UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File Number:
March 31, 1997 0-10211
INTER-TEL, INCORPORATED
Incorporated in the State of Arizona I.R.S. No. 86-0220994
120 North 44th Street, Suite 200
Phoenix, Arizona 85034-1822
(602) 302-8900
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Common Stock
(12,958,463 shares outstanding as of March 31, 1997)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
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INDEX
INTER-TEL, INCORPORATED AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--March 31, 3
1997 and December 31, 1996
Condensed consolidated statements of income--three 4
months ended March 31, 1997 and March 31, 1996
Condensed consolidated statements of cash flows 5
--three months ended March 31, 1997 and
March 31, 1996
Notes to condensed consolidated financial 6
statements--March 31, 1997
Item 2. Management's Discussion and Analysis of Financial 6
Condition and Results of Operations
PART II. OTHER INFORMATION 15
SIGNATURES 17
EXHIBIT 11.1 18
2
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PART I. FINANCIAL INFORMATION
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands) March 31, December 31,
1997 1996
---- ----
ASSETS
CURRENT ASSETS
Cash and equivalents $ 41,843 $ 38,936
Accounts receivable - net 29,568 29,998
Inventories 21,060 21,280
Net investment in sales-leases 10,546 8,243
Prepaid expenses and other assets 6,270 7,008
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TOTAL CURRENT ASSETS 109,287 105,465
PROPERTY & EQUIPMENT 11,953 11,189
OTHER ASSETS 13,907 15,957
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$ 135,147 $ 132,611
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 7,922 $ 8,915
Other current liabilities 16,864 16,841
--------- ---------
TOTAL CURRENT LIABILITIES 24,786 25,756
DEFERRED TAXES AND OTHER LIABILITIES 12,805 11,921
SHAREHOLDERS' EQUITY
Common stock 59,948 59,875
Retained earnings 38,134 35,464
Equity adjustment for foreign
currency translation (503) (359)
---- ----
97,579 94,980
Less receivable from Employee
Stock Ownership Trust (23) (46)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 97,556 94,934
--------- ---------
$ 135,147 $ 132,611
========= =========
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except Three Months Ended
per share amounts) March 31, 1997 March 31, 1996
-------------- --------------
NET SALES $ 50,322 $ 42,213
Cost of sales 28,152 22,901
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GROSS PROFIT 22,170 19,312
Research & development 1,845 1,704
Selling, general, and administrative 16,052 13,200
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17,897 14,904
OPERATING INCOME 4,273 4,408
Interest and other income 223 446
Interest expense (7) (4)
-------- --------
INCOME BEFORE TAXES 4,489 4,850
Income taxes 1,819 1,951
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NET INCOME $ 2,670 $ 2,899
-------- --------
NET INCOME PER SHARE $ .20 $ .22
======== ========
Average number of shares
outstanding 13,346 13,293
======== ========
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
(In thousands) March 31, 1997 March 31, 1996
-------------- --------------
OPERATING ACTIVITIES
NET INCOME $ 2,670 $ 2,899
Adjustments to reflect operating activities:
Depreciation and amortization 1,069 921
Changes in operating assets and liabilities (166) (7,230)
Other 1,795 2,130
-------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 5,368 (1,280)
INVESTING ACTIVITIES
Additions to property and equipment (1,709) (1,597)
Cash used in acquisition (825) 0
-------- --------
NET CASH USED IN INVESTING
ACTIVITIES (2,534) (1,597)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 73 89
-------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 73 89
INCREASE/(DECREASE) IN CASH
AND EQUIVALENTS 2,907 (2,788)
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD 38,936 39,640
-------- --------
CASH AND EQUIVALENTS AT
END OF PERIOD $ 41,843 $ 36,852
======== ========
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1997
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the results for the interim periods presented have been included. Operating
results for the three months ending March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1996.
NOTE B--INCOME PER SHARE
Primary earnings per share assume that outstanding common shares were increased
by shares issuable upon the exercise of all outstanding stock options to which
market price exceeds exercise price less shares which could have been purchased
with related proceeds.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in an increase
in primary earnings per share for the first quarter ended March 31, 1997 and
March 31, 1996 of $.01 and $.01 per share, respectively. The impact of Statement
128 on the calculation of fully diluted earnings per share for these quarters is
not expected to be material.
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PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Inter-Tel is a single point of contact, full service solutions
integrator providing AXXESS and Axxent digital business communication platforms,
Axxessory Talk voice processing platforms, call processing and voice processing
software along with various other productivity enhancing software applications,
computer telephone integration, and network services and long distance calling
services, as well as maintenance, leasing and support services. The Company's
Common Stock is quoted on the Nasdaq National Market System under the symbol
INTL.
This Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of many risk
factors, including, without limitation, those set forth under "Factors That May
Affect Future Results Of Operations" below.
Results of Operations
Net sales increased 19.2% to $50.3 million in the first quarter of 1997
from $42.2 million in the first quarter of 1996. Sales from direct sales offices
accounted for approximately $6.2 million of the increase, while wholesale
distribution sales decreased approximately $500,000. The remaining increases
occurred in long distance sales and other operations.
The following table sets forth selected statements of income data as a
percentage of net sales:
Three months and year
Ended March 31,
1997 1996
---- ----
Net sales 100.0% 100.0%
Cost of sales 55.9 54.3
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Gross profit 44.1 45.7
Research and development 3.7 4.0
Selling, general and administrative 31.9 31.3
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Operating income 8.5 10.4
Interest and other income 0.4 1.1
Interest expense 0.0 0.0
Income taxes 3.6 4.6
------ ------
Net income 5.3% 6.9%
------ ------
Gross profit for the first quarter of 1997 increased 14.8% to $22.2
million, or 44.1% of net sales, from $19.3 million, or 45.7% of net sales, in
the first quarter of 1996. Gross margin decreased slightly compared to the first
quarter of 1996, but was higher than the year ended December 31, 1996 gross
margin. The different sales mix of products and services, and sales through
different distribution channels each impact the Company's gross margin. The
Company received higher margins from sales of AXXESS digital communication
platforms, call processing
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software and voice processing software, which were offset by lower margins on
sales through dealer channels and sales of long distance calling services.
Research and development expenses for the first quarter of 1997
increased 8.3% to $1.8 million, or 3.7% of net sales, from $1.7 million, or 4.0%
of net sales, for the first quarter of 1996. This increase was primarily
attributable to expenses relating to the continued development of the AXXESS and
Inter-Tel Axxent software and systems, unified messaging and voice processing
software, Inter-Tel.Net and Vocal'Net server, and CTI applications. The Company
expects that research and development expenses will continue to increase in
absolute dollars as the Company continues to develop and enhance existing and
new technologies and products. These expenses may vary, however, as a percentage
of net sales.
Selling, general and administrative expenses in the first quarter of
1997 increased to $16.1 million, or 31.9% of net sales, from $13.2 million, or
31.3% of net sales, in the first quarter 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 expanded long distance operations, 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 appropriate 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.
Other income in both periods consisted primarily of interest income and
foreign exchange rate gains and losses and decreased in the first quarter of
1997 primarily due to differences in net foreign exchange rate gains and losses.
Net income for the first quarter of 1997 was $2.7 million ($.20 per
share), compared to net income of $2.9 million ($.22 per share) for the first
quarter of 1996, a decrease of 7.9%.
Inflation/Currency Fluctuation
Inflation and currency fluctuations have not previously had a material
impact on Inter-Tel's operations. International procurement agreements have
traditionally been denominated in U.S. currency. Moreover, a significant amount
of contract manufacturing has been moved to domestic sources. The expansion of
international operations in the United Kingdom and Europe and anticipated
increased sales in Japan and Asia and elsewhere could result in higher
international sales as a percentage of total revenues, but international
revenues are currently not significant.
Liquidity and Capital Resources
The Company continues to expand its direct sales offices and dealer
network, which has required and is expected to continue to require working
capital for increased accounts receivable and inventories. During the first
three months of 1997, despite the expansion of the Company's sales channels,
including the integration of NTL Corporation, dba ComNet of Ohio, which was
acquired in November 1996, accounts receivable and inventories decreased
approximately $650,000. This decrease reflects the Company's moves to tighten
credit on its customers and to place stricter controls on inventory purchases.
In addition, the Company's capital expenditures totaled $1.7 million in the
first quarter of 1997. The Company intends to continue to make significant
capital expenditures during 1997, principally relating to improvement of the
Company's management
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information systems. At March 31, 1997, the Company had $41.8 million in cash
and equivalents, which represents an increase of approximately $2.9 million from
December 31, 1996.
The Company has a loan agreement with Bank One, Arizona, NA. which
provides for a $7.0 million, unsecured revolving line of credit. The credit
facility is annually renewable and is available through July 31, 1997. Under the
credit facility, the Company has the option to borrow at a prime rate or
adjusted LIBOR interest rate. The credit facility is being used primarily to
support international letters of credit to suppliers.
During the third quarter of 1995, the Company completed a secondary
stock offering. A portion of the net proceeds from that offering have been used,
and may continue to be used, to finance strategic acquisitions or corporate
alliances. In April, 1997, the Company announced a plan to repurchase up to
1,450,000 shares of its common stock, which may require significant outlays of
available cash.
The Company offers to its customers lease financing and other services,
including its Totalease program, through its Inter-Tel Leasing subsidiary. The
Company funds its Totalease program in part through the sale to financial
institutions of rental income streams under the leases. Resold Totalease rentals
totaling $75.8 million and $66.0 million remain unbilled at March 31, 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
the Totalease program profitably and on a substantially current basis, the
timing and profitability of lease resales could impact the Company's business
and operating results, particularly in an environment of fluctuating interest
rates. If the Company is required to repurchase rental streams and realize
losses thereon in amounts exceeding its reserves, its operating results will be
adversely affected.
The Company believes that its working capital and credit facilities
will be sufficient to fund purchases of capital equipment, to finance cash
acquisitions, and to repurchase shares of the Company's common stock which the
Company may consider and to provide adequate working capital for the foreseeable
future. However, to the extent that additional funds are required in the future
to address working capital needs and to provide funding for capital
expenditures, expansion of the business or additional acquisitions, the Company
will seek additional financing. There can be no assurance that additional
financing will be available when required or on acceptable terms.
Factors That May Affect Results of Future Operations
In evaluating the Company's business, shareholders should carefully consider the
following factors in addition to the other information presented in this Form
10-Q.
Rapid Technological Change and Dependence on New and Timely Product
Introductions
The market for the Company's software, products and services is
characterized by rapid technological change and continuing demand for new
products, features and applications. Current competitors or new market entrants
may develop new products or product features that could adversely affect the
competitive position of the Company's products. Accordingly, the timely
introduction of new products and product features, as well as new
telecommunications applications, will be a key factor in the Company's future
success. Occasionally, new products
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contain undetected errors or "bugs" when released. Such bugs may result from
defects contained in software products offered by the Company's suppliers or
other third parties that are intended to be compatible with the Company's
products, over which the Company has little or no control. Although the Company
seeks to minimize the number of bugs in its products by its test procedures and
strict quality control, there can be no assurance that its new products will be
error free when introduced. Any significant delay in the commercial introduction
of the Company's products due to bugs, any design modifications required to
correct bugs or any impairment of customer satisfaction as a result of bugs
could have a material adverse effect on the Company's business and operating
results. In addition, new products often take several months before their
manufacturing costs stabilize, which may adversely affect operating results for
a period of time following introduction.
During the past twelve months, the Company introduced ISDN on its
AXXESS digital communication platform, expanded the size of the AXXESS and
Inter-Tel Axxent platforms, introduced a number of upgrades to its existing
AXXESSORY Talk and IVX-500 voice processing platforms and announced the
introduction of the Vocal'Net Server product. In the event that the Company were
to fail to successfully introduce new software, products or services or upgrades
to its existing systems or products on a regular and timely basis, demand for
the Company's existing software, products and services could decline, which
could have a material adverse effect on the Company's business and operating
results. Additionally, there can be no guaranty that future costs of
accessibility, lack of capacity or voice transmission quality of the Internet
will not adversely affect the ability of the Company to deliver all Internet
products and services on a cost effective basis. There can be no assurance that
the Company will be able to successfully develop new software, products,
services, technologies and applications on a timely basis as required by
changing market needs or that new software or products or enhancements thereto,
including its recently announced products and upgrades, when introduced by the
Company, will achieve market acceptance.
The Company has recently developed and continues to develop products
designed to address the emerging market for the convergence of voice and data
applications, or computer telephony integration. If the computer telephony
integration ("CTI") market fails to develop or grows more slowly than the
Company anticipates, or if the Company is unable for any reason to capitalize on
this emerging market opportunity, the Company's business and operating results
could be materially adversely affected.
Dependence Upon Contract Manufacturers and Component Suppliers
Certain components used in the Company's digital communication
platforms, including certain microprocessors, integrated circuits, power
supplies and voice processing interface cards, are currently available from a
single source or limited sources of supply, and product availability could be
limited. In addition, the Company currently manufactures its products through a
limited number of contract manufacturers located in the United States, the
Philippines and the People's Republic of China. Foreign manufacturing facilities
are subject to changes in governmental policies, imposition of tariffs and
import restrictions and other factors beyond the Company's control. Varian
Associates, Inc. ("Varian") currently manufactures a significant portion of the
Company's products at Varian's Tempe, Arizona facility, including substantially
all of the printed circuit boards used in the AXXESS and Inter-Tel Axxent
digital communications platforms. From time to time, the Company has experienced
delays in the supply of components and finished goods, and there can be no
assurance that the Company will not experience such delays in the future. The
Company's reliance on third party manufacturers involves a number of additional
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risks, including reduced control over delivery schedules, quality assurance and
costs. Any delay in delivery or shortage of supply of components or finished
goods from Varian or any other supplier, or the Company's inability to develop
in a timely manner alternative or additional sources if and when required, could
damage the Company's relationships with current and prospective customers and
could materially and adversely affect the Company's business and operating
results. The Company has no long term agreements with its suppliers that require
the suppliers to provide fixed quantities of components or finished goods at set
prices. There can be no assurance that the Company will be able to continue to
obtain components or finished goods in sufficient quantities or quality or on
favorable pricing and delivery terms in the future.
Competition
The market for the Company's digital communications platforms is highly
competitive and in recent periods has been characterized by pricing pressures
and business consolidations. The Company's competitors include Lucent
Technologies and Northern Telecom Limited ("NorTel"), as well as Comdial
Corporation ("Comdial"), EXECUTONE Information Systems, Inc. ("Executone"),
Mitel Corporation ("Mitel"), Panasonic, Siemens ROLM Communications Inc.
("ROLM"), Toshiba and others. The Company also competes against the regional
Bell operating companies ("RBOCS"), which offer systems produced by one or more
of the aforementioned competitors and also offer Centrex systems in which call
processing facilities are provided through equipment located in the telephone
company's central office. Competition by the RBOCs may increase significantly in
the future, as the RBOCs have been granted the right to manufacture telephone
systems and equipment themselves and/or to bundle the sale of equipment with
telephone calling services.
The Telecommunication Act of 1996 and AT&T's announcement to divide
itself into three enterprises has had an impact on competition in the
communication industry. The Telecommunication Act of 1996 opened the market for
telephone and cable television services, forcing telephone companies to open
their networks to competitors and giving consumers a choice of local phone
carriers. Conversely, local phone companies are now able to offer long distance
services. In addition, cable companies can now offer telephone services and
Internet access. These changes will increase competition in the communication
industry and will create additional competition and opportunities in customer
premise equipment as these new services and interfaces become available. As the
Company enters the markets for local telephone service and Internet access, it
will face additional competition from RBOCs and other providers, which have
larger marketing and sales organizations, significantly greater financial and
technical resources and a larger and more established customer base than the
Company. In addition, RBOCs and other providers have greater name recognition,
more established positions in the market and long standing relationships with
customers. Therefore, there can be no assurance that the Company will compete
successfully in these markets.
In the market for voice processing applications, including voice mail,
the Company competes against Centigram Communications Corporation ("Centigram"),
Octel Communications Corporation ("Octel"), Active Voice Corporation ("Active
Voice"), Applied Voice Technology, Inc. ("AVT") and other competitors, including
telephone systems manufacturers such as Lucent Technologies, NorTel and ROLM,
which offer integrated voice processing systems under their own label as well as
through various OEM arrangements. Certain of the Company's competitors may
achieve marketing advantages by bundling their voice processing equipment with
sales of telephone systems, or by designing their telephone systems so that they
do not readily integrate with independent voice processing systems. Inter-Tel
expects that the development of industry
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standards and the acceptance of open systems architectures in the voice
processing market will reduce technical barriers to market entry and lead to
increased competition.
In the market for long distance services, the Company competes against
AT&T Corp., MCI Telecommunications Corporation, Sprint Corporation and other
suppliers, certain of which also supply the long distance calling and network
services that the Company resells. Although the Company acquires a variety of
long distance calling services in bulk from certain long distance carriers,
there can be no assurance that the Company will be able to purchase long
distance calling services on favorable terms from one or more of such providers
in the future. In addition, a substantial majority of prospective new long
distance customers for the Company currently purchase long distance calling
services from the Company's competitors. The Company believes that it is likely
to face increased competition in the long distance calling services market as a
result of telecommunications deregulation, which enables RBOCs to supply long
distance calling and network services, and enables RBOCs and others to bundle
long distance, local telephone and wireless services. Moreover, the Company
expects to face increased competition in the future because low technical
barriers to entry will allow new market entrants.
As Inter-Tel develops more server-based and CTI telecommunications
products, Inter-Tel's competition will be the large computer software companies,
such as IBM (Lotus), and Microsoft. In addition, the server-based telephony,
internet telephony and CTI markets have shown increasing competition from small
start-up software companies.
Many of the Company's competitors are substantially larger, and have
significantly greater financial and technical resources, name recognition and
marketing and distribution capabilities, than the Company. The Company expects
that competition will continue to be intense in the markets addressed by its
products and services, and there can be no assurance that the Company will be
able to compete successfully in the future.
Management of Growth; Implementation of New Management Information Systems
The growth in the Company's business has placed, and is expected to
continue to place, a significant strain on the Company's personnel, management
and other resources. The Company's ability to manage any future growth
effectively will require it to attract, train, motivate and manage new employees
successfully, to integrate new employees into its overall operations and to
continue to improve its operational, financial and management information
systems.
The Company implemented a new MIS system late in 1995. The MIS system
significantly affected many aspects of the Company's business, including its
accounting, operations, purchasing, sales and marketing functions. Since the
date of implementation, the Company has experienced difficulty with the new MIS
system software, which increased the Company's costs, had an adverse effect on
the Company's ability to provide products and services to its customers on a
timely basis and caused delays in coordinating accounting and financial results.
During the fourth quarter of 1996, the Company determined that the limitations
of the existing system software would prevent Inter-Tel from establishing an
integrated and centralized dispatch and telemarketing center.
As a result, during the fourth quarter of 1996, the Company decided to
replace its MIS system software with an integrated solution from a more
established vendor and accordingly has written off the software license and
implementation costs relating to the system software being replaced. Inter-Tel
has signed an agreement with a large, established software and database
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vendor to implement, maintain and support alternate MIS system software to be
utilized throughout the Company. Inter-Tel believes that such action was
necessary to allow for the stability and growth of Inter-Tel.
The actions to replace the MIS system software could result in additional
costs and delays in obtaining a fully functional MIS system, including but not
limited to additional or alternate hardware and software required, but not
available in the current system configuration, and additional personnel, which
could have a material adverse effect on the company's business and operating
results. In addition, implementation of this system software and the transition
from the current system software to the new information system software will
require substantial financial resources and personnel.
The Company has made strategic acquisitions in the past and expects to
continue to do so in the future. Acquisitions require a significant amount of
the Company's management attention and financial and operational resources, all
of which are limited. The integration of acquired entities may also result in
unexpected costs and disruptions, and significant fluctuations in, or reduced
predictability of, operating results from period to period. There can be no
assurance that an acquisition will not adversely affect the business
relationships of the Company or the acquired entity with their respective
suppliers or customers. Further, there can be no assurance that the Company will
successfully integrate the acquired operations or achieve any of the intended
benefits of an acquisition. The Company's failure to manage its growth
effectively could have a material adverse effect on its business and operating
results.
Product Protection and Infringement
The Company's future success is dependent in part upon its proprietary
technology. The Company relies principally on copyright and trade secret law and
contractual provisions to protect its intellectual property. There can be no
assurance that any copyright owned by the Company will not be invalidated,
circumvented or challenged or that the rights granted thereunder will provide
competitive advantages to the Company. Further, there can be no assurance that
others will not develop technologies that are similar or superior to the
Company's technology or that duplicate the Company's technology.
As the Company expands its international operations, effective
intellectual property protection may be unavailable or limited in certain
foreign countries. There can be no assurance that the steps taken by the Company
will prevent misappropriation of its technology. Litigation may be necessary in
the future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the proprietary
rights of others, or to defend against claims of infringement or invalidity.
Such litigation or delays in product introductions or decisions to discontinue
development, manufacture or sale of such products, could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business and operating results.
Reliance on Dealer Network
A substantial portion of the Company's net sales are made through its
network of independent dealers. The company faces intense competition from other
telephone system and voice processing system manufacturers for such dealers'
business, as most of the Company's dealers carry products which compete with the
Company's products. The Company has no exclusive agreements with any of its
dealers. The loss of any significant dealer or group of
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dealers, or any event or condition adversely affecting the Company's dealer
network, could have a material adverse effect on the Company's business and
operating results.
Risks of Providing Long Distance and Network Services
Inter-Tel depends on a reliable supply of telecommunications services
and information from several long distance carriers. Because it does not own
transmission facilities, the Company relies on long distance carriers for the
provision of network services to the Company's customers and for billing
information. Long distance services are subject to extensive and uncertain
governmental regulation on both the federal and state level. There can be no
assurance that the promulgation of certain regulations will not adversely affect
the Company's business and operating results. Contracts with the long distance
carriers from which the Company currently resells services typically have a
multi-year term in which the Company's prices are relatively fixed and have
minimum use requirements. There can be no assurance that the Company will meet
minimum use commitments, will be able to negotiate lower rates with carriers in
the event of any decrease in end user rates or will be able to extend its
contracts with long distance carriers at prices favorable to the Company. The
Company's ability to continue to expand its long distance service operations
will depend on its ability to continue to secure reliable long distance services
from a number of long distance carriers and the willingness of such carriers to
continue to make telecommunications services and billing information available
to the Company on favorable terms.
Dependence on Key Personnel
The Company is dependent on the continued service of, and its ability
to attract and retain, qualified technical, marketing, sales and managerial
personnel. The competition for such personnel is intense, and the loss of any of
such persons, as well as the failure to recruit additional key technical and
sales personnel in a timely manner, would have a material adverse effect on the
Company's business and operating results. There can be no assurance that the
Company will be able to continue to attract and retain the qualified personnel
necessary for the development of its business.
Possible Volatility of Stock Price
The Company believes that factors such as announcements of
developments relating to the Company's business, fluctuations in the Company's
operating results, general conditions in the telecommunications industry or the
worldwide economy, changes in legislation or regulation affecting the
telecommunications industry, an outbreak of hostilities, a shortfall in revenue
or earnings from securities analysts' expectations, announcements of
technological innovations or new products or enhancements by the Company or its
competitors, developments in intellectual property rights and developments in
the Company's relationships with its customers and suppliers could cause the
price of the Company's Common Stock to fluctuate, perhaps substantially. Many of
such factors are beyond the Company's control. In addition, in recent years the
stock market in general, and the market for shares of technology stocks in
particular, have experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. There can be no
assurance that the market price of the Company's Common Stock will not
experience significant fluctuations in the future, including fluctuations that
are unrelated to the Company's performance.
14
<PAGE>
Potential Fluctuations In Quarterly Results; Limited Backlog
The Company's quarterly operating results depend upon a variety of
factors, including the volume and timing of orders received during the quarter,
the mix of products sold, mix of distribution channels, general economic
conditions, patterns of capital spending by customers, the timing of new product
announcements and releases by the Company and its competitors, pricing pressures
and the availability and cost of products and components from the Company's
suppliers. The Company's customers typically require immediate shipment and
installation of platforms and software. As a result, the Company has
historically operated with a relatively small backlog, and sales and operating
results in any quarter are principally dependent on orders booked and shipped in
that quarter. Moreover, market demand for investment in capital equipment such
as digital communication platforms and associated call processing and voice
processing software applications is largely dependent on general economic
conditions, and can vary significantly as a result of changing conditions in the
economy as a whole. The Company's expense levels are based in part on
expectations of future sales and, if sales levels do not meet expectations,
operating results could be adversely affected. Because sales of digital
communication platforms through the Company's dealers produce lower gross
margins than sales through the Company's direct sales organization, operating
results will vary based upon the mix of sales through direct and indirect
channels. Although the Company to date has been able to resell the rental
streams from leases under its Totalease program profitably and on a
substantially current basis, the timing and profitability of lease resales from
quarter to quarter could impact operating results, particularly in an
environment of fluctuating interest rates. Long distance sales have, in recent
periods, grown at a faster rate than the Company's overall net sales and such
sales have lower gross margins than the Company's core business. As a result,
gross margins could be adversely affected in the event that long distance
calling services continue to increase as a percentage of net sales. In addition,
the Company is subject to seasonality in its operating results, as net sales for
the first and third quarters are frequently less than those experienced in the
fourth and second quarters, respectively. As a result of these and other
factors, the Company has in the past and could in the future experience
fluctuations in sales and operating results on a quarterly basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Concentration of Ownership
As of March 31, 1997, the Company's Chairman of the Board of Directors and Chief
Executive Officer beneficially owned approximately 21% of the outstanding shares
of the Common Stock. As a result, he has the ability to exercise significant
influence over all matters requiring shareholder approval. In addition, the
concentration of ownership could have the effect of delaying or preventing a
change in control of the Company.
INTER-TEL, INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS--Not Applicable
ITEM 2. CHANGES IN SECURITIES--Not Applicable
ITEM 3. DEFAULTS ON SENIOR SECURITIES--Not Applicable
15
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
HOLDERS
1. On April 23, 1997, at the Company's annual meeting of shareholders, the
shareholders of the Company elected the following directors, each of whom was a
nominee of the Company:
Name Votes For Votes Withheld
- ---- --------- --------------
Steven G. Mihaylo 10,141,397 226,028
J. Robert Anderson 10,141,275 226,150
Gary D. Edens 10,141,247 226,178
Maurice H. Esperseth 10,135,247 232,178
C. Roland Haden 10,141,547 225,878
Norman Stout 10,140,747 226,678
2. The proposal to approve the Inter-Tel, Incorporated 1997 Long-Term Incentive
Plan received the following votes:
Votes For Percentage
--------- ----------
For: 5,367,052 51.77%
Against: 2,692,039 25.97%
Abstain: 43,392 0.42%
Broker Non Vote: 2,264,942 21.84%
3. The proposal to approve the Inter-Tel, Incorporated Employee Stock Purchase
Plan received the following votes:
Votes For Percentage
--------- ----------
For: 7,484,179 72.19%
Against: 549,886 5.30%
Abstain: 35,218 0.34%
Broker Non Vote: 2,298,142 22.17%
4. The proposal to approve adoption of an Amendment to Article IX, Paragraph 1
of the Company's Restated Articles of Incorporation regarding Indemnification
received the following votes:
Votes For Percentage
--------- ----------
For: 10,263,812 99.00%
Against: 62,621 0.60%
Abstain: 40,992 0.40%
Broker Non Vote: 0 0.00%
16
<PAGE>
ITEM 5. OTHER INFORMATION--Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
Exhibits:
11.1 Computation of Earnings per Share
27 Financial Data Schedule
Reports on Form 8-K:
No reports filed during quarter
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTER-TEL, INCORPORATED
Date May 13, 1997 /s/ Steven G. Mihaylo
-------------------- --------------------------------
Steven G. Mihaylo
Chairman of the Board and
Chief Executive Officer
Date May 13, 1997 /s/ Kurt R. Kneip
------------------ --------------------------------
Kurt R. Kneip
Vice President and
Chief Financial Officer
17
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(In thousands except Three Months Ended
per share amounts) March 31, 1997 March 31, 1996
-------------- --------------
PRIMARY
Average shares outstanding 12,950 12,821
Net effect of dilutive stock options--
based on the treasury stock method
using average market price 396 472
--- ----
TOTAL 13,346 13,293
====== ======
Net income $ 2,670 $ 2,899
====== =====
Per share amount $ .20 $ .22
==== ====
FULLY DILUTED
Average shares outstanding 12,950 12,821
Net effect of dilutive stock options--
based on the treasury stock method
using the quarter-end market price,
if higher than the average market price 396 543
--- ---
TOTAL 13,346 13,364
====== ======
Net income $2,670 $2,899
====== ======
Per share amount $.20 $.22
==== ====
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE INTER-TEL,
INCORPORATED AND SUBSIDIARIES FINANCIAL
STATEMENTS FOR THE QUARTER ENDED MARCH 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 41843
<SECURITIES> 0
<RECEIVABLES> 32802
<ALLOWANCES> 3234
<INVENTORY> 21060
<CURRENT-ASSETS> 109287
<PP&E> 28324
<DEPRECIATION> 16371
<TOTAL-ASSETS> 135147
<CURRENT-LIABILITIES> 24786
<BONDS> 0
0
0
<COMMON> 59948
<OTHER-SE> 37608
<TOTAL-LIABILITY-AND-EQUITY> 135147
<SALES> 50322
<TOTAL-REVENUES> 50322
<CGS> 28152
<TOTAL-COSTS> 28152
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 4489
<INCOME-TAX> 1819
<INCOME-CONTINUING> 2670
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2670
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
