look-up (where customer information is retrieved
automatically from a computerized database when the customer calls).
The emergence of high-performance, low-cost computers and the growth of
the Internet and other digital IP networks have enabled real-time voice
communications to be transmitted on digital packet switched networks rather
than over traditional circuit switched telephone networks. This development of
voice applications for the Internet and other IP networks reflects a broader
convergence of standard voice communications and data networks. Because IP
network telephony converts all transmissions to the same type of packets, both
voice and data can use the same data circuits, thereby increasing efficiency
and maximizing the use of available bandwidth. The lowering of federal
regulatory barriers to competition across traditionally distinct sectors of the
telecommunications industry has opened new markets for and increased
competitive pressures on telecommunications companies. In response to these
factors, telecommunications companies have begun to establish a presence in
Internet and other IP network voice communications services.
Following the breakup of the Bell system in 1984, which removed
restrictions on the ability of the RBOCs to purchase telecommunications
equipment from independent suppliers and to resell such equipment to end users,
the market for telecommunications systems and applications became increasingly
fragmented. The number of independent suppliers and distributors of
telecommunications equipment
23
<PAGE>
initially increased, but increased levels of competition subsequently led to
consolidation among suppliers and distributors. In addition, different
telecommunications systems and applications were often available from only one
or a limited number of suppliers, which required businesses seeking complete
systems to work with a number of different suppliers. A business seeking a
telephone system, voice mail and long distance services would most likely
purchase the products and services from three separate vendors. As business
telecommunications requirements have become more advanced, the integration of
different systems has become increasingly difficult.
Strategy
Inter-Tel's objective is to continue to strengthen its position as a
leading single-source provider of telecommunications equipment, software
applications and network services. The Company's strategy incorporates the
following key elements:
Offer Total Telephony Solution
The Company intends to continue to offer a broad range of products and
services that incorporates advanced technologies and provides customers with a
single source to fulfill their telecommunications needs on a cost-effective
basis. Inter-Tel couples this solution-oriented approach with a high level of
customer service and support and a commitment to quality throughout the
Company's operations. The Company's telephone systems are integrated with the
Company's long distance calling services, voice mail, automated attendant and
other telecommunications applications, support for interactive voice response.
Because of the modular design of the Company's systems and the high level of
software content in its products, customers can readily increase the size and
functionality of their systems as their needs change by adding software and
hardware applications or services or by upgrading to new systems or advanced
versions of existing systems. The Company believes that its customers prefer to
purchase telecommunications equipment and services from a single source because
of the convenience, consistency of service, ease of upgrade, availability of
financing alternatives and confidence in the performance of integrated systems
and services.
Accelerate Adoption of Vocal'Net Gateway
In September 1997, Inter-Tel commercially released Vocal'Net, a gateway
for bridging public circuit switched telephone networks and IP packet switched
networks such as the Internet. The Company intends to focus its initial
marketing efforts on existing customers as well as other multi-location
companies and international enterprises. Vocal'Net can be used to reduce an
enterprise's communications costs through more effective use of its data
network and reduced use of traditional long distance services. In addition, the
Company plans to pursue relationships with ISPs, long distance resellers, cable
television companies and other service providers that choose to establish
alternative networks to compete with traditional long distance services and to
provide additional applications to their customers.
Expand Inter-Tel.net Network
The Company is currently developing and implementing its own private IP
telephony network, Inter-Tel.net, to carry telephone traffic at rates typically
lower than those of standard telephone networks. To date, the Inter-Tel.net
network has established points of presence in the San Francisco Bay Area,
Washington, D.C., Chicago, New York, Phoenix and Los Angeles. The Company
intends to expand the number of points of presence, both domestically and
internationally, as well as increase capacity in existing cities. Inter-Tel.net
is designed to carry long distance traffic originated from Inter-Tel's customer
base and provide other exchange carriers, individuals, and enterprises a
cost-effective alternative to current offerings of the conventional circuit
switched long distance carriers.
Continue to Develop Advanced Communications Products
The Company commits substantial research and development resources in
order to provide its customers with advanced telecommunications technologies on
a cost-effective basis. The Company has developed an extensive C++ library and
significant telecommunications expertise. In many cases, the Company develops
new technologies as software upgrades or add-ons to existing products. In this
regard,
24
<PAGE>
the AXXESS 5.0 platform, which is currently scheduled for release in the first
half of 1998, will provide an extensive enhancement of AXXESS, the Company's
primary product. Ongoing research and development efforts are directed to the
development of new products, applications and services for sale into the
Company's existing customer base and to new customers. Through CTI applications
and advanced network services, Inter-Tel provides technology that is designed
to enable its customers to improve their efficiency and enhance their
competitiveness.
Expand Distribution Channels
The Company continues to expand its distribution channels through a
growing network of direct dealers, expansion of the Company's direct sales
presence, hiring additional direct sales personnel and extension into
international markets. The Company has established sales relationships with
hundreds of direct dealers and continues to expand this network. The Company is
in the process of establishing dealer networks in Japan and other parts of Asia
and is expanding its dealer network in the United Kingdom and Europe. The
Company has expanded its direct sales activity in recent periods through
strategic acquisitions of resellers of telephony products and services in areas
where the Company has existing direct sales offices and other strategic
markets, and considers additional acquisition opportunities on an ongoing
basis. The Company also is expanding its distribution into other channels such
as computer equipment dealers, resellers of data communications equipment and
software resellers.
Products and Services
The Company offers a broad range of products and services designed to
support the needs of businesses and other organizations requiring voice and
data communications systems. The Company's principal products are digital
telephone systems which support installations up to 512 ports, IP telephony
products and services, CTI applications, unified messaging software and voice
processing software. The Company's principal system sales consist of systems
supporting 10 to 300 telephones with suggested retail prices of up to $300,000
per system, depending on configuration. The Company also offers long distance
calling services, network design and implementation services, maintenance,
leasing and support services, and resells other telecommunications products.
Digital Communication Platforms
Inter-Tel offers an extensive line of digital communication systems,
including hardware platforms and C++ software applications. Because these
platforms are based upon open architecture and conform to established computer
and telephone industry standard programming interfaces and protocols (such as
TAPI, TSAPI and TCP/IP), customers can choose from a variety of either server
level or desktop applications.
AXXESS. Inter-Tel's primary 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. The current AXXESS system release supports up to 512
ports and includes such advanced capabilities as primary rate ISDN, integrated
call recording, voice prompts in different languages, and a Windows-based
attendant's console. The AXXESS 5.0 platform, which is currently scheduled for
release in the first half of 1998, is designed to allow, through fully
transparent digital networking, two or more systems to operate as one, and to
increase capacity to 20,000 ports.
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 object-oriented C++ software developed by the Company, which
facilitates upgrades and the 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, 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, currently 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.
25
<PAGE>
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 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 processor semiconductor components ("DSPs")
incorporated into the system hardware. The use of DSPs and related software
lowers system costs, permits higher functionality and increases system
flexibility. For example, DSPscan 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. 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 supports 24 lines and 12 trunks and 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 chassis,
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.
IP Network Gateway and Inter-Tel.net Network
Gateway products are designed as transition points between two different
network types, such as between the public circuit switched telephone network
and a packet switched IP network such as the Internet. Gateway products convert
regular voice transmissions to or from the compressed data packets that travel
over packetized networks.
In September 1997, the Company released Vocal'Net, a stand-alone IP
network telephony solution available for use with the AXXESS system or other
traditional telephone systems equipped with T-1/E-1, ISDN or analog capability.
It provides a gateway for bridging the telephone network and a company's
intranet or the Internet. With the Vocal'Net gateway, users can conduct
real-time, two-way voice communications over the Internet and realize potential
savings compared to standard long distance telephone service. Designed to meet
the needs of most businesses, the Vocal'Net gateway is available in multiple
port sizes.
Vocal'Net does not require customized telephone sets or specialized
software or cards in each desktop computer. Further, Vocal'Net does not rely on
the central processing unit of the computer for the compression or
packetization of information, but instead uses high speed DSPs, enabling the
server to handle additional functions such as unified messaging.
A caller can dial from a standard telephone to the Vocal'Net gateway,
which connects the call from the circuit switched telephone network, converts
it into the compressed, digitized data packets used by an IP network, and
routes the call via the IP network to another Vocal'Net gateway. The second
26
<PAGE>
gateway connects with the regular telephone system and dials the final
destination. (See illustration below.)
[GRAPHIC OMITTED]
When used in a corporate environment, Vocal'Net can be attached to a
T-1/E-1, ISDN or analog trunk interface on the PBX, and the PBX's Automatic
Route Selection or Least Cost Routing features will be programmed to
automatically route calls for other locations that have Vocal'Net Servers
through that trunk interface. When phone users wish to place a call, they
simply dial the desired telephone number like any other call. The PBX will
route the call to Vocal'Net, which converts it into the compressed, digitized
data packets used by an IP network, and routes the call via the IP network to
another Vocal'Net gateway. The second gateway connects with the far-end PBX and
dials either the extension number of the desired party or accesses a trunk on
the PBX and makes a call into the switched network. (See illustration below.)
[GRAPHIC OMITTED]
Because IP network telephony converts all transmissions to the same type
of packets, both voice and data can use the same data circuits, thereby
increasing efficiency and maximizing the use of bandwidth. Bandwidth
utilization can be maximized to a point that some users may be able to reduce
the overall number of circuits needed.
In its initial commercial release, Vocal'Net is designed to work with
business telephone systems that operate over T-1/E-1, ISDN and analog lines,
and to handle up to 24 simultaneous calls per server. Vocal'Net servers can
also be networked to operate seamlessly in configurations consisting of
thousands of ports. The Company is currently developing additional
enhancements, including 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.
Other planned enhancements to the Vocal'Net include functionality designed to
allow businesses to create virtual offices,
27
<PAGE>
enabling traveling or off-site employees to connect to the main office from
remote locations. Another planned application is "Touch-To-Talk"
telephony-enabled web pages, which will allow users to press a link on a web
page and to automatically connect over an IP network to talk to customer
service agents.
Utilizing Vocal'Net technology, Inter-Tel continues to develop and expand
Inter-Tel.net, a private IP network designed to carry long distance telephone
traffic at rates typically lower than traditional long distance providers.
Inter-Tel.net is currently being used by the Company's employees for calls
between Inter-Tel.net's six points of presence: the San Francisco Bay Area,
Washington D.C., Chicago, New York, Phoenix and Los Angeles. In its initial
commercial release, the Vocal'Net gateway supports calls placed from telephone
to telephone. Later releases are planned to support communications from
telephone to computer, computer to telephone, computer to computer and a
facsimile machine to facsimile machine. See "Risk Factors--Developing Market
for IP Network Telephony; Uncertain Regulatory Environment," "--Risks
Associated with Vocal'Net; Dependence upon IP Network Infrastructures; Risk of
System Failure; Security Risks" and "--Development and Maintenance of
Inter-Tel.net Network."
Computer-Telephone Integration
Through CTI, the computer and the telephone are linked into one
environment. Inter-Tel's AXXESSORY Connect software for the AXXESS system
enables users to receive phone calls through their desktop PC. Using Caller
I.D., a caller's information can be retrieved from the company's database even
before the call is accepted. 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.
Inter-Tel's software applications integrate, through the use of Novell's
TSAPI and Microsoft's TAPI standard interfaces, 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 formed
relationships 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 adequately meet the needs of
a customer, the open design of Inter-Tel's software enables independent
software developers to write custom applications through Inter-Tel's
Developer's Program. Alternatively, 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.
Unified Messaging and Voice Processing Software
Inter-Tel's unified messaging software, Visual Mail, works in conjunction
with a variety of messaging platforms, including the Microsoft Exchange
messaging application, Lotus Notes, Lotus cc:Mail, Novell's GroupWise and
Internet mail applications such as Qualcomm's Eudora. Visual Mail integrates
all types of messages into a single-user interface on a PC, supports both voice
mail and facsimile mail and provides another means for improving workplace
productivity and retrieving messages from a PC connected to a modem.
Inter-Tel's AXXESSORY Talk, Axxent Talk and IVX500 are 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.
Other Services and Products
Networking Technologies Integration. To develop a solid foundation for
state-of-the-art data and telecommunications networking, customers require
strategic network expertise from their networking provider. Inter-Tel designs,
installs and supports the complete integration of a customer's complex data and
telecommunications network, from land-based LANs to geographically dispersed
wide area networks ("WANs").
28
<PAGE>
By forming relationships with major manufacturers of hardware and software
technologies, Inter-Tel provides 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 Company, through its Inter-Tel
NetSolutions, Inc. subsidiary, resells a variety of long distance calling
services, including domestic and international calling services, 800 calling
services, dedicated services, voice and video conferencing, customized billing
and a variety of other telecommunication services. The Company believes that
certain of its customers desire the convenience of acquiring long distance
calling services through the same vendor that the customer uses to purchase its
other telephony equipment and services. The Company currently resells long
distance services pursuant to contracts with four of the six largest U.S. long
distance carriers. There can be no assurance that the Company will meet its
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 on prices favorable to the Company.
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.
Leasing Services. The Company offers its Totalease program through its
Inter-Tel Leasing, Inc. subsidiary. Totalease enables an end user to acquire a
full range of telephony systems, applications, maintenance and support
services, as well as lease financing, from a single vendor. The Totalease
contract provides a total system solution to the customer at a set monthly
cost, with system expansion available at predictable additional fees. The
typical Totalease contract has a term of 60 months, with the customer entitled
to renew the contract at a specified price for up to an additional 36 months.
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, the customer is able to lease
directly from the manufacturer and Inter-Tel, or the Inter-Tel dealer, is able
to maintain a close customer relationship.
Other Products. 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 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 Inter-Tel telephone systems. Inter-Tel's product selection
consists of videoconferencing, battery backup, headsets, surge protection,
paging equipment, wireless communications and data multiplexers.
Sales and Distribution
The Company has developed a distribution network of direct sales offices,
dealers and 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 also distributes its products
through 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 dealers in the United Kingdom and Europe. In addition, the
Company maintains a dealer support office and direct sales office in Japan and
is in the process of establishing dealers in other parts of 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
29
<PAGE>
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.
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 faces
intense competition from other telephone system and voice processing system
manufacturers for its dealers' attention, as most of the Company's dealers
carry products which compete with the Company's products. There can be no
assurance that any such dealer will not promote the products of the Company's
competitors to the detriment of the Company's products. The loss of any
significant dealer or group of dealers, or any event or condition adversely
affecting the Company's dealer network, could have a material adverse effect on
the Company's business, financial condition and operating results. See "Risk
Factors--Reliance on Dealer Network."
International sales, which to date have not been significant, are made
through the Company's United Kingdom and Japan subsidiaries. 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. 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 other parts of Asia and is working to expand its dealer
network in the United Kingdom and Europe. International sales are subject to a
number of risks, including changes in foreign government regulations and
telecommunications standards, export license requirements, tariffs and taxes,
other trade barriers, fluctuations in currency exchange rates, difficulty in
collecting accounts receivable, difficulty in staffing and managing foreign
operations and political and economic instability. Fluctuations in currency
exchange rates could cause the Company's products to become relatively more
expensive to customers in a particular country, leading to a reduction in sales
or profitability in that country. In addition, the costs associated with
developing international sales may not be offset by increased sales in the
short term, or at all.
Customer Service and Support
The Company believes that customer service and support are critical
components 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.
Research and Development
The Company believes that its ability to enhance its current products,
develop and introduce new products on a timely basis, maintain technological
competitiveness and meet customer requirements are essential to the Company's
success. The Company's research and development efforts over the last several
years have been focused primarily on enhancing the existing AXXESS and AXXESSORY
Talk systems with additional applications, capacity and features, developing a
unified messaging software application, developing a telecommunications
networking package, and developing new products like the Vocal'Net Server.
Current efforts are related to support the development and enhancement of IP
telephony products like the Vocal'Net Server, development of additional
applications and features of the AXXESS and AXXESSORY Talk communications
products. The software-based architecture of the AXXESS system facilitates
maintenance and support, upgrades, and incorporation of additional features and
functionality.
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<PAGE>
The Company had a total of 94 personnel engaged in research and
development as of September 30, 1997. Research and development expenses were
$4.5 million, $5.8 million, $6.6 million and $5.9 million in 1994, 1995, 1996
and the nine months ended September 30, 1997, 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. Varian, a
multinational electronic company, currently manufacturers a significant portion
of the Company's products, including substantially all of the printed circuit
boards used in the AXXESS and Inter-Tel Axxent systems, at Varian's Tempe,
Arizona facility. If Varian or any of the Company's other manufacturers were
unable or unwilling to manufacture the Company's products in the future, the
Company could experience substantial delays in finding alternative sources,
which could have a material adverse effect on the Company's business and
operating results. The Company maintains written 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. See "Risk Factors--Dependence on
Contract Manufacturers and Component
Suppliers."
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 and NorTel, as well as Comdial,
Executone, Iwatsu, Mitel, NEC, Nitsuko, Panasonic, Siemens, Toshiba and others.
Many of these competitors have significantly greater financial, marketing and
technical resources than the Company. The Company also competes against the
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.
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<PAGE>
The Telecommunications Act and AT&T's announcement to divide itself into
three enterprises has had an impact on competition in the communications
industry. The Telecommunications Act opened the market for telephone and cable
television services, forcing telephone companies to open their networks to
competitors and giving consumers a choice of local phone carriers. Conversely,
local phone companies are now able to offer long distance services. In
addition, cable companies can offer telephone services and Internet access.
These changes have increased competition in the communications industry and
have created additional competition and opportunities in customer premise
equipment, as these new services and interfaces have become available.
In the market for voice processing applications, including voice mail, the
Company competes against AVT, Active Voice, Centigram, Lucent and other
competitors, certain of which have significantly greater resources than the
Company. In the market for long distance services, the Company competes against
AT&T, MCI, Sprint Corporation and other competitors, many of which have
significantly greater resources than the Company. The Company will also compete
with RBOCs, cable television companies, satellite and other wireless broadband
service providers, and others for long distance business as those companies
gradually respond to the Telecommunications Act. Key competitive factors in the
sale of telephone systems and related applications include price, performance,
features, reliability, service and support, name recognition and distribution
capability. The Company believes that it competes favorably in its markets with
respect to the price, performance and features of its systems, as well as the
level of service and support that the Company provides to its customers. Certain
of the Company's competitors have significantly greater name recognition and
distribution capabilities than the Company, 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.
In the market for IP telephony products, the Company competes against
existing IP telephony gateway providers such as Lucent, NetSpeak Corporation,
Vocaltec Communications Ltd., Vienna Systems Corporation and others. Several of
these competitors have been active in developing and marketing IP telephony
products for a greater period of time than the Company and have already
established relationships with customers within their market. In addition, the
Company could face significant competition from vendors such as Cisco Systems,
Inc., Bay Networks, Inc., 3Com Corporation, Motorola, Inc., and MICOM
Communications Corp., should such established data vendors choose to enter the
market for IP telephony products. Such companies currently produce products
that, if equipped with voice capabilities, could represent a considerable threat
to the Company within that market. Moreover, should the market for IP telephony
products become fully developed or develop at a rapid rate, large companies such
as IBM and Microsoft could choose to develop proprietary software designed to
facilitate voice communication over an IP network.
As the Company enters the markets for local telephone service and IP
network access, it will face additional competition from RBOCs and other
providers, which have larger marketing and sales organizations, significantly
greater financial and technical resources and a larger and more established
customer base than the Company. In addition, RBOCs and other providers have
greater name recognition, more established positions in the market and long
standing relationships with customers. Therefore, there can be no assurance that
the Company will compete successfully in these markets.
Intellectual Property Rights
The Company's future success will depend in part upon its proprietary
technology. Although the Company has applied to the U.S. Patent and Trademark
Office for a patent related to certain aspects of the Vocal'Net technology, the
Company currently has no issued patents and relies principally on copyright and
trade secret law and contractual provisions to protect its intellectual
property. There can be no assurance that any patent, trademark or copyright
owned by the Company will not be invalidated, circumvented or challenged or that
the rights granted thereunder will provide meaningful protection or any
commercial competitive advantage to the Company. Further, there can be no
assurance that others will not develop technologies that are similar or superior
to the Company's technology or that duplicate the Company's
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<PAGE>
technology. As the Company expands its international operations, effective
intellectual property protection may be unavailable or limited in certain
foreign countries. There can be no assurance that the steps taken by the
Company will prevent misappropriation of its technology. Litigation may be
necessary in the future to enforce the Company's intellectual property rights,
to protect the Company's trade secrets, to determine the validity and scope of
the proprietary rights of others, or to defend against claims of infringement
or invalidity. Such litigation could result in substantial costs and diversion
of resources and could have a material adverse effect on the Company's business
and operating results.
From time to time, the Company is subject to proceedings alleging
infringement by the Company of intellectual property rights of others. If any
such claim is asserted against the Company, the Company may seek to obtain a
license under the third party's intellectual property rights. There can be no
assurance that a license will be available on terms acceptable to the Company or
at all. In the alternative, the Company could resort to litigation to challenge
any such claim. Any such litigation could require the Company to expend
significant sums and could require the Company to pay significant damages,
develop non-infringing technology or acquire licenses to the technology which is
the subject of the asserted infringement, any of which could have a material
adverse effect on the Company's business and operating results. In the event
that the Company is unable or chooses not to license such technology or decides
not to challenge such third party's rights, the Company could encounter
substantial and costly delays in product introductions while attempting to
design around such third party rights, or could find that the development,
manufacture or sale of products requiring such licenses could be foreclosed.
Employees
As of September 30, 1997, the Company had a total of 1,220 employees, of
whom 964 were engaged in sales, marketing and customer support, 57 in quality,
manufacturing and related operations, 94 in research and development, and 105
in finance, leasing 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.
Property
The Company maintains its corporate headquarters in 23,000 square feet of
a building located in Phoenix, Arizona pursuant to a lease that expires in
2000, and its principal manufacturing operations in an 85,000 square foot
building located in Chandler, Arizona pursuant to a lease that expires in 2008.
The Company also leases sales and support offices in a total of 28 locations in
the United States and two locations overseas. The Company believes that its
facilities will be adequate to meet its current needs and that additional or
alternative space will be available as necessary in the future on commercially
reasonable terms. See "Risk Factors--Management of Growth; Implementation of
New Management Information Systems."
Legal Proceedings
The Company is involved from time to time in litigation incidental to its
business. The Company believes that the outcome of current litigation will not
have a material adverse effect upon its business, financial condition or
results of operations and will not disrupt the normal operations of the
Company.
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<PAGE>
MANAGEMENT
<TABLE>
The executive officers and directors of the Company are as follows:
<CAPTION>
Name Age Position
- ----------------------------- ----- ---------------------------------------------------------------
<S> <C> <C>
Steven G. Mihaylo ......... 53 Chairman of the Board of Directors and Chief Executive Officer
Thomas C. Parise ......... 43 President and Chief Operating Officer
Craig W. Rauchle ......... 42 Executive Vice President
Ross McAlpine ............ 46 President of Inter-Tel Leasing, Inc.
Kurt R. Kneip ............ 35 Vice President, Chief Financial Officer, Secretary and
Assistant Treasurer
J. Robert Anderson ......... 61 Director
Gary Edens ............... 55 Director
Maurice H. Esperseth ...... 72 Director
C. Roland Haden ............ 57 Director
Norman Stout ............... 40 Director
</TABLE>
Mr. Mihaylo, the founder of the Company, has served as Chairman of the
Board of Directors of the Company since September 1983 and as Chief Executive
Officer of the Company since its inception in July 1969. From July 1969 to
September 1983 and from March 1984 to December 1994, Mr. Mihaylo also served as
President of the Company, and from July 1969 to October 1982 he served as the
Company's Chairman of the Board of Directors. Mr. Mihaylo also is a director of
MicroAge, Inc. and Microtest, Inc.
Mr. Parise was elected President and Chief Operating Officer of the
Company in December 1994. Since 1986, he has been President of Inter-Tel
Integrated Services, Inc., a wholly owned research and development,
manufacturing and distribution subsidiary of the Company. From 1986 to December
1994, he served as Senior Vice President of the Company. From joining the
Company in 1981 until 1986, Mr. Parise served in various sales management and
executive capacities. Mr. Parise also is a director of Globe Business
Resources, Inc. He has also been a director of the American Electronics
Association (the "AEA") since 1995 and was elected to the Executive Committee
of the AEA in 1997.
Mr. Rauchle was elected Executive Vice President in December 1994. He had
served as Senior Vice President of the Company, and serves as President of
Inter-Tel Technologies, Inc., a wholly-owned sales subsidiary of the Company.
Mr. Rauchle joined the Company in 1979 as a Branch General Manager of the
Denver direct sales office and in 1983 was appointed Central Region Vice
President and subsequently the Western Regional Vice President.
Mr. McAlpine has served as President of Inter-Tel Leasing, Inc., a wholly
owned subsidiary of the Company, since April 1993. From April 1992 to April
1993, Mr. McAlpine served as the Company's Treasurer, and from April 1991 to
April 1992 served as Vice President of Inter-Tel Communications, Inc., a
wholly-owned subsidiary of the Company. He joined the Company in July 1991 in
connection with the Company's acquisition of Telecommunications Specialists,
Inc., a telecommunications firm. Prior to joining Inter-Tel, Mr. McAlpine was
employed in the leasing and financial services industry for 17 years.
Mr. Kneip has served as Vice President and Chief Financial Officer of the
Company since September 1993, and as Secretary and Treasurer since October
1994. He joined the Company in May 1992 as Director of Corporate Tax, after
being employed for seven years with the accounting firm of Ernst & Young. Mr.
Kneip is a Certified Public Accountant, and holds a B.S. 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.
From 1991 to 1994, Mr. Anderson served as Vice Chairman, Chief Financial
Officer and a director of the Grumman Corporation. From 1983 to 1991, Mr.
Anderson served in various senior management capacities for the Firestone Tire
and Rubber Company, including Vice Chairman of Bridgestone/Firestone, Inc. from
1989 to 1991. 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. Mr. Anderson retired in 1994, and has been an active leader in
various business, civic and philanthropic organizations.
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<PAGE>
Mr. Edens was elected as a director of the Company in October 1994. He is
presently the President of the Hanover Companies, Inc., an investment firm.
From 1970 to October, he served in various executive management capacities in
the broadcasting media industry, including Chairman and Chief Executive Officer
of Edens Broadcasting, Inc. from 1984 to 1994. Mr. Edens 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 Corporation, and served as
Executive Vice President of Inter-Tel from 1986 to 1988. Mr. Esperseth retired
as an officer of the Company in December 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 at Arizona State University 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. Since 1996 Mr. Stout has also been President of Oldcastle
Architectural West, the parent company of Superlite Block and four other
concrete product plants. Mr. Stout 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 Messrs. 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.
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<PAGE>
SELLING SHAREHOLDERS
<TABLE>
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of September 30, 1997,
and as adjusted to reflect the sale of Common Stock offered hereby, of each
Selling Shareholder:
<CAPTION>
Including Shares Beneficially
Shares Beneficially All Owned After
Owned Prior to Offering(1) Vested and Number Offering(1)
----------------------------- Unvested of Shares -------------------------
Name of Owner Number Percentage(2) Options Offered(3) Number Percent(2)
- -------------------------- ----------- --------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Steven G. Mihaylo ...... 5,500,000 23.7% 5,900,000 -- 5,500,000 20.7%
Thomas C. Parise ...... 187,380 * 561,380 40,000 147,380 *
Craig W. Rauchle ...... 97,900 * 385,400 30,000 67,900 *
<FN>
- ------------
* Less than 1%
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable. Shares of Common Stock subject to options or warrants that are
currently exercisable or exercisable within 60 days of September 30, 1997
are deemed to be outstanding and to be beneficially owned by the person
holding such options for the purpose of computing the percentage ownership
of such person but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person.
(2) Based on 23,553,942 shares of Common Stock outstanding prior to the
offering and 26,553,942 shares outstanding after the offering.
(3) Assumes that the Underwriters' over-allotment option to purchase up to
340,000 shares from Steven G. Mihaylo, 72,951 shares from Thomas C. Parise
and 47,549 shares from Craig W. Rauchle has not been exercised.
</FN>
</TABLE>
36
<PAGE>
UNDERWRITING
<TABLE>
NationsBanc Montgomery Securities, Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and Jefferies & Company, Inc. (collectively, the
"Underwriters") have severally agreed, subject to the terms and conditions set
forth in the Underwriting Agreement, to purchase from the Company and the
Selling Shareholders the number of shares of Common Stock as indicated below
opposite their respective names at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent, and that the Underwriters are
committed to purchase all of such shares if any are purchased.
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
NationsBanc Montgomery Securities, Inc. ..................
Donaldson, Lufkin & Jenrette Securities Corporation ......
Jefferies & Company, Inc. .................................
---------
Total ............................................. 3,070,000
=========
</TABLE>
The Underwriters have advised the Company and the Selling Shareholders
that they propose initially to offer the Common Stock to the public on the
terms set forth on the cover page of this Prospectus. The Underwriters may
allow to selected dealers a concession of not more than $ per share, and
the Underwriters may allow, and such dealers may reallow, a concession not more
than $ per share to certain other dealers. After the offering, the
offering price and other selling terms may be changed by the Underwriters. The
Common Stock is offered subject to receipt and acceptance by the Underwriters,
and to certain other conditions, including the right to reject orders in whole
or part.
The Selling Shareholders have granted an option to the Underwriters
exercisable during the 30-day period after the date of this Prospectus to
purchase up to 460,500 additional shares of Common Stock to cover
over-allotments, if any, at the same price per share as the initial 3,070,000
shares to be purchased by the Underwriters. To the extent that the Underwriters
exercise this option, each of the Underwriters will be committed, subject to
certain conditions, to purchase such additional shares in approximately the
same proportion as set forth in the above table. The Underwriters may purchase
such shares only to cover over-allotments made in connection with this
offering.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the several Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or will
contribute to payments the Underwriters may be required to make in respect
thereof.
The Company's executive officers, including the Selling Shareholders, will
collectively hold an aggregate of approximately 5,577,180 shares of Common Stock
after this offering, have agreed that without the consent of NationsBanc
Montgomery Securities, Inc., they will not, directly or indirectly offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable therefor for a period of 90 days
from the date of this Prospectus. The Company has agreed that, for a period of
90 days from the date of this Prospectus, it will not, without the written
consent of NationsBanc Montgomery Securities, Inc., directly or indirectly,
offer, sell, contract to sell or otherwise dispose of any shares of Common Stock
or any securities, convertible or exchangeable therefor, subject to limited
exceptions.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, an Underwriter is permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock. If the Underwriters create a short position in the Common Stock
in connection with the offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Underwriters may
reduce that short position by purchasing Common Stock in the open market. The
Underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment option described above. The Underwriters may also
37
<PAGE>
impose a penalty bid on certain selling group members. This means that if the
Underwriters purchase shares of Common Stock in the open market to reduce their
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. Neither the Company nor any of the
Underwriters makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
From time to time, certain of the Underwriters or their affiliates have
provided, and may continue to provide, investment banking services to the
Company.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby and certain other
matters relating to Arizona law will be passed upon for the Company by John L.
Gardner, the Company's General Counsel. Certain other legal matters are being
passed upon for the Company and the Selling Shareholders by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California. Pillsbury
Madison & Sutro LLP, San Francisco, California, is acting as counsel for the
Underwriters in connection with certain legal matters relating to the shares of
Common Stock offered hereby.
EXPERTS
The consolidated financial statements of the Company appearing in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
38
<PAGE>
================================================================================
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company, any Selling Shareholder or the Underwriters. This
Prospectus does not constitute an offer to sell or a solicitation of any offer
to buy any securities other than the shares of Common Stock to which it relates
or an offer to, or a solicitation of, any person in any jurisdiction where such
an offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create an
implication that there has been no change in the affairs of the Company or that
information contained herein is correct as of any time subsequent to the date
hereof.
------------------
TABLE OF CONTENTS
------------------
Page
-----
Available Information ..................... 2
Information Incorporated by Reference ...... 2
Prospectus Summary ........................ 3
Risk Factors .............................. 5
Use of Proceeds ........................... 14
Dividend Policy ........................... 14
Price Range of Common Stock ............... 15
Capitalization .............................. 16
Selected Consolidated Financial Data ...... 17
Management's Discussion and Analysis
of Financial Condition and Results of
Operations .............................. 18
Business .................................... 23
Management ................................. 34
Selling Shareholders ........................ 36
Underwriting .............................. 37
Legal Matters .............................. 38
Experts .................................... 38
================================================================================
================================================================================
3,070,000 Shares
(Graphic Ommitted)
Common Stock
---------------------
PROSPECTUS
---------------------
NATIONSBANC MONTGOMERY
SECURITIES, INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
JEFFERIES & COMPANY, INC.
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. Other Expenses of Issuance and Distribution
The following table sets forth the various costs and expenses payable by
the Company, other than underwriting discounts and commissions, of the sale and
distribution of the securities being registered. All of the amounts shown are
estimates except the Securities and Exchange Commission registration fee, the
Nasdaq Stock Market listing fee and the NASD filing fee.
SEC Registration Fee ............... $ 23,805
NASD Filing Fee ..................... 8,356
Nasdaq Stock Market Listing Fee ...... 17,500
Blue Sky Fees and Expenses ......... 5,000
Legal Fees and Expenses ............ 200,000
Accounting Fees and Expenses ......... 30,000
Directors' and Officers' Insurance ... 300,000
Printing ........................... 70,000
Transfer Agent and Registrar Fees ... 10,000
Miscellaneous ........................ 35,339
---------
Total ........................... $700,000
=========
ITEM 15. Indemnification of Directors and Officers
The Company's Restated Articles of Incorporation limit, to the maximum
extent permitted by Arizona law, the personal liability of directors for
monetary damages for breach of their fiduciary duties as a director. The
Company's Restated Articles of Incorporation provide that the Company shall
indemnify its officers and directors to the fullest extent permitted by law,
subject to certain exceptions. The Company has entered into indemnification
agreements with its officers and directors containing provisions which are in
some respects broader than the specific indemnification provisions contained in
the Arizona Revised Statutes. The indemnification agreements may require the
Company, among other things, to indemnify such officers and directors against
certain liabilities that may arise by reason of their status or service as
directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance, if available on reasonable terms. The
Company believes that these agreements are necessary to attract and retain
qualified persons as directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
The Company currently maintains directors' and officers' liability
insurance.
Reference is also made to Section 11 of the Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of the
Registrant against certain liabilities.
II-1
<PAGE>
<TABLE>
ITEM 16. Exhibits
<CAPTION>
Exhibit
Number Description
- -------- ----------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
4.1 Restated Articles of Incorporation of Registrant, as amended.*
5.1 Opinion of John L. Gardner, General Counsel, regarding legality of securities being registered.*
23.1 Consent of Ernst & Young LLP.
23.2 Consent of John L. Gardner, General Counsel (included in Exhibit 5.1).*
24.1 Power of Attorney (see page II-3).
<FN>
- ------------
* To be filed by amendment.
</FN>
</TABLE>
ITEM 17. Undertakings
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act that is incorporated by reference in the Registration
Statement shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions of the Company's Articles of Incorporation
and Bylaws, the Arizona Revised Statutes, the Underwriting Agreement or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the
question has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant, Inter-Tel, Incorporated, a corporation organized and existing
under the law of the State of Arizona, certifies that it has reasonable grounds
to believe that it meets all of the requirements for filing on Form S-3 and has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Phoenix, State of
Arizona, on the 31st day of October, 1997.
Inter-Tel, Incorporated
By: /s/ Kurt R. Kneip
------------------------------------
Kurt R. Kneip,
Chief Financial Officer
<TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS 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 power of substitution,
for him in any and all capacities, to sign any amendments to this Registration
Statement (including post-effective amendments), 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 Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
<CAPTION>
Signature Title Date
- ---------------------------- ---------------------------------------------- -----------------
<S> <C> <C>
/s/ STEVEN G. MIHAYLO Chairman and Chief Executive Officer October 31, 1997
- ------------------------- (Principal Executive Officer)
Steven G. Mihaylo
/s/ KURT R. KNEIP Chief Financial Officer (Principal Financial October 31, 1997
- ------------------------- Officer and Principal Accounting Officer)
Kurt R. Kneip
/s/ GARY D. EDENS Director October 31, 1997
- -------------------------
Gary D. Edens
/s/ MAURICE H. ESPERSETH Director October 31, 1997
- -------------------------
Maurice H. Esperseth
/s/ C. ROLAND HADEN Director October 31, 1997
- -------------------------
C. Roland Haden
/s/ NORMAN STOUT Director October 31, 1997
- -------------------------
Norman Stout
/s/ J. ROBERT ANDERSON Director October 31, 1997
- -------------------------
J. Robert Anderson
</TABLE>
II-3
<PAGE>
Inter-Tel, Incorporated
REGISTRATION STATEMENT ON FORM S-3
<TABLE>
EXHIBIT INDEX
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- --------- ---------------------------------------------------------------------------------- -------------
<S> <C> <C>
1.1 Form of Underwriting Agreement.
4.1 Restated Articles of Incorporation of Registrant, as amended.*
5.1 Opinion of John L. Gardner, General Counsel, regarding legality of securities being
registered.*
23.1 Consent of Ernst & Young LLP.
23.2 Consent of John L. Gardner, General Counsel (included in Exhibit 5.1).*
24.1 Power of Attorney (see page II-3).
<FN>
- ------------
* To be filed by amendment.
</FN>
</TABLE>
II-4
3,070,000 Shares
INTER-TEL, INCORPORATED
Common Stock
UNDERWRITING AGREEMENT
____________, 1997
NATIONSBANC MONTGOMERY SECURITIES, INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
JEFFERIES & COMPANY, INC.
c/o NATIONSBANC MONTGOMERY SECURITIES, INC.
600 Montgomery Street
San Francisco, California 94111
Dear Sirs:
Section 1. Introductory. Inter-Tel, Incorporated, an Arizona
corporation (the "Company"), proposes to issue and sell 3,000,000 shares of its
authorized but unissued Common Stock (the "Common Stock") and certain
shareholders of the Company named in Schedule B annexed hereto propose to sell
an aggregate of 70,000 shares of the Company's issued and outstanding Common
Stock to you (sometimes called herein the "Underwriters"). Said aggregate of
3,070,000 shares are herein called the "Firm Common Shares." In addition,
certain shareholders of the Company named in Schedule B hereto all such
shareholders named in Schedule B hereto being referred to herein as the "Selling
Shareholders") propose to grant to the Underwriters an option to purchase up to
460,500 additional shares of Common Stock (the "Optional Common Shares"), as
provided in Section 5 hereof. The Firm Common Shares and, to the extent such
option is exercised, the Optional Common Shares are hereinafter collectively
referred to as the "Common Shares."
You have advised the Company and the Selling Shareholders that
you propose to make a public offering of your respective portions of the Common
Shares on the effective date of the registration statement hereinafter referred
to, or as soon thereafter as in your judgment is advisable.
The Company and each of the Selling Shareholders hereby confirm
their respective agreements with respect to the purchase of the Common Shares by
the Underwriters as follows:
<PAGE>
Section 2. Representations and Warranties of the Company. The
Company hereby represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-3 (File No. _________)
with respect to the Common Shares has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. The Company has prepared and has filed or proposes to file prior to
the effective date of such registration statement an amendment or amendments to
such registration statement, which amendment or amendments have been or will be
similarly prepared. There have been delivered to you two signed copies of such
registration statement and amendment, together with two copies of each exhibit
filed therewith. Conformed copies of such registration statement and amendments
(but without exhibits) and of the related preliminary prospectus have been
delivered to you in such reasonable quantities as you have requested. The
Company will next file with the Commission one of the following: (i) prior to
effectiveness of such registration statement, a further amendment thereto,
including the form of final prospectus, or (ii) a final prospectus in accordance
with Rules 430A and 424(b) of the Rules and Regulations. As filed, such
amendment and form of final prospectus, or such final prospectus, shall include
all Rule 430A Information (as hereinafter defined) and, except to the extent
that you shall agree in writing to a modification, shall be in all substantive
respects in the form furnished to you prior to the date and time that this
Agreement was executed and delivered by the parties hereto, or, to the extent
not completed at such date and time, shall contain only such specific additional
information and other changes (beyond that contained in the latest Preliminary
Prospectus) as the Company shall have previously advised you in writing would be
included or made therein.
The term "Registration Statement" as used in this Agreement shall
mean such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date (as hereinafter defined), shall also
mean such registration statement as so amended; provided, however, that such
term shall also include (i) all Rule 430A Information deemed to be included in
such registration statement at the time such registration statement becomes
effective as provided by Rule 430A of the Rules and Regulations and (ii) a
registration statement, if any, filed pursuant to Rule 462(b) of the Rules and
Regulations relating to the Common Shares. The term "Preliminary Prospectus"
shall mean any preliminary prospectus referred to in the preceding paragraph and
any preliminary prospectus included in the Registration Statement at the time it
becomes effective that omits Rule 430A Information. The term "Prospectus" as
used in this Agreement shall mean the prospectus relating to the Common Shares
in the form in which it is first filed with the Commission pursuant to Rule
424(b) of the Rules and Regulations or, if no filing pursuant to Rule 424(b) of
the Rules and Regulations is required, shall mean the form of final prospectus
included in the Registration Statement at the time such registration statement
becomes effective. The term "Rule 430A Information" means information with
respect to the Common Shares and the offering thereof permitted to be omitted
from the Registration Statement when it becomes effective pursuant to Rule 430A
of the Rules and Regulations. Any reference herein to any Preliminary Prospectus
or the Prospectus shall be deemed to refer to and include the documents
incorporated by reference therein pursuant to Form S-3 under the Act, as of the
date of such Preliminary Prospectus or Prospectus, as the case may be.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus has conformed in all material respects to the requirements of the Act
and the Rules and Regulations and, as of its date, has not included any untrue
-2-
<PAGE>
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; and at the time the Registration Statement becomes
effective, and at all times subsequent thereto up to and including each Closing
Date hereinafter mentioned, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, will contain all material statements and
information required to be included therein by the Act and the Rules and
Regulations and will in all material respects conform to the requirements of the
Act and the Rules and Regulations, and neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, will include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, no representation or warranty contained in this subsection
2(b) shall be applicable to information contained in or omitted from any
Preliminary Prospectus, the Registration Statement, the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by or on behalf of you specifically for use
in the preparation thereof. The documents incorporated by reference in the
Prospectus, when they were filed with the Commission, conformed in all material
respects to the requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and the rules and regulations of the Commission thereunder,
and none of such documents contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
(c) The Company does not own or control, directly or indirectly,
any corporation, association or other entity other than (i) the subsidiaries
listed in Exhibit 22.1 to the Annual Report on Form 10-K for the Company's most
recent fiscal year (the "Company Form 10-K") and (ii) Inter-Tel.net, Inc., a
Nevada corporation. The Company and each of its subsidiaries have been duly
incorporated and are validly existing as corporations in good standing under the
laws of their respective jurisdictions of incorporation, with full power and
authority (corporate and other) to own and lease their properties and conduct
their respective businesses as described in the Prospectus; the Company, or one
of its wholly-owned subsidiaries, beneficially owns all of the outstanding
capital stock of its subsidiaries free and clear of all claims, liens, charges
and encumbrances; the Company and each of its subsidiaries are in possession of
and operating in compliance with all authorizations, licenses, permits,
consents, certificates and orders material to the conduct of their respective
businesses, all of which are valid and in full force and effect; the Company and
each of its subsidiaries are duly qualified to do business and in good standing
as foreign corporations in each jurisdiction in which the ownership or leasing
of properties or the conduct of their respective businesses requires such
qualification, except for jurisdictions in which the failure to so qualify would
not have a material adverse effect upon the Company or the subsidiary;
(d) As of September 30, 1997, the Company had authorized and
outstanding capital stock as set forth under the heading "Capitalization" in the
Prospectus; the issued and outstanding shares of the Company's Common Stock have
been duly authorized and validly issued, are fully paid and nonassessable, are
duly listed on The Nasdaq Stock Market, have been issued in compliance with all
federal and state securities laws, were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase securities,
and conform to the description thereof contained in the Prospectus. All issued
and outstanding shares of capital stock of each subsidiary of the Company have
been duly authorized and validly issued and are fully paid and nonassessable.
Except as disclosed in or contemplated by the Prospectus and the financial
statements of the Company, and the related notes thereto, included in the
Prospectus, neither the Company nor any subsidiary has outstanding any options
to purchase, or any preemptive rights or other rights to subscribe for or to
purchase, any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such options,
rights, convertible
-3-
<PAGE>
securities or obligations. The description of the Company's stock option, stock
bonus and other stock plans or arrangements, and the options or other rights
granted and exercised thereunder, set forth in or incorporated by reference in
the Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
(e) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set forth in
this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and will conform to the description thereof contained in the
Prospectus. No preemptive rights or other rights to subscribe for or purchase
exist with respect to the issuance and sale of the Common Shares by the Company
pursuant to this Agreement. No shareholder of the Company has any right which
has not been waived or satisfied to require the Company to register the sale of
any shares owned by such shareholder under the Act in the public offering
contemplated by this Agreement. No further approval or authority of the
shareholders or the Board of Directors of the Company will be required for the
transfer and sale of the Common Shares to be sold by the Selling Shareholders or
the issuance and sale of the Common Shares to be sold by the Company as
contemplated herein.
(f) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company in accordance with its
terms. The making and performance of this Agreement by the Company and the
consummation of the transactions herein contemplated will not violate any
provisions of the articles of incorporation or bylaws, or other organizational
documents, of the Company or any of its subsidiaries, and will not conflict
with, result in the breach or violation of, or constitute, either by itself or
upon notice or the passage of time or both, a default under any agreement,
mortgage, deed of trust, lease, franchise, license, indenture, permit or other
instrument to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or any of its respective properties
may be bound or affected, and which is material to the Company and its
subsidiaries, as a whole, any statute or any authorization, judgment, decree,
order, rule or regulation of any court or any regulatory body, administrative
agency or other governmental body applicable to the Company or any of its
subsidiaries or any of their respective properties. No consent, approval,
authorization or other order of any court, regulatory body, administrative
agency or other governmental body is required for the execution and delivery of
this Agreement or the consummation of the transactions contemplated by this
Agreement, except for compliance with the Act, the Blue Sky laws applicable to
the public offering of the Common Shares by the several Underwriters and the
clearance of such offering with the National Association of Securities Dealers,
Inc. (the "NASD").
(g) Ernst & Young LLP, who have expressed their opinion with
respect to the financial statements and schedules included in or incorporated by
reference in the Prospectus and in the Registration Statement, are independent
accountants as required by the Act and the Rules and Regulations.
(h) The financial statements and schedules of the Company, and
the related notes thereto, included in or incorporated by reference in the
Registration Statement and the Prospectus present fairly the financial position
of the Company as of the respective dates of such financial statements and
schedules, and the results of operations and changes in financial position of
the Company for the respective periods covered thereby. Such statements,
schedules and related notes have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis as certified by the
independent accountants named in subsection 2(g). No other financial
-4-
<PAGE>
statements or schedules are required to be included in the Registration
Statement. The selected financial and statistical data set forth in the
Prospectus under the captions "Capitalization" and "Selected Consolidated
Financial Data" fairly present the information set forth therein on the basis
stated in the Registration Statement.
(i) Except as disclosed in the Prospectus, and except as to
defaults which individually or in the aggregate would not be material to the
Company and its subsidiaries, as a whole, neither the Company nor any of its
subsidiaries is in violation or default of any provision of its articles of
incorporation or bylaws, or other organizational documents, or is in breach of
or default with respect to any provision of any agreement, judgment, decree,
order, mortgage, deed of trust, lease, franchise, license, indenture, permit or
other instrument to which it is a party or by which it or any of its properties
are bound; and there does not exist any state of facts which constitutes an
event of default on the part of the Company or any such subsidiary as defined in
such documents or which, with notice or lapse of time or both, would constitute
such an event of default.
(j) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which have not
been described or filed as required. The contracts so described in the
Prospectus are in full force and effect on the date hereof; and neither the
Company nor any of its subsidiaries, nor to the best of the Company's knowledge,
any other party is in breach of or default under any of such contracts.
(k) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened to which the Company or any of its subsidiaries
is or may be a party or of which property owned or leased by the Company or any
of its subsidiaries is or may be the subject, or related to environmental or
discrimination matters, which actions, suits or proceedings would reasonably be
expected to, individually or in the aggregate, prevent or adversely affect the
transactions contemplated by this Agreement or result in a material adverse
change in the condition (financial or otherwise), properties, business, results
of operations or prospects of the Company and its subsidiaries, as a whole; and
no labor disturbance by the employees of the Company or any of its subsidiaries
exists or is imminent which would reasonably be expected to affect adversely
such condition, properties, business, results of operations or prospects.
Neither the Company nor any of its subsidiaries is a party or subject to the
provisions of any material injunction, judgment, decree or order of any court,
regulatory body, administrative agency or other governmental body.
(l) The Company or the applicable subsidiary has good and
marketable title to all the properties and assets reflected as owned in the
financial statements hereinabove described (or elsewhere in the Prospectus),
subject to no lien, mortgage, pledge, charge or encumbrance of any kind except
(i) those, if any, reflected in such financial statements (or elsewhere in the
Prospectus), or (ii) those which are not material in amount and do not adversely
affect the use made and proposed to be made of such property by the Company and
its subsidiaries. The Company or the applicable subsidiary holds its leased
properties under valid and binding leases, with such exceptions as are not
materially significant in relation to the business of the Company and its
subsidiaries, as a whole. Except as disclosed in the Prospectus, the Company
owns or leases all such properties as are necessary to its operations as now
conducted or as proposed to be conducted.
(m) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus:
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(i) the Company and its subsidiaries have not incurred any material liabilities
or obligations, indirect, direct or contingent, or entered into any material
verbal or written agreement or other transaction which is not in the ordinary
course of business or which would reasonably be expected to result in a material
reduction in the future earnings of the Company and its subsidiaries, as a
whole; (ii) the Company and its subsidiaries have not sustained any material
loss or interference with their respective businesses or properties from fire,
flood, windstorm, accident or other calamity, whether or not covered by
insurance; (iii) the Company has not paid or declared any dividends or other
distributions with respect to its capital stock and the Company and its
subsidiaries are not in default in the payment of principal or interest on any
outstanding debt obligations; (iv) there has not been any change in the capital
stock (other than upon the sale of the Common Shares hereunder and upon the
exercise of options and warrants described in the Registration Statement) or
indebtedness material to the Company and its subsidiaries (other than in the
ordinary course of business); and (v) there has not been any material adverse
change in the condition (financial or otherwise), business, properties, results
of operations or prospects of the Company and its subsidiaries, as a whole.
(n) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and its subsidiaries have sufficient trademarks, trade
names, patent rights, copyrights, licenses, approvals and governmental
authorizations to conduct their businesses as now conducted; the expiration of
any trademarks, trade names, patent rights, copyrights, licenses, approvals or
governmental authorizations would not have a material adverse effect on the
condition (financial or otherwise), business, results of operations or prospects
of the Company or its subsidiaries, as a whole; and the Company has no knowledge
of any material infringement by it or its subsidiaries of trademark, trade name
rights, patent rights, copyrights, licenses, trade secret or other similar
rights of others, and there is no claim being made against the Company or its
subsidiaries regarding trademark, trade name, patent, copyright, license, trade
secret or other infringement which would reasonably be expected to have a
material adverse effect on the condition (financial or otherwise), business,
results of operations or prospects of the Company and its subsidiaries.
(o) The Company has not been advised, and has no reason to
believe, that either it or any of its subsidiaries is not conducting business in
compliance with all applicable laws, rules and regulations of the jurisdictions
in which it is conducting business, including, without limitation, all
applicable local, state and federal environmental laws and regulations, except
where failure to be so in compliance would not materially adversely affect the
condition (financial or otherwise), business, results of operations or prospects
of the Company and its subsidiaries, as a whole.
(p) The Company and its subsidiaries have filed all necessary
federal, state and foreign income and franchise tax returns and have paid or
accrued all taxes shown as due thereon; and the Company has no knowledge of any
tax deficiency which has been or might be asserted or threatened against the
Company or its subsidiaries which would reasonably be expected to materially and
adversely affect the business, operations or properties of the Company and its
subsidiaries.
(q) The Company is not an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
(r) The Company has not distributed and will not distribute prior
to the First Closing Date hereinafter mentioned any offering material in
connection with the offering and sale of the Common Shares other than the
Prospectus, the Registration Statement and the other materials permitted by the
Act.
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(s) Each of the Company and its subsidiaries maintains insurance
of the types and in the amounts generally deemed adequate for its business,
including, but not limited to, insurance covering all real and personal property
owned or leased by the Company and its subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
(t) Neither the Company nor any of its subsidiaries has, directly
or indirectly, at any time during the last five years (i) made any unlawful
contribution to any candidate for public office, or failed to disclose fully any
contribution in violation of law, or (ii) made any payment to any federal or
state governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or permitted by the
laws of the United States or any jurisdiction thereof.
(u) The Company has not taken and will not take, directly or
indirectly, any action designed to or which has constituted or which might be
reasonably expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Common Shares.
Section 3. Representations, Warranties and Covenants of the
Selling Shareholders.
(a) Each of the Selling Shareholders represents and warrants to,
and agrees with, the several Underwriters that:
(i) Such Selling Shareholder has, and on the First Closing Date
and Second Closing Date hereinafter mentioned will have, good and valid
title to the Common Shares proposed to be sold by such Selling Shareholder
hereunder on such Closing Date and full right, power and authority to
enter into this Agreement and to sell, assign, transfer and deliver such
Common Shares hereunder, free and clear of all voting trust arrangements,
liens, encumbrances, equities, security interests, restrictions and claims
whatsoever; and upon delivery of and payment for such Common Shares
hereunder, the Underwriters will acquire good and marketable title
thereto, free and clear of all liens, encumbrances, equities, claims,
restrictions, security interests, voting trusts or other defects of title
whatsoever.
(ii) Such Selling Shareholder has executed and delivered a Power
of Attorney and caused to be executed and delivered on its behalf a
Custody Agreement (hereinafter collectively referred to as the
"Shareholders Agreement") and in connection herewith such Selling
Shareholder further represents, warrants and agrees that such Selling
Shareholder has deposited in custody, under the Shareholders Agreement,
with the agent named therein (the "Agent") as custodian, certificates in
negotiable form for the Common Shares to be sold hereunder by such Selling
Shareholder, for the purpose of further delivery pursuant to this
Agreement. Such Selling Shareholder agrees that the Common Shares to be
sold by such Selling Shareholder on deposit with the Agent are subject to
the interests of the Company and the Underwriters, that the arrangements
made for such custody are to that extent irrevocable, and that the
obligations of such Selling Shareholder hereunder shall not be terminated,
except as provided in this Agreement or in the Shareholders Agreement, by
any act of such Selling Shareholder, by
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operation of law, by the death or incapacity of such Selling Shareholder
or by the occurrence of any other event. If the Selling Shareholder should
die or become incapacitated, or if any other event should occur, before
the delivery of the Common Shares hereunder, the documents evidencing
Common Shares then on deposit with the Agent shall be delivered by the
Agent in accordance with the terms and conditions of this Agreement as if
such death, incapacity or other event had not occurred, regardless of
whether or not the Agent shall have received notice thereof. This
Agreement and the Shareholders Agreement have been duly executed and
delivered by or on behalf of such Selling Shareholder and the form of such
Shareholders Agreement has been delivered to you.
(iii) The performance of this Agreement and the Shareholders
Agreement and the consummation of the transactions contemplated hereby and
by the Shareholders Agreement will not result in a breach or violation by
such Selling Shareholder of any of the terms or provisions of, or
constitute a default by such Selling Shareholder under, any indenture,
mortgage, deed of trust, trust (constructive or other), loan agreement,
lease, franchise, license or other agreement or instrument to which such
Selling Shareholder is a party or by which such Selling Shareholder or any
of its properties is bound, any statute, or any judgment, decree, order
rule or regulation of any court or governmental agency or body applicable
to such Selling Shareholder or any of its properties.
(iv) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to or which has constituted or
which might reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Common Shares.
(v) Each Preliminary Prospectus and the Prospectus, insofar as it
has related to such Selling Shareholder, has not included any untrue
statement of a material fact or omitted to state a material fact necessary
to make the statements therein not misleading in light of the
circumstances under which they were made; and neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto, as
it relates to such Selling Shareholder, will include any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
(vi) Such Selling Shareholder is not aware that any of the
representations and warranties of the Company set forth in Section 2 above
is untrue or inaccurate in any material respect.
(b) Each of the Selling Shareholders agrees with the Company and
the Underwriters not to directly or indirectly offer to sell, sell or contract
to sell or otherwise dispose of any shares of Common Stock or securities
convertible into or exchangeable for any shares of Common Stock, or any right to
purchase or acquire Common Stock, for a period of 90 days after the first date
that any of the Common Shares are released by you for sale to the public,
without the prior written consent of NationsBanc Montgomery Securities, Inc.,
which consent may be withheld in your sole discretion.
Section 4. Representations and Warranties of the Underwriters.
You represent and warrant to the Company and to the Selling Shareholders that
the information set forth (i) on the cover page of the Prospectus with respect
to price, underwriting discounts and commissions and terms of offering, (ii) on
the inside front cover of the Prospectus with respect to stabilization and (iii)
under "Underwriting" in the Prospectus was furnished to the Company by and on
behalf of the Underwriters for use in connection with the preparation of the
Registration Statement and the Prospectus and is
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correct in all material respects. NationsBanc Montgomery Securities, Inc.
represents and warrants that they have been authorized by each of the
Underwriters to enter into this Agreement on their behalf and to act for them in
the manner herein provided.
Section 5. Purchase, Sale and Delivery of Common Shares. On the
basis of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, (i) the Company agrees to
issue and sell to the Underwriters 3,000,000 of the Firm Common Shares, and (ii)
the Selling Shareholders agree, severally and not jointly, to sell to the
Underwriters in the respective amounts set forth in Schedule B hereto, an
aggregate of 70,000 of the Firm Common Shares. The Underwriters agree, severally
and not jointly, to purchase from the Company and the Selling Shareholders,
respectively, the number of Firm Common Shares described below. The purchase
price per share to be paid by the several Underwriters to the Company and to the
Selling Shareholders, respectively, shall be $________ per share.
The obligation of each Underwriter to the Company shall be to
purchase from the Company that number of full shares which (as nearly as
practicable, as determined by you) bears to 3,000,000 in the same proportion as
the number of shares set forth opposite the name of such Underwriter in Schedule
A hereto bears to the total number of Firm Common Shares. The obligation of each
Underwriter to the Selling Shareholders shall be to purchase from the Selling
Shareholders that number of full shares which (as nearly as practicable, as
determined by you) bears to 3,000,000 in the same proportion as the number of
shares set forth opposite the name of such Underwriter in Schedule A hereto
bears to the total number of Firm Common Shares.
Delivery of certificates for the Firm Common Shares to be
purchased by the Underwriters and payment therefor shall be made at the offices
of NationsBanc Montgomery Securities, Inc., 600 Montgomery Street, San
Francisco, California (or such other place as may be agreed upon by the Company
and you) at such time and date, not later than the third (or, if the Firm Common
Shares are priced, as contemplated by Rule 15c6-1(c) of the Exchange Act, after
4:30 P.M. Washington, D.C. time, the fourth) full business day following the
first date that any of the Common Shares are released by you for sale to the
public, as you shall designate by at least 48 hours prior notice to the Company
(or such other time and date, not later than one week after such third or
fourth, as the case may be, full business day as may be agreed upon by the
Company and the Underwriters) (the "First Closing Date"), provided, however,
that in the event the Registration Statement is amended or the Prospectus is
supplemented between the date hereof and the First Closing Date, you shall have
the right to delay the First Closing Date to a date (not later than one week
after such third or fourth, as the case may be, full business day) that shall
allow you sufficient time to distribute the Prospectus as amended or
supplemented. (As used herein, "business day" means a day on which the New York
Stock Exchange is open for trading and on which banks in New York are open for
business and are not permitted by law or executive order to be closed.)
Delivery of certificates for the Firm Common Shares shall be made
by or on behalf of the Company and the Selling Shareholders to you with respect
to the Firm Common Shares to be sold by the Company and by the Selling
Shareholders against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor to the order of
the Company and of the Agent in proportion to the number of Firm Common Shares
to be sold by the Company and the Selling Shareholders, respectively. The
certificates for the Firm Common Shares shall be registered in such names and
denominations as you shall have requested at least two full business days prior
to the First Closing Date, and shall be made available for checking and
packaging on the business day preceding the First Closing Date at a location in
New York, New York, as may be designated by you. Time
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<PAGE>
shall be of the essence, and delivery at the time and place specified in this
Agreement is a further condition to the obligations of the Underwriters.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Selling Shareholder set forth in Schedule B hereto hereby grants an
option to the Underwriters to purchase, severally and not jointly, up to an
aggregate of 460,500 Optional Common Shares at the purchase price per share to
be paid for the Firm Common Shares, for use solely in covering any
over-allotments made by you for the account of the Underwriters in the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) within 30 days after the first
date that any of the Common Shares are released by you for sale to the public,
upon notice by you to the Company and the Selling Shareholders setting forth the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the option, the names and denominations in which the certificates for
such shares are to be registered and the time and place at which such
certificates will be delivered. Such time of delivery (which may not be earlier
than the First Closing Date), being herein referred to as the "Second Closing
Date," if at any time other than the First Closing Date shall be three full
business days after delivery of such notice of exercise. The number of Optional
Common Shares to be purchased by each Underwriter shall be determined by
multiplying the number of Optional Common Shares to be sold by the Selling
Shareholders pursuant to such notice of exercise by a fraction, the numerator of
which is the number of Firm Common Shares to be purchased by such Underwriter as
set forth opposite its name in Schedule A and the denominator of which is
3,070,000 (subject to such adjustments to eliminate any fractional share
purchases as you in your discretion may make). Certificates for the Optional
Common Shares will be made available for checking and packaging on the business
day preceding the Second Closing Date at a location in New York, New York, as
may be designated by you. The manner of payment for and delivery of the Optional
Common Shares shall be the same as for the Firm Common Shares purchased from the
Selling Shareholders as specified in the two preceding paragraphs. At any time
before lapse of the option, you may cancel such option by giving written notice
of such cancellation to the Selling Shareholders. If the option is cancelled or
expires unexercised in whole or in part, the Company will deregister under the
Act the number of Option Shares as to which the option has not been exercised.
Subject to the terms and conditions hereof, the Underwriters
propose to make a public offering of their respective portions of the Common
Shares as soon after the effective date of the Registration Statement as in your
judgment is advisable and at the public offering price set forth on the cover
page of and on the terms set forth in the Prospectus.
Section 6. Covenants of the Company. The Company covenants and
agrees that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective. If the Registration Statement has become or becomes effective
pursuant to Rule 430A of the Rules and Regulations, or the filing of the
Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations,
the Company will file the Prospectus, properly completed, pursuant to the
applicable paragraph of Rule 424(b) of the Rules and Regulations within the time
period prescribed and will provide evidence satisfactory to you of such timely
filing. The Company will promptly advise you in writing (i) of the receipt of
any comments of the Commission, (ii) of any request of the Commission for
amendment of or supplement to the Registration Statement (either before or after
it becomes effective), any Preliminary Prospectus or the Prospectus or for
additional information, (iii) when the Registration Statement shall have become
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effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the institution
of any proceedings for that purpose. If the Commission shall enter any such stop
order at any time, the Company will use its best efforts to obtain the lifting
of such order at the earliest possible moment. The Company will not file any
amendment or supplement to the Registration Statement (either before or after it
becomes effective), any Preliminary Prospectus or the Prospectus of which you
have not been furnished with a copy a reasonable time prior to such filing or to
which you reasonably object or which is not in compliance with the Act and the
Rules and Regulations.
(b) The Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the Registration
Statement or the Prospectus which in your judgment may be necessary or advisable
to enable the Underwriters to continue the distribution of the Common Shares and
will use its best efforts to cause the same to become effective as promptly as
possible. The Company will fully and completely comply with the provisions of
Rule 430A of the Rules and Regulations with respect to information omitted from
the Registration Statement in reliance upon such Rule.
(c) If at any time within the nine-month period referred to in
Section 10(a)(3) of the Act during which a prospectus relating to the Common
Shares is required to be delivered under the Act any event occurs, as a result
of which the Prospectus, including any amendments or supplements, would include
an untrue statement of a material fact, or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, or if it is necessary at any time to amend the Prospectus, including
any amendments or supplements, to comply with the Act or the Rules and
Regulations, the Company will promptly advise you thereof and will promptly
prepare and file with the Commission, at its own expense, an amendment or
supplement which will correct such statement or omission or an amendment or
supplement which will effect such compliance and will use its best efforts to
cause the same to become effective as soon as possible; and, in case any
Underwriter is required to deliver a prospectus after such nine-month period,
the Company upon request, but at the expense of such Underwriter, will promptly
prepare such amendment or amendments to the Registration Statement and such
Prospectus or Prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act.
(d) As soon as practicable, but not later than 45 days after the
end of the first quarter ending after one year following the "effective date of
the Registration Statement" (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security holders
an earnings statement (which need not be audited) which will satisfy the
provisions of the last paragraph of Section 11(a) of the Act.
(e) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the Company, at
its expense, but only for the nine-month period referred to in Section 10(a)(3)
of the Act, will furnish to you and the Selling Shareholders or mail to your
order copies of the Registration Statement, the Prospectus, the Preliminary
Prospectus and all amendments and supplements to any such documents in each case
as soon as available and in such quantities as you and the Selling Shareholders
may request, for the purposes contemplated by the Act.
(f) The Company shall cooperate with you and your counsel in
order to qualify or register the Common Shares for sale under (or obtain
exemptions from the application of) the blue sky laws of such jurisdictions as
you designate, will comply with such laws and will continue such qualifications,
registrations and exemptions in effect so long as reasonably required for the
distribution
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of the Common Shares. The Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any such
jurisdiction where it is not presently qualified or where it would be subject to
taxation as a foreign corporation. The Company will advise you promptly of the
suspension of the qualification or registration of (or any such exemption
relating to) the Common Shares for offering, sale or trading in any jurisdiction
or any initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification, registration
or exemption, the Company, with your cooperation, will use its best efforts to
obtain the withdrawal thereof.
(g) During the period of five years hereafter, the Company will
furnish to you: (i) as soon as practicable after the end of each fiscal year,
copies of the Annual Report of the Company containing the balance sheet of the
Company as of the close of such fiscal year and statements of income,
shareholders' equity and cash flows for the year then ended and the opinion
thereon of the Company's independent public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement, Annual
Report on Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other
report filed by the Company with the Commission, the NASD or any securities
exchange; and (iii) as soon as available, copies of any report or communication
of the Company mailed generally to holders of its Common Stock.
(h) During the period of 90 days after the first date that any of
the Common Shares are released by you for sale to the public, without the prior
written consent of NationsBanc Montgomery Securities, Inc., which consent may be
withheld in your sole discretion, the Company will not, directly or indirectly
(other than pursuant to outstanding stock options and warrants disclosed in the
Prospectus), issue, offer, sell, grant options to purchase (other than the grant
of options pursuant to stock option plans existing on the date hereof) or
otherwise dispose of any of the Company's equity securities or any other
securities convertible into or exchangeable for its Common Stock or other equity
security.
(i) The Company will apply the net proceeds of the sale of the
Common Shares sold by it substantially in accordance with its statements under
the caption "Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to qualify or register
its Common Stock for sale in non-issuer transactions under (or obtain exemptions
from the application of) the Blue Sky laws of the State of California (and
thereby permit market making transactions and secondary trading in the Company's
Common Stock in California), and will comply with such Blue Sky laws and will
continue such qualifications, registrations and exemptions in effect for a
period of five years after the date hereof.
You may, in your sole discretion, waive in writing the
performance by the Company of any one or more of the foregoing covenants or
extend the time for their performance.
Section 7. Payment of Expenses. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective or is
terminated, the Company and, unless otherwise paid by the Company, the Selling
Shareholders agree to pay in such proportions as they may agree upon among
themselves all costs, fees and expenses incurred in connection with the
performance of their obligations hereunder and in connection with the
transactions contemplated hereby, including without limiting the generality of
the foregoing, (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock and of the
Agent, (iii) all necessary issue, transfer
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and other stamp taxes in connection with the issuance and sale of the Common
Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel
(including fees and expenses relating to the representation of the Selling
Shareholders by the Company's counsel) and the Company's independent
accountants, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement, each Preliminary Prospectus and the Prospectus (including all
exhibits and financial statements) and all amendments and supplements provided
for herein, this Agreement, any Agreement Among Underwriters, any Selected
Dealers Agreement, any Underwriters' Questionnaire, any Underwriters' Power of
Attorney and the Blue Sky memoranda, (vi) all filing fees, attorneys' fees and
expenses incurred by the Company or the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Common Shares for offer and sale under
state Blue Sky or Canadian securities laws, (vii) the filing fee of the National
Association of Securities Dealers, Inc., and (viii) all other fees, costs and
expenses referred to in Item 14 of the Registration Statement. The Underwriters
may deem the Company to be the primary obligor with respect to all costs, fees
and expenses to be paid by the Company and by the Selling Shareholders. Except
as provided in this Section 7, Section 9 and Section 11 hereof, the Underwriters
shall pay all of their own expenses, including the fees and disbursements of
their counsel (excluding those relating to qualification, registration or
exemption under the state Blue Sky or Canadian securities laws and the Blue Sky
memoranda referred to above). This Section 7 shall not affect any agreements
relating to the payment of expenses between the Company and the Selling
Shareholders.
The Selling Shareholders will pay (directly or by reimbursement)
all fees and expenses incident to the performance of their obligations under
this Agreement which are not otherwise specifically provided for herein,
including but not limited to (i) any fees and expenses of counsel for such
Selling Shareholders (other than fees and expenses of the Company's counsel);
and (ii) all expenses and taxes incident to the sale and delivery of the Common
Shares to be sold by such Selling Shareholders to the Underwriters hereunder.
Section 8. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm Common
Shares on the First Closing Date and the Optional Common Shares on the Second
Closing Date shall be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Shareholders herein set
forth as of the date hereof and as of the First Closing Date or the Second
Closing Date, as the case may be, to the accuracy of the statements of Company
officers and the Selling Shareholders made pursuant to the provisions hereof, to
the performance by the Company and the Selling Shareholders of their respective
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 P.M. (or, in the case of a registration statement filed pursuant
to Rule 462(b) of the Rules and Regulations relating to the Common Shares, not
later than 10:00 P.M.), Washington, D.C. time, on the date of this Agreement, or
at such later time as shall have been consented to by you; if the filing of the
Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of
the Rules and Regulations, the Prospectus shall have been filed in the manner
and within the time period required by Rule 424(b) of the Rules and Regulations;
and prior to such Closing Date, no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the knowledge of
the Company, the Selling Shareholders or you, shall be contemplated by the
Commission; and any request of the Commission for inclusion of additional
information in the Registration Statement, or otherwise, shall have been
complied with to your satisfaction.
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(b) You shall be satisfied that since the respective dates as of
which information is given in the Registration Statement and Prospectus, (i)
there shall not have been any change in the capital stock (other than pursuant
to the exercise of outstanding options and warrants disclosed in the Prospectus)
of the Company or any of its subsidiaries or any material change in the
indebtedness (other than in the ordinary course of business) of the Company or
any of its subsidiaries, (ii) except as set forth or contemplated by the
Registration Statement or the Prospectus, no material verbal or written
agreement or other transaction shall have been entered into by the Company or
any of its subsidiaries, which is not in the ordinary course of business or
which would reasonably be expected to result in a material reduction in the
future earnings of the Company and its subsidiaries, (iii) no loss or damage
(whether or not insured) to the property of the Company or any of its
subsidiaries shall have been sustained which materially and adversely affects
the condition (financial or otherwise), business, results of operations or
prospects of the Company and its subsidiaries, (iv) no legal or governmental
action, suit or proceeding affecting the Company or any of its subsidiaries
which is material to the Company and its subsidiaries or which affects or may
affect the transactions contemplated by this Agreement shall have been
instituted or threatened and (v) there shall not have been any material change
in the condition (financial or otherwise), business, management, results of
operations or prospects of the Company and its subsidiaries which makes it
impractical or inadvisable in your judgment to proceed with the public offering
or purchase the Common Shares as contemplated hereby.
(c) There shall have been furnished to you on each Closing Date,
in form and substance satisfactory to you, except as otherwise expressly
provided below:
(i) An opinion of Wilson, Sonsini, Goodrich & Rosati,
Professional Corporation, counsel for the Company and the Selling
Shareholders, addressed to you and dated the First Closing Date, or the
Second Closing Date, as the case may be, to the effect that:
(1) Each of the Company and its Material Subsidiaries has been
duly incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation, is duly
qualified to do business as a foreign corporation and is in good standing
in all other jurisdictions where the ownership or leasing of properties or
the conduct of its business requires such qualification, except for
jurisdictions in which the failure to so qualify would not have a material
adverse effect on the Company and its subsidiaries, and has full corporate
power and authority to own its properties and conduct its business as
described in the Registration Statement (as used herein, "Material
Subsidiary" means any subsidiary of the Company deemed to be such by you
and the Company and any corporation (i) of which more than 50% of the
voting stock is owned or controlled by the Company or by one or more of
its subsidiaries and (ii) to such counsel's knowledge either (x) the total
assets of which represent 5% or more of the total assets of the Company
and its subsidiaries consolidated as of the end of the Company's most
recent fiscal quarter or (y) the net sales of which represent 5% or more
of the net sales of the Company and its subsidiaries consolidated for the
nine months ended September 30, 1997 or (z) the Company's and its other
subsidiaries' equity in the income from continuing operations before
income taxes, extraordinary items and cumulative effect of a change in
accounting principle of such corporation exceeds 5% of such income of the
Company and its subsidiaries consolidated for the nine months ended
September 30, 1997);
(2) The authorized, issued and outstanding capital stock of the
Company is as set forth under the caption "Capitalization" in the
Prospectus; all necessary corporate proceedings have been taken in order
to authorize validly such authorized Common Stock; all outstanding
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shares of Common Stock (including the Firm Common Shares and any Optional
Common Shares to be sold by the Selling Shareholders) have been duly and
validly issued, are fully paid and nonassessable, and, to such counsel's
knowledge, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase any securities;
without limiting the foregoing, to such counsel's knowledge, there are no
preemptive or other rights to subscribe for or purchase any of the Common
Shares to be sold by the Company hereunder;
(3) All of the issued and outstanding shares of capital stock of
the Material Subsidiaries have been duly and validly authorized and issued
and are fully paid and nonassessable and are owned beneficially by the
Company free and clear of all liens, encumbrances, equities, claims,
security interests, voting trusts or other defects of title whatsoever;
(4) The certificates evidencing the Common Shares to be delivered
hereunder are in due and proper form under Arizona law, and when duly
countersigned by the Company's transfer agent and registrar, and delivered
to you or upon your order against payment of the agreed consideration
therefor in accordance with the provisions of this Agreement, the Common
Shares represented thereby will be duly authorized and validly issued,
fully paid and nonassessable, and, to such counsel's knowledge, will not
have been issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities;
(5) Except as disclosed in or specifically contemplated by the
Prospectus, to such counsel's knowledge, there are no outstanding options,
warrants or other rights requiring the issuance of, and no commitments to
issue, any shares of capital stock of the Company or any security
convertible into or exchangeable for capital stock of the Company;
(6) (a) The Registration Statement has become effective under the
Act, and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or preventing
the use of the Prospectus has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated by the
Commission; any required filing of the Prospectus and any supplement
thereto pursuant to Rule 424(b) of the Rules and Regulations has been made
in the manner and within the time period required by such Rule 424(b);
(b) The Registration Statement, the Prospectus and each amendment
or supplement thereto (except for the financial statements and schedules
included therein as to which such counsel need express no opinion) comply
as to form in all material respects with the requirements of the Act and
the Rules and Regulations;
(c) To such counsel's knowledge, there are no franchises, leases,
contracts, agreements or documents of a character required to be disclosed
in the Registration Statement or Prospectus or to be filed as exhibits to
the Registration Statement or to the Company's Annual Report on Form 10-K
which are not disclosed or filed, as required;
(d) To such counsel's knowledge, there are no legal or
governmental actions, suits or proceedings pending or threatened against
the Company or its subsidiaries which are required to be described in the
Prospectus which are not described as required;
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<PAGE>
(e) The documents incorporated by reference in the Prospectus
(except for any financial statements and schedules included in such
documents as to which such counsel need express no opinion), when they
were filed with the Commission, complied as to form in all material
respects with the requirements of the Exchange Act and the rules and
regulations of the Commission thereunder;
(7) The Company has the requisite corporate power and authority
to enter into this Agreement and to sell and deliver the Common Shares to
be sold by it to the several Underwriters; this Agreement has been duly
and validly authorized by all necessary corporate action by the Company,
has been duly and validly executed and delivered by and on behalf of the
Company, and is a valid and binding agreement of the Company in accordance
with its terms, except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, reorganization, moratorium
or other laws affecting creditors' rights generally and except as to those
provisions relating to indemnity or contribution for liabilities arising
under the Act as to which no opinion need be expressed; and no approval,
authorization, order, consent, registration, filing, qualification,
license or permit of or with any court, regulatory, administrative or
other governmental body is required for the execution and delivery of this
Agreement by the Company or the performance by the Company of its
obligations set forth in this Agreement, except such as have been obtained
and are in full force and effect under the Act and such as may be required
under applicable Blue Sky laws in connection with the purchase and
distribution of the Common Shares by the Underwriters and the clearance of
such offering with the NASD;
(8) The execution and delivery of this Agreement and the
performance by the Company of its obligations set forth in this Agreement
will not result in the breach of, or constitute, either by itself or upon
notice or the passage of time or both, a default under, any agreement,
mortgage, deed of trust, lease, franchise, license, indenture, permit or
other instrument known to such counsel to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
or any of its or their property may be bound or affected which is material
to the Company and its subsidiaries, as a whole, or violate any of the
provisions of the articles of incorporation or bylaws, or other
organizational documents, of the Company or any of its subsidiaries or, so
far as is known to such counsel, violate any statute, judgment, decree,
order, rule or regulation of any court or governmental body having
jurisdiction over the Company or any of its subsidiaries or any of its or
their property;
(9) The Company is not in violation of its articles of
incorporation or bylaws, none of the Material Subsidiaries is in violation
of its articles of incorporation or, to such counsel's knowledge, bylaws
or other organizational documents, and, to such counsel's knowledge,
neither the Company nor any Material Subsidiary is in breach of or default
with respect to any provision of any agreement, mortgage, deed of trust,
lease, franchise, license, indenture, permit or other instrument filed as
an exhibit to the Registration Statement or the Company Form 10-K to which
the Company or any such subsidiary is a party or by which it or any of its
properties may be bound or affected, except where such default would not
materially adversely affect the Company and its subsidiaries, taken as a
whole;
(10) To such counsel's knowledge, no holders of securities of the
Company have rights which have not been waived or fulfilled to the
registration of shares of Common Stock or other securities, because of the
filing of the Registration Statement by the Company or the offering
contemplated hereby;
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(11) To such counsel's knowledge, this Agreement and the
Shareholders Agreement have been duly authorized, executed and delivered
by or on behalf of each of the Selling Shareholders; the Agent has been
duly and validly authorized to act as the custodian of the Common Shares
to be sold by each such Selling Shareholder; and, to such counsel's
knowledge, the execution and delivery of this Agreement and the
Shareholders Agreement by each Selling Shareholder and the performance by
the Selling Shareholders of their obligations set forth herein and
therein, will not result in a breach of, or constitute a default under,
any indenture, mortgage, deed of trust, trust (constructive or other),
loan agreement, lease, franchise, license or other agreement or instrument
to which any of the Selling Shareholders is a party or by which any of the
Selling Shareholders or any of their properties may be bound and which is
material to any Selling Shareholder, or violate any statute, judgment,
decree, order, rule or regulation known to such counsel of any court or
governmental body having jurisdiction over any of the Selling Shareholders
or any of their properties; and to such counsel's knowledge, no approval,
authorization, order or consent of any court, regulatory body,
administrative agency or other governmental body is required for the
execution and delivery of this Agreement or the Shareholders Agreement or
the performance by the Selling Shareholders of their obligations set forth
in this Agreement, except such as have been obtained and are in full force
and effect under the Act and such as may be required under the rules of
the NASD and applicable Blue Sky laws;
(12) To such counsel's knowledge, the Selling Shareholders have
full right, power and authority to enter into this Agreement and the
Shareholders Agreement and to sell, transfer and deliver the Common Shares
to be sold on such Closing Date by such Selling Shareholders hereunder and
good and valid title to such Common Shares so sold, free and clear of all
liens, encumbrances, equities, claims, restrictions, security interests,
voting trusts, or other defects of title whatsoever, has been transferred
to the Underwriters (whom counsel may assume to be bona fide purchasers)
who have purchased such Common Shares hereunder; and
(13) To such counsel's knowledge, this Agreement and the
Shareholders Agreement are valid and binding agreements of each of the
Selling Shareholders in accordance with their terms except as
enforceability may be limited by general equitable principles, bankruptcy,
insolvency, reorganization, moratorium or other laws affecting creditors'
rights generally and except with respect to those provisions relating to
indemnities or contributions for liabilities under the Act, as to which no
opinion need be expressed.
In rendering such opinion, such counsel may rely as to the
matters set forth in paragraphs (11), (12) and (13), on opinions of other
counsel retained by the Selling Shareholders, as to matters of local or
regulatory law, on opinions of local or regulatory counsel, and as to
matters of fact, on certificates of the Selling Shareholders and of
officers of the Company and of governmental officials, in which case their
opinion is to state that they are so doing and that the Underwriters are
justified in relying on such opinions or certificates and copies of said
opinions or certificates are to be delivered to counsel for the
Underwriters. Such counsel shall also include a statement to the effect
that nothing has come to such counsel's attention that would lead such
counsel to believe that either at the effective date of the Registration
Statement or at the applicable Closing Date the Registration Statement or
the Prospectus, or any such amendment or supplement (other than the
financial statements and schedules and other financial or statistical data
set forth therein, as to which such counsel need express no belief),
contains any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading;
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(ii) Such opinion or opinions of Pillsbury Madison & Sutro LLP,
counsel for the Underwriters, dated the First Closing Date or the Second
Closing Date, as the case may be, with respect to the incorporation of the
Company, the sufficiency of all corporate proceedings and other legal
matters relating to this Agreement, the validity of the Common Shares, the
Registration Statement and the Prospectus and other related matters as you
may reasonably require, and the Company and the Selling Shareholders shall
have furnished to such counsel such documents and shall have exhibited to
them such papers and records as they may reasonably request for the
purpose of enabling them to pass upon such matters. In connection with
such opinions, such counsel may rely on representations or certificates of
officers of the Company and governmental officials.
(iii) A certificate of the Company executed by the Chairman of
the Board or President and the chief financial or accounting officer of
the Company, dated the First Closing Date or the Second Closing Date, as
the case may be, to the effect that:
(1) The representations and warranties of the Company set forth
in Section 2 of this Agreement are true and correct as of the date of this
Agreement and as of the First Closing Date or the Second Closing Date, as
the case may be, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied on
or prior to such Closing Date;
(2) The Commission has not issued any order preventing or
suspending the use of the Prospectus or any Preliminary Prospectus filed
as a part of the Registration Statement or any amendment thereto; no stop
order suspending the effectiveness of the Registration Statement has been
issued; and to the best of the knowledge of the respective signers, no
proceedings for that purpose have been instituted or are pending or
contemplated under the Act;
(3) Each of the respective signers of the certificate has
carefully examined the Registration Statement and the prospectus; to the
best of his knowledge, the Registration Statement and the Prospectus and
any amendments or supplements thereto contain all statements required to
be stated therein regarding the Company and its subsidiaries; and neither
the Registration State ment nor the Prospectus nor any amendment or
supplement thereto includes any untrue statement of a material fact or
omits to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(4) Since the initial date on which the Registration Statement
was filed, no agreement, written or oral, transaction or event has
occurred which should have been set forth in an amendment to the
Registration Statement or in a supplement to or amendment of any
prospectus which has not been disclosed in such a supplement or amendment;
(5) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, and except as disclosed
in or contemplated by the Prospectus, there has not been any material
adverse change or a development which would be reasonably likely to result
in a material adverse change in the condition (financial or otherwise),
business, properties, results of operations or management of the Company
and its subsidiaries, as a whole; and no legal or governmental action,
suit or proceeding is pending or threatened against the Company or any of
its subsidiaries which is material to the Company and its subsidiaries, as
a whole, whether or not arising from transactions in the ordinary course
of business, or which may
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<PAGE>
adversely affect the transactions contemplated by this Agreement; since
such dates and except as so disclosed, neither the Company nor any of its
subsidiaries has entered into any verbal or written agreement or other
transaction which is not in the ordinary course of business or which would
reasonably be expected to result in a material reduction in the future
earnings of the Company or incurred any material liability or obligation,
direct, contingent or indirect, made any change in its capital stock
(except pursuant to exercise of stock options and warrants as disclosed in
the Prospectus), made any material change in its short-term debt or funded
debt or repurchased or otherwise acquired any of the Company's capital
stock; and the Company has not declared or paid any dividend, or made any
other distribution, upon its outstanding capital stock payable to
shareholders of record on a date prior to the First Closing Date or Second
Closing Date; and
(6) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus and except as disclosed
in or contemplated by the Prospectus, the Company and its subsidiaries
have not sustained a material loss or damage by strike, fire, flood,
windstorm, accident or other calamity (whether or not insured).
(iv) On the date before this Agreement is executed and also on
the First Closing Date and the Second Closing Date a letter addressed to
you from Ernst & Young LLP, independent accountants, the first one to be
dated the day before the date of this Agreement, the second one to be
dated the First Closing Date and the third one (in the event of a Second
Closing) to be dated the Second Closing Date, in form and substance
satisfactory to you.
(v) On the First Closing Date or the Second Closing Date, as the
case may be, a certificate, dated such Closing Date and addressed to you,
signed by or on behalf of each of the Selling Shareholders to the effect
that the representations and warranties of such Selling Shareholder in
this Agreement are true and correct, as if made at and as of the First
Closing Date or Second Closing Date, as the case may be, and such Selling
Shareholder has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied prior to the First
Closing Date or Second Closing Date, as the case may be.
(vi) On or before the First Closing Date, letters from each
executive officer of the Company, in form and substance satisfactory to
you, confirming that for a period of 90 days after the first date that any
of the Common Shares are released by you for sale to the public, such
person will not directly or indirectly sell or offer to sell or otherwise
dispose of any shares of Common Stock or any right to acquire such shares
without the prior written consent of NationsBanc Montgomery Securities,
Inc., which consent may be withheld your sole discretion.
All such opinions, certificates, letters and documents shall be
in compliance with the provisions hereof only if they are satisfactory to you
and to Pillsbury Madison & Sutro LLP, counsel for the Underwriters. The Company
shall furnish you with such manually signed or conformed copies of such
opinions, certificates, letters and documents as you request. Any certificate
signed by any officer of the Company and delivered to you or to counsel for the
Underwriters shall be deemed to be a representation and warranty by the Company
to the Underwriters as to the statements made therein.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you to the
Company and the Selling Shareholders without liability on the part of any
Underwriter or the Company or the Selling Shareholders except for the expenses
to be paid or reimbursed by the
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Company and by the Selling Shareholders pursuant to Sections 7 and 9 hereof and
except to the extent provided in Section 11 hereof.
Section 9. Reimbursement of Underwriters' Expenses.
Notwithstanding any other provisions hereof, if this Agreement shall be
terminated by you pursuant to Section 8 hereof, or if the sale to the
Underwriters of the Common Shares at the First Closing is not consummated
because of any refusal, inability or failure on the part of the Company or the
Selling Shareholders to perform any agreement herein or to comply with any
provision hereof, the Company agrees to reimburse you and the other Underwriters
upon demand for all out-of-pocket expenses that shall have been reasonably
incurred by you and them in connection with the proposed purchase and the sale
of the Common Shares, including but not limited to fees and disbursements of
counsel, printing expenses, travel expenses, postage, telegraph charges and
telephone charges relating directly to the offering contemplated by the
Prospectus. Any such termination shall be without liability of any party to any
other party except that the provisions of this Section, Section 7 and Section 11
shall at all times be effective and shall apply.
Section 10. Effectiveness of Registration Statement. You, the
Company and the Selling Shareholders will use your, its and their best efforts
to cause the Registration Statement to become effective, to prevent the issuance
of any stop order suspending the effectiveness of the Registration Statement
and, if such stop order be issued, to obtain as soon as possible the lifting
thereof.
Section 11. Indemnification.
(a) The Company and each of the Selling Shareholders, jointly and
severally, agree to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of the Act
against any losses, claims, damages, liabilities or expenses, joint or several,
to which such Underwriter or such controlling person may become subject, under
the Act, the Exchange Act, or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company), insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof as contemplated below) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the Prospectus, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state in any of them a material fact required to
be stated therein or necessary to make the statements in any of them not
misleading, or arise out of or are based in whole or in part on any inaccuracy
in the representations and warranties of the Company or the Selling Shareholders
contained herein or any failure of the Company or the Selling Shareholders to
perform their respective obligations hereunder or under law; and will reimburse
each Underwriter and each such controlling person for any legal and other
expenses reasonably incurred by such Underwriter or such controlling person in
connection with investigating, defending, settling, compromising or paying any
such loss, claim, damage, liability, expense or action; provided, however, that
neither the Company nor the Selling Shareholders will be liable in any such case
to the extent that any such loss, claim, damage, liability or expense arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto in reliance
upon and in conformity with the information furnished to the Company pursuant to
Section 4 hereof; and provided further, that with respect to any untrue
statement or omission or alleged untrue statement or omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, each Selling Shareholder shall not be liable
under this paragraph for an amount in
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excess of the proceeds received by the Selling Shareholder for the Common Shares
sold by such Selling Shareholder to the Underwriters; and provided further, that
the indemnity provided in this Section 11(a) with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any losses, claims, charges, liabilities or litigation based
upon any untrue statement or alleged untrue statement of any material fact or
omission or alleged omission to state therein a material fact, if a copy of the
Prospectus in which such untrue statement or alleged untrue statement or
omission was corrected has not been sent or given to such person within the time
required by the Act and the Rule and Regulations thereunder, unless such failure
is the result of noncompliance by the Company with Section 6(e) hereof; and
provided further, that no Selling Shareholder shall be liable in any case
pursuant to this Section 11 to the extent any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or omission or
alleged omission made in the Registration Statement, any Preliminary Prospectus,
the Prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with information furnished to the Company in writing by any other
Selling Shareholder; and provided further, that no Selling Shareholder shall be
required to provide indemnification or reimbursement hereunder until the
Underwriter or control person seeking indemnification or reimbursement shall
have first made a claim therefor against the Company and such claim has not been
paid by the Company for a period of not less than 45 days. The Company and the
Selling Shareholders may agree, as among themselves, as to their respective
amounts of such liability for which they each shall be responsible. In addition
to their other obligations under this Section 11(a), the Company and the Selling
Shareholders agree that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, or any
inaccuracy in the representations and warranties of the Company or the Selling
Shareholders herein or failure to perform its obligations hereunder, all as
described in this Section 11(a), they will reimburse each Underwriter on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
or the Selling Shareholders' obligation to reimburse each Underwriter for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, each Underwriter
shall promptly return it to the Company together with interest, compounded
daily, determined on the basis of the prime rate (or other commercial lending
rate for borrowers of the highest credit standing) announced from time to time
by Bank of America National Trust and Savings Association, San Francisco,
California (the "Prime Rate"). Any such interim reimbursement payments which are
not made to an Underwriter within 30 days of a request for reimbursement, shall
bear interest at the Prime Rate from the date of such request. This indemnity
agreement will be in addition to any liability which the Company or the Selling
Shareholders may otherwise have.
(b) Each Underwriter will severally indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement, the Selling Shareholders and each person, if any, who
controls the Company or any Selling Shareholder within the meaning of the Act,
against any losses, claims, damages, liabilities or expenses to which the
Company, or any such director, officer, Selling Shareholder or controlling
person may become subject, under the Act, the Exchange Act, or other federal or
state statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated below)
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the
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Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, in reliance upon and in conformity with the
information furnished to the Company pursuant to Section 4 hereof; and will
reimburse the Company, or any such director, officer, Selling Shareholder or
controlling person for any legal and other expense reasonably incurred by the
Company, or any such director, officer, Selling Shareholder or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. In addition
to its other obligations under this Section 11(b), each Underwriter severally
agrees that, as an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, described in this
Section 11(b) which relates to information furnished to the Company pursuant to
Section 4 hereof, it will reimburse the Company (and, to the extent applicable,
each officer, director, Selling Shareholder or controlling person) on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligations to reimburse the Company (and, to the extent
applicable, each officer, director, Selling Shareholder or controlling person)
for such expenses and the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction. To the extent that any
such interim reimbursement payment is so held to have been improper, the Company
(and, to the extent applicable, each officer, director, Selling Shareholder or
controlling person) shall promptly return it to the Underwriters together with
interest, compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Company within 30 days
of a request for reimbursement, shall bear interest at the Prime Rate from the
date of such request. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under this Section, notify the indemnifying party in writing of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party for
contribution or otherwise than under the indemnity agreement contained in this
Section or to the extent it is not prejudiced as a proximate result of such
failure. In case any such action is brought against any indemnified party and
such indemnified party seeks or intends to seek indemnity from an indemnifying
party, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with all other indemnifying parties similarly
notified, to assume the defense thereof with counsel reasonably satisfactory to
such indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be a conflict
between the positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section for any legal or
other
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expenses subsequently incurred by such indemnified party in connection with the
defense thereof unless (i) the indemnified party shall have employed such
counsel in connection with the assumption of legal defenses in accordance with
the proviso to the preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel, approved by you in the case of paragraph (a), representing the
indemnified parties who are parties to such action) or (ii) the indemnifying
party shall not have employed counsel reasonably satisfactory to the indemnified
party to represent the indemnified party within a reasonable time after notice
of commencement of the action, in each of which cases the fees and expenses of
counsel shall be at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 11 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under paragraphs
(a), (b) or (c) of this Section 11 in respect of any losses, claims, damages,
liabilities or expenses referred to herein, then each applicable indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of any losses, claims, damages, liabilities or expenses referred to
herein (i) in such proportion as is appropriate to reflect the relative benefits
received by the Company, Selling Shareholders and the Underwriters from the
offering of the Common Shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company, Selling Shareholders and the
Underwriters in connection with the statements or omissions or inaccuracies in
the representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The respective relative benefits received by the Company,
Selling Shareholders and the Underwriters shall be deemed to be in the same
proportion, in the case of the Company and the Selling Shareholders as the total
price paid to the Company and to the Selling Shareholders, respectively, for the
Common Shares sold by them to the Underwriters (net of underwriting commissions
but before deducting expenses), and in the case of the Underwriters as the
underwriting commissions received by them bears to the total of such amounts
paid to the Company and the Selling Shareholders and received by the
Underwriters as underwriting commissions. The relative fault of the Company,
Selling Shareholders and the Underwriters shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact or the
inaccurate or the alleged inaccurate representation and/or warranty relates to
information supplied by the Company, Selling Shareholders or the Underwriters
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The amount paid or
payable by a party as a result of the losses, claims, damages, liabilities and
expenses referred to above shall be deemed to include, subject to the
limitations set forth in paragraph (c) of this Section 11, any legal or other
fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
paragraph (c) of this Section 11 with respect to notice of commencement of any
action shall apply if a claim for contribution is to be made under this
paragraph (d); provided, however, that no additional notice shall be required
with respect to any action for which notice has been given under paragraph (c)
for purposes of indemnification. The Company, Selling Shareholders and the
Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 11 were determined solely by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to in this paragraph. Notwithstanding the provisions of this Section
11, no Underwriter shall be required to contribute any amount in excess of the
amount of the total underwriting commissions received by such Underwriter in
connection with the Common Shares
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underwritten by it and distributed to the public. Notwithstanding the provisions
of this Section 11, no Selling Shareholder shall be required to contribute any
amount in excess of the proceeds received by the Selling Shareholder for the
Common Shares sold by such Selling Shareholder to the Underwriters. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 11 are several in proportion to their respective
underwriting commitments and not joint.
(e) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections 11(a)
and (b), including the amounts of any requested reimbursement payments and the
method of determining such amounts, shall be settled by arbitration conducted
under the provisions of the Constitution and Rules of the Board of Governors of
the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration
Procedure of the NASD. Any such arbitration must be commenced by service of a
written demand for arbitration or written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in Sections 11(a) and (b) and
would not resolve the ultimate propriety or enforceability of the obligation to
reimburse expenses which is created by the provisions of such Sections 11(a) and
(b) hereof.
Section 12. Default of Underwriters. It shall be a condition to
this Agreement and the obligation of the Company and the Selling Shareholders to
sell and deliver the Common Shares hereunder, and of each Underwriter to
purchase the Common Shares in the manner as described herein, that, except as
hereinafter in this paragraph provided, each of the Underwriters shall purchase
and pay for all the Common Shares agreed to be purchased by such Underwriter
hereunder upon tender to the Underwriters of all such shares in accordance with
the terms hereof. If any Underwriter or Underwriters default in your or their
obligations to purchase Common Shares hereunder on either the First or Second
Closing Date and the aggregate number of Common Shares which such defaulting
Underwriter or Underwriters agreed but failed to purchase on such Closing Date
does not exceed 10% of the total number of Common Shares which the Underwriters
are obligated to purchase on such Closing Date, the nondefaulting entities shall
be obligated severally, in proportion to their respective commitments hereunder,
to purchase the Common Shares which such defaulting entities agreed but failed
to purchase on such Closing Date. If any Underwriter or Underwriters so default
and the aggregate number of Common Shares with respect to which such default
occurs is more than the above percentage and arrangements satisfactory to you
and the Company for the purchase of such Common Shares by other persons are not
made within 48 hours after such default, this Agreement will terminate without
liability on the part of any nondefaulting Underwriter or the Company or the
Selling Shareholders except for the expenses to be paid by the Company and the
Selling Shareholders pursuant to Section 7 hereof and except to the extent
provided in Section 11 hereof.
In the event that Common Shares to which a default relates are to
be purchased by the nondefaulting entities or by another party or parties, you
or the Company shall have the right to postpone the First or Second Closing
Date, as the case may be, for not more than five business days in order that the
necessary changes in the Registration Statement, Prospectus and any other
documents, as well as any other arrangements, may be effected. As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve you or a defaulting
Underwriter from liability for its default.
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<PAGE>
Section 13. Effective Date. This Agreement shall become effective
immediately as to Sections 7, 9, 11, 14 and 16 and, as to all other provisions,
(i) if at the time of execution of this Agreement the Registration Statement has
not become effective, at 2:00 P.M., California time, on the first full business
day following the effectiveness of the Registration Statement, or (ii) if at the
time of execution of this Agreement the Registration Statement has been declared
effective, at 2:00 P.M., California time, on the first full business day
following the date of execution of this Agreement; but this Agreement shall
nevertheless become effective at such earlier time after the Registration
Statement becomes effective as you may determine on and by notice to the Company
or by release of any of the Common Shares for sale to the public. For the
purposes of this Section 13, the Common Shares shall be deemed to have been so
released upon the release for publication of any newspaper advertisement
relating to the Common Shares or upon the release by you of telegrams (i)
advising Underwriters that the Common Shares are released for public offering,
or (ii) offering the Common Shares for sale to securities dealers, whichever may
occur first.
Section 14. Termination. Without limiting the right to terminate
this Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to
you and the Selling Shareholders or by you by notice to the Company and the
Selling Shareholders at any time prior to the time this Agreement shall become
effective as to all its provisions, and any such termination shall be without
liability on the part of the Company or the Selling Shareholders to any
Underwriter (except for the expenses to be paid or reimbursed by the Company and
the Selling Shareholders pursuant to Sections 7 and 9 hereof and except to the
extent provided in Section 11 hereof) or of any Underwriter to the Company or
the Selling Shareholders (except to the extent provided in Section 11 hereof).
(b) This Agreement may also be terminated by you prior to the
First Closing Date by notice to the Company and the Selling Shareholders (i) if
additional material governmental restrictions, not in force and effect on the
date hereof, shall have been imposed upon trading in securities generally or
minimum or maximum prices shall have been generally established on the New York
Stock Exchange or on the American Stock Exchange or in the over the counter
market by the NASD, or trading in securities generally shall have been suspended
on either such Exchange or in the over the counter market by the NASD, or a
general banking moratorium shall have been established by federal, New York or
California authorities, (ii) if an outbreak or escalation of major hostilities
or other national or international calamity or any substantial change in
political, financial or economic conditions shall have occurred or shall have
accelerated or escalated to such an extent, as, in your judgment, to affect
adversely the marketability of the Common Shares, (iii) if any adverse event
shall have occurred or shall exist which makes untrue or incorrect in any
material respect any statement or information contained in the Registration
Statement or Prospectus or which is not reflected in the Registration Statement
or Prospectus but should be reflected therein in order to make the statements or
information contained therein not misleading in any material respect, or (iv) if
there shall be any action, suit or proceeding pending or threatened, or there
shall have been any development or prospective development involving
particularly the business or properties or securities of the Company or any of
its subsidiaries or the transactions contemplated by this Agreement, which, in
your judgment, may materially and adversely affect the Company's business or
earnings and makes it impractical or inadvisable to offer or sell the Common
Shares. Any termination pursuant to this subsection (b) shall be without
liability on the part of any Underwriter to the Company or the Selling
Shareholders or on the part of the Company or the Selling Shareholders to any
Underwriter (except for expenses to be paid
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or reimbursed by the Company and the Selling Shareholders pursuant to Sections 7
and 9 hereof and except to the extent provided in Section 11 hereof).
Section 15. Failure of the Selling Shareholders to Sell and
Deliver. If one or more of the Selling Shareholders shall fail to sell and
deliver to the Underwriters the Common Shares to be sold and delivered by such
Selling Shareholders at the First Closing Date under the terms of this
Agreement, then the Underwriters may at their option, by written notice from you
to the Company and the Selling Shareholders, either (i) terminate this Agreement
without any liability on the part of any Underwriter or, except as provided in
Sections 7, 9 and 11 hereof, the Company or the Selling Shareholders, or (ii)
purchase the shares which the Company and other Selling Shareholders have agreed
to sell and deliver in accordance with the terms hereof. In the event of a
failure by one or more of the Selling Shareholders to sell and deliver as
referred to in this Section, either you or the Company shall have the rights to
postpone the Closing Date for a period not exceeding seven business days in
order that the necessary changes in the Registration Statement, Prospectus, and
any other documents, as well as any other arrangements, may be effected.
Section 16. Representations and Indemnities To Survive Delivery.
The respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Shareholders and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Selling Shareholders, as
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
Section 17. Notices. All communications hereunder shall be in
writing and, if sent to the Underwriters shall be mailed, delivered or
telegraphed and confirmed to you at 600 Montgomery Street, San Francisco,
California 94111, Attention: David A. Baylor, Esq., with a copy to Pillsbury
Madison & Sutro LLP, 235 Montgomery Street, San Francisco, California 94104,
Attention: Stanton D. Wong, Esq.; and if sent to the Company or the Selling
Shareholders shall be mailed, delivered or telegraphed and confirmed to the
Company at 120 North 44th Street, Suite 200, Phoenix, Arizona 85034-1822,
Attention: Mr. Steven G. Mihaylo, with a copy to Wilson, Sonsini, Goodrich &
Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California
94304, Attention: Jeffrey D. Saper, Esq. The Company, the Selling Shareholders
or you may change the address for receipt of communications hereunder by giving
notice to the others.
Section 18. Successors. This Agreement will inure to the benefit
of and be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 12 hereof, and to the benefit of the officers and directors
and controlling persons referred to in Section 11, and in each case their
respective successors, personal representatives and assigns, and no other person
will have any right or obligation hereunder. No such assignment shall relieve
any party of its obligations hereunder. The term "successors" shall not include
any purchaser of the Common Shares as such from any of the Underwriters merely
by reason of such purchase.
Section 19. Representation of Underwriters. Except as otherwise
expressly provided herein, any action under or in respect of this Agreement
taken by you jointly or by NationsBanc Montgomery Securities, Inc. will be
binding upon all the Underwriters.
Section 20. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other
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<PAGE>
Section, paragraph or provision hereof. If any Section, paragraph or provision
of this Agreement is for any reason determined to be invalid or unenforceable,
there shall be deemed to be made such minor changes (and only such minor
changes) as are necessary to make it valid and enforceable.
Section 21. Applicable Law. This Agreement shall be governed by
and construed in accordance with the internal laws (and not the laws pertaining
to conflicts of laws) of the State of California.
Section 22. General. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in
several counterparts, each one of which shall be an original, and all of which
shall constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and
the singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company, Selling Shareholders and you.
Any person executing and delivering this Agreement as
Attorney-in-fact for the Selling Shareholders represents by so doing that he has
been duly appointed as Attorney-in-fact by such Selling Shareholder pursuant to
a validly existing and binding Power of Attorney which authorizes such Attorney-
in-fact to take such action. Any action taken under this Agreement by any of the
Attorneys-in-fact will be binding on all Selling Shareholders.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon it
will become a binding agreement among the
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<PAGE>
Company, the Selling Shareholders and the several Underwriters including you,
all in accordance with its terms.
Very truly yours,
INTER-TEL INCORPORATED
By ___________________________
Its _______________________
SELLING SHAREHOLDERS
By ___________________________
(Attorney-in-fact)
The foregoing Underwriting Agreement is hereby confirmed and accepted by us in
San Francisco, California as of the date first above written.
NATIONSBANC MONTGOMERY SECURITIES, INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
JEFFERIES & COMPANY, INC.
By NATIONSBANC MONTGOMERY SECURITIES, INC.
By ____________________________________
Managing Director
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SCHEDULE A
Number of Firm
Common Shares
Name of Underwriter To Be Purchased
- ------------------- ---------------
Montgomery Securities .........................................
Donaldson, Lufkin & Jenrette
Securities Corporation .....................................
Jefferies & Company, Inc.......................................
TOTAL..................................................... 3,070,000
=========
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SCHEDULE B
Number of Firm
Common Shares to
be Sold by Selling
Name of Selling Shareholder Shareholders
- --------------------------- ------------------
Thomas C. Parise.............................................
Craig W. Rauchle.............................................
Total .................................................. 70,000
======
Number of Optional
Common Shares to
be Sold by Selling
Name of Selling Shareholder Shareholders
- --------------------------- ------------------
Steven G. Mihaylo............................................
Thomas C. Parise.............................................
Craig W. Rauchle.............................................
Total .................................................. 460,500
=======
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" in the Registration Statement (Form
S-3) and the related Prospectus of Inter-Tel, Incorporated for the registration
of 3,530,500 shares of its common stock and to the incorporation by reference
therein of our report dated February 28, 1997 with respect to the consolidated
financial statements and schedule of Inter-Tel, Incorporated included in its
Annual Report on Form 10-K for the year ended December 31, 1996, filed with the
Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
October 30, 1997
Phoenix, Arizona
