As filed with the Securities and Exchange Commission on November 20, 1997
Registration No. 333-39221
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
INTER-TEL, INCORPORATED
(Exact name of Registrant as specified in its charter)
Arizona 86-0220994
-------------------- ---------------------
(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
---------------
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. [ ]
---------------
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 NOVEMBER 20, 1997
3,070,000 Shares
[INTER-TEL LOGO]
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
- -----------------------------------------------------------------------------------------------
<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, June 30 and September 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>
The Offering
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>
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 26,770 26,035
Fully diluted ............................... 17,402 18,132 21,800 24,048 26,794 26,796 27,155
</TABLE>
September 30, 1997
--------------------------
Actual As Adjusted(5)
---------- ---------------
Balance Sheet Data:
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.
("Iwatsu"), Mitel Corporation ("Mitel"), NEC Corporation ("NEC"), Nitsuko
Corporation ("Nitsuko"), Matsushita Electric Industrial Co., Ltd. ("Panasonic"),
Siemens Rolm Communications, Inc.
7
<PAGE>
("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.
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.
8
<PAGE>
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 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
9
<PAGE>
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
11
<PAGE>
the Company's direct sales organization, operating results have varied, and
will continue to vary based upon the mix of sales through direct and indirect
channels. Although the Company to date has been able to resell the rental
streams from leases under its Totalease program profitably and on a
substantially current basis, the timing and profitability of lease resales from
quarter to quarter could impact operating results, particularly in an
environment of fluctuating interest rates. Long distance sales, which have
lower gross margins than the Company's core business, have grown in recent
periods at a faster rate than the Company's overall net sales. As a result,
gross margins could be adversely affected in the event that long distance
calling services continue to increase as a percentage of net sales. In
addition, the Company is subject to seasonality in its operating results, as
net sales for the first and third quarters are frequently less than those
experienced, in the fourth and second quarters, respectively. As a result of
these and other factors, the Company has in the past experienced, and could in
the future experience, fluctuations in sales and operating results on a
quarterly basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Volatility of Stock Price
The market price for the Company's Common Stock has been highly volatile.
The Company believes that factors such as announcements of developments relating
to the Company's business, fluctuations in the Company's operating results,
shortfalls in revenue or earnings relative to securities analysts' expectations,
announcements of technological innovations or new products or enhancements by
the Company or its competitors, general conditions in the telecommunications
industry or the worldwide economy, changes in legislation or regulation
affecting the telecommunications industry, an outbreak of hostilities,
developments in intellectual property rights and developments in the Company's
relationships with its customers and suppliers could cause the price of the
Company's Common Stock to fluctuate, perhaps substantially. Many of such factors
are beyond the Company's control. In addition, in recent years the stock market
in general, and the market for shares of technology stocks in particular, have
experienced extreme price fluctuations, which have often been unrelated to the
operating performance of affected companies. There can be no assurance that the
market price of the Company's Common Stock will not experience significant
fluctuations in the future, including fluctuations that are unrelated to the
Company's performance.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than three years, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. Although the Company currently offers software
products that are designed to be Year 2000 compliant, there can be no assurance
that the Company's software products contain all necessary date code changes.
The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues in a variety of ways.
Many companies are expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase software products such as those offered
by the Company. Many potential customers may also choose to defer purchasing
Year 2000 compliant products until they believe it is absolutely necessary, thus
resulting in potentially stalled market sales within the industry. Conversely,
Year 2000 issues may cause other companies to accelerate purchases, thereby
causing an increase in short-term demand and a consequent decrease in long-term
demand for software products. Additionally, Year 2000 issues could cause a
significant number of companies, including existing customers of the Company, to
reevaluate their current communications platform, IP network telephony or voice
processing software needs, and as a result consider switching to other systems
or suppliers. Any of the foregoing could result in a material adverse effect on
the Company's business, financial condition and operating results.
12
<PAGE>
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.
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.
High Low
-------- ------
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
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.
14
<PAGE>
CAPITALIZATION
<TABLE>
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 14, 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>
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
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 26,770 26,035
Fully diluted ................................... 17,402 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>
16
<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.
17
<PAGE>
Results of Operations
<TABLE>
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 1997 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.
18
<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.
19
<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 $4.1 million due to higher revenues and operations. The
Company continues to expand its dealer network, which has required and is
expected to continue to require working capital for increased accounts
receivable and inventories.
Net cash used in investing activities, primarily in the form of capital
expenditures, was $8.8 million and $4.6 million for the nine months ended
September 30, 1997 and 1996, respectively. Capital expenditures and cash used in
an acquisition totaled approximately $8.1 million and $825,000, respectively, in
the first nine months of 1997. The Company anticipates making additional capital
expenditures during the remainder of 1997, which will relate to the expansion of
facilities, equipment and management information systems used in operations.
Net cash used in financing activities totaled $25.6 million for the nine
months ended September 30, 1997 compared to net cash generated of $591,000 for
the same period in 1996. During the second quarter of 1997, the Company
initiated a stock repurchase program under which the Board of Directors
authorized the repurchase of up to 1,470,000 shares (on a pre-Stock Split basis)
of the Common Stock. The Company expended approximately $7.6 million and $25.1
million for stock repurchases in the third quarter and the nine months ended
September 30, 1997, respectively, which were funded primarily through existing
cash balances. The Company reissued shares with a cost basis of approximately
$2.1 million and $4.1 million in the third quarter and nine months ended
September 30, 1997, respectively,
20
<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.
21
<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
22
<PAGE>
fragmented. The number of independent suppliers and distributors of
telecommunications equipment 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,
23
<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
24
<PAGE>
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.
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, DSPs can be configured by the system manager for
different combinations of speakerphones, conference capabilities and other
DSP-based facilities. The system's speakerphones incorporate full-duplex
technology, which permits speakerphones to transmit in both directions at the
same time without the necessity to override one speaker's voice to prevent
feedback interference.
The AXXESS software is written in a high-level, object-oriented language
which can operate on many commonly used processors. Accordingly, the software
can be readily ported to other hardware platforms. The Company intends to port
the AXXESS software to faster microprocessors which will permit the AXXESS to
grow to a much larger size, in order to enhance the functionality and
performance of these larger systems and to permit a migration path from the
smaller AXXESS system as a customer's system requirements increase.
Inter-Tel Axxent. 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.
25
<PAGE>
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 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
26
<PAGE>
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, 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
27
<PAGE>
provider. Inter-Tel designs, installs and supports the complete integration of a
customer's complex data and telecommunications network, from LANs to
geographically dispersed wide area networks ("WANs").
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
28
<PAGE>
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 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
29
<PAGE>
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.
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
30
<PAGE>
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.
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.
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<PAGE>
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 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.
32
<PAGE>
MANAGEMENT
<TABLE>
The executive officers and directors of the Company are as follows:
<CAPTION>
Name Age Position
- ----------------------------- ----- ---------------------------------------------------------------
<S> <C> <C>
Steven G. Mihaylo ......... 54 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.
34
<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>
Shares Beneficially
Shares Beneficially Including Owned After
Owned Prior to Offering(1) All 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 23.4% 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>
35
<PAGE>
UNDERWRITING
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.
Underwriters Number of Shares
------------- ----------------
NationsBanc Montgomery Securities, Inc. .................
Donaldson, Lufkin & Jenrette Securities Corporation .....
Jefferies & Company, Inc. ................................ ---------
Total ............................................ 3,070,000
=========
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, who
will collectively hold an aggregate of approximately 5,577,000 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
36
<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.
In connection with this offering, certain Underwriters may engage in
passive market making transactions in the Common Stock on the Nasdaq National
Market immediately prior to the commencement of sales in this offering, in
accordance with Rule 103 under Regulation M. Passive market making consists of
displaying bids on the Nasdaq National Market that are limited by the bid prices
of independent market makers and completing purchases in response to order flow
at prices limited by such bids. Net purchases by a passive market maker on each
day are limited to a specified percentage of the passive market maker's average
daily trading volume in the Common Stock during a specified period and must be
discontinued for any day in which such limit is reached. Passive market making
may stabilize the market price of the Common Stock at a level above that which
might otherwise prevail and, if commenced, may be discontinued at any time.
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.
37
<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
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 ............... 14
Capitalization .............................. 15
Selected Consolidated Financial Data ...... 16
Management's Discussion and Analysis
of Financial Condition and Results of
Operations .............................. 17
Business .................................... 22
Management ................................. 33
Selling Shareholders ........................ 35
Underwriting .............................. 36
Legal Matters .............................. 37
Experts .................................... 37
================================================================================
3,070,000 Shares
[INTER-TEL LOGO]
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>
ITEM 16. Exhibits
Exhibit
Number Description
- ------- ----------------------------------------------------------------------
1.1 Form of Underwriting Agreement.+
4.1 Articles of Amendment to Articles of Incorporation of Registrant.
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).+
- ------------
+ Previously filed.
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 Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Phoenix,
State of Arizona, on November 20, 1997.
Inter-Tel, Incorporated
By: /s/ KURT R. KNEIP
------------------------------------
Kurt R. Kneip,
Chief Financial Officer
<TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the 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>
* Chairman and Chief Executive Officer November 20, 1997
- ------------------------- (Principal Executive Officer)
Steven G. Mihaylo
/s/ KURT R. KNEIP Chief Financial Officer (Principal Financial November 20, 1997
- ------------------------- Officer and Principal Accounting Officer)
Kurt R. Kneip
* Director November 20, 1997
- -------------------------
Gary D. Edens
* Director November 20, 1997
- -------------------------
Maurice H. Esperseth
* Director November 20, 1997
- -------------------------
C. Roland Haden
* Director November 20, 1997
- -------------------------
Norman Stout
* Director November 20, 1997
- -------------------------
J. Robert Anderson
*By: /s/ KURT R. KNEIP
- -------------------------
Kurt R. Kneip
(Attorney-in-Fact)
</TABLE>
II-3
<PAGE>
Inter-Tel, Incorporated
REGISTRATION STATEMENT ON FORM S-3
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
- ------- ---------------------------------------------------- -------------
1.1 Form of Underwriting Agreement.+
4.1 Articles of Amendment to Articles of Incorporation of
Registrant.
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).+
- ------------
+ Previously filed.
II-4
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
INTER-TEL, INCORPORATED
Pursuant to the provisions of Section 10-061, Arizona Revised Statutes, the
undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation.
FIRST: The name of the corporation is Inter-Tel, Incorporated.
SECOND: Attached hereto as Exhibit A is the text of each amendment adopted.
THIRD: The amendment does not provide for an exchange, reclassification or
cancellation of issued shares.
FOURTH: The amendment was adopted the 14th day of November 1997.
FIFTH: The amendment was approved by the shareholders. There is one voting
group eligible to vote on the amendment. The designation of voting
groups entitled to vote separately on the amendment was adopted and the
votes cast for and against the amendment were as follows.
The voting group consisting of 23,563,464 outstanding shares of Common
Stock is entitled to 23,563,464 votes. There were 11,969,168 votes present at
the meeting. The voting group cast 9,899,140 votes for approval, 1,751,065 votes
against approval of the amendment and 318,963 abstentions from voting on the
amendment to article V paragraph 1. The number of votes cast for approval of the
amendment was sufficient for approval by the voting group.
DATED AS OF THIS November 18, 1997.
Inter-Tel, Incorporated
By: /s/ John Abbot
-----------------------
Title: Treasurer
--------------------
Attest:
/s/ John L. Gardner
- ------------------------
John L. Gardner, Assistant Secretary
<PAGE>
ACKNOWLEDGEMENTS
State of Arizona )
) ss.
County of Maricopa )
The foregoing instrument was acknowledged before me this 18th day of
November, 1997, by John Abbott of Inter-Tel, Incorporated, an Arizona
corporation, on behalf of the corporation.
/s/ Dina Lansdell
---------------------------------
Notary Public
My Commission Expires: 6-11-99
ACKNOWLEDGEMENTS
State of Arizona )
) ss.
County of Maricopa )
The foregoing instrument was acknowledged before me this 18th day of
November, 1997, by John L. Gardner of Inter-Tel, Incorporated, an Arizona
corporation, on behalf of the corporation.
/s/ Dina Lansdell
---------------------------------
Notary Public
<PAGE>
EXHIBIT "A"
AMENDMENT TO ARTICLES OF INCORPORATION
The first paragraph of Article V of the Articles of Incorporation of Inter-Tel,
Incorporated is hereby amended to read as follows:
ARTICLE V
This Corporation is authorized to issue only one class of shares, which shall be
designated Common Shares. The total authorized number of such shares is
100,000,000.
November 19, 1997
Inter-Tel, Incorporated
120 N. 44th Street, Suite 200
Phoenix, Arizona 85034-1822
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
I have examined the Registration Statement on Form S-3 filed by Inter-Tel,
Incorporated, an Arizona corporation (the "Company"), with the Securities and
Exchange Commission (the "Commission") on October 31, 1997, and Amendment No. 1
to the Company's Registration Statement on Form S-3 filed with the Commission on
or about November 19, 1997 (collectively, the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of 3,530,500 shares of the Company's Common Stock, no par value (the "Shares"),
which amount includes 3,000,000 Shares to be sold by the Company (the "Company
Shares") and, 530,500 Shares to be sold by certain selling shareholders
(including an option to purchase 460,500 Shares granted to the underwriters to
cover over-allotments, if any (the "Selling Shareholder Shares")). The Shares
are to be sold to the underwriters for resale to the public as described in the
Registration Statement and pursuant to the Underwriting Agreement filed as an
exhibit thereto. As general counsel to the Company, I have examined the
proceedings proposed to be taken in connection with said sale and issuance of
the Shares.
It is my opinion that the Company Shares, when issued and sold in the manner
described in the Registration Statement and paid for by the underwriters in
accordance with the Underwriting Agreement, will be legally and validly issued,
fully paid and nonassessable. Further, it is my opinion that the Selling
Shareholder Shares have been legally and validly issued and are fully paid and
nonassessable.
I consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of my name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendment or amendments thereto.
/s/ John L. Gardner
- -------------------
John L. Gardner
General Counsel
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 Amendment No. 1 to the
Registration Statement (Form S-3 No. 333-39221) 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
November 20, 1997
Phoenix, Arizona
