-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VmlNFwXBVAM9kVC27O+Xn4Y0DpYbYz4yzl4rJqiRCR6navj8Oz3Tf3OlxtX6Jm5S eB54Z2wObkzE0D5efvBynA== 0000950147-96-000549.txt : 19961118 0000950147-96-000549.hdr.sgml : 19961118 ACCESSION NUMBER: 0000950147-96-000549 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTER TEL INC CENTRAL INDEX KEY: 0000350066 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 860220994 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10211 FILM NUMBER: 96663934 BUSINESS ADDRESS: STREET 1: 120 N 44TH ST STREET 2: STE 200 CITY: PHOENIX STATE: AZ ZIP: 85034-1822 BUSINESS PHONE: 6029619000 MAIL ADDRESS: STREET 1: 120 N 44TH ST STREET 2: STE 200 CITY: PHOENIX STATE: AZ ZIP: 85034-1822 10-Q 1 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended Commission File Number: September 30, 1996 0-10211 INTER-TEL, INCORPORATED Incorporated in the State of Arizona I.R.S. No. 86-0220994 120 North 44th Street Phoenix, Arizona 85034-1822 (602) 302-8900 -------------- Common Stock (12,949,431 shares outstanding as of September 30, 1996) 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 ----- ----- INDEX INTER-TEL, INCORPORATED AND SUBSIDIARIES Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets--September 30, 3 1996 and December 31, 1995 Condensed consolidated statements of income--three 4 and nine months ended September 30, 1996 and September 30, 1995 Condensed consolidated statements of cash flows 5 --three and nine months ended September 30, 1996 and September 30, 1995 Notes to condensed consolidated financial 6 statements--September 30, 1996 Item 2. Management's Discussion and Analysis of Financial 7 Condition and Results of Operations PART II. OTHER INFORMATION 18 SIGNATURES 19 EXHIBIT 11.1 20 2 PART I. FINANCIAL INFORMATION INTER-TEL, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (1)
(In thousands) September 30, December 31, 1996 1995 ---- ---- ASSETS CURRENT ASSETS Cash and equivalents $34,950 $39,640 Accounts receivable -- net 34,876 29,789 Inventories 24,373 20,580 Net investment in sales-leases 7,234 3,629 Prepaid expenses and other assets 7,380 4,501 -------- -------- TOTAL CURRENT ASSETS 108,813 98,139 PROPERTY & EQUIPMENT 13,573 11,813 OTHER ASSETS 11,942 8,815 -------- -------- $134,328 $118,767 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $11,870 $11,262 Other current liabilities 14,458 11,254 -------- -------- TOTAL CURRENT LIABILITIES 26,328 22,516 DEFERRED TAXES AND OTHER LIABILITIES 13,881 11,134 SHAREHOLDERS' EQUITY Common stock 59,557 58,966 Retained earnings 34,794 26,422 Equity adjustment for foreign currency translation (158) (112) -------- -------- 94,193 85,276 Less receivable from Employee Stock Ownership Trust (74) (159) -------- -------- TOTAL SHAREHOLDERS' EQUITY 94,119 85,117 -------- -------- $134,328 $118,767 ======== ========
(1) Financial data for all periods have been restated to reflect the acquisition of Florida Telephone Systems, Inc. in May 1996, accounted for as a pooling of interests. 3 INTER-TEL, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (1)
Three Months Nine Months (In thousands except Ended September 30, Ended September 30, per share amounts) 1996 1995 1996 1995 ---- ---- ---- ---- NET SALES $ 47,435 $ 38,343 $ 133,384 $ 110,400 Cost of sales 27,819 22,424 75,348 64,836 -------- -------- --------- --------- GROSS PROFIT 19,616 15,919 58,036 45,564 -------- -------- --------- --------- Research & development 1,568 1,488 4,933 4,368 Selling, general and administrative 13,895 10,908 40,233 31,739 Special charge -- -- -- 1,315 (2) -------- -------- --------- --------- 15,463 12,396 45,166 37,422 -------- -------- --------- --------- OPERATING INCOME 4,153 3,523 12,870 8,142 (2) Interest and other income 393 499 1,356 1,064 Interest expense (10) (14) (43) (91) -------- -------- --------- --------- INCOME BEFORE TAXES 4,536 4,008 14,183 9,115 (2) Income taxes 1,847 1,508 5,811 3,414 -------- -------- --------- --------- NET INCOME $ 2,689 $ 2,500 $ 8,372 $ 5,701 (2) ======== ======== ========= ========= NET INCOME PER SHARE $ 0.20 $ 0.20 $ 0.63 $ 0.49 (2) ======== ======== ========= ========= Average number of common shares outstanding 13,443 12,343 13,385 11,566 ======== ======== ========= =========
(1) Financial data for all periods have been restated to reflect the acquisition of Florida Telephone Systems, Inc. in May 1996, accounted for as a pooling of interests. (2) Operating income in 1995 includes a special charge of $1,315,000, which reduced net income by $815,000, or $.07 per share. This special charge reflects the costs associated with integrating the operations of the two acquired companies. Without this special charge, the Company would have reported operating income of approximately $9.5 million and net income of approximately $6.5 million, or $.56 per share, in the nine months ended September 30, 1995. 4 INTER-TEL, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (1)
Three Months Nine Months Ended September 30, Ended September 30, (In thousands) 1996 1995 1996 1995 ---- ---- ---- ---- OPERATING ACTIVITIES NET INCOME $2,689 $2,500 $8,372 $5,701 Adjustments to reflect operating activities: Depreciation and amortization 1,107 587 3,002 1,703 Changes in operating assets and liabilities (863) (5,441) (16,999) (13,236) Other 2,209 1.561 4,903 3,562 ------ ------ ------ ------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 5,142 (793) (722) (2,270) INVESTING ACTIVITIES Proceeds from disposal of property and equipment 11 5 143 6 Additions to property and equipment (2,232) (1,892) (4,702) (5,894) ------ ------ ------ ------ NET CASH USED IN INVESTING ACTIVITIES (2,221) (1,887) (4,559) (5,888) FINANCING ACTIVITIES Net proceeds from sale of common stock -- 30,664 -- 30,664 Payments on long-term debt -- (1) -- (7) Proceeds from exercise of stock options 105 163 591 468 ------ ------ ------ ------ NET CASH PROVIDED BY FINANCING ACTIVITIES 105 30,826 591 31,125 INCREASE (DECREASE) IN CASH AND EQUIVALENTS 3,026 28,146 (4,690) 22,967 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 31,924 10,388 39,640 15,567 ------ ------ ------ ------ CASH AND EQUIVALENTS AT END OF PERIOD $34,950 $38,534 $34,950 $38,534 ======= ======= ======= =======
(1) Financial data for all periods have been restated to reflect the acquisition of Florida Telephone Systems, Inc. in May 1996, accounted for as a pooling of interests. 5 INTER-TEL, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 30, 1996 NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods presented have been included. Operating results for the three and nine months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form l0-K for the year ended December 31, 1995. NOTE B--INCOME PER SHARE Primary income per share is based on the weighted average number of common shares outstanding during each year and common stock equivalents. NOTE C--RESTATEMENT FOR POOLING OF INTERESTS The financial statements for all prior periods have been restated to include the accounts of Florida Telephone Systems, Inc. ("FTS"), which was acquired by the Company in a pooling of interests transaction in May 1996, in which 48,193 shares of Inter-Tel Common Stock were issued. FTS did not constitute a significant subsidiary as defined under the regulations. In the statements of income for the nine months ended September 30, 1995 net sales increased by $1.5 million and net income increased by $124,000 as a result of the restatement. The restatement increased earnings per share by approximately $.01, from $.48 to $.49 per share, for the nine months ended September 30, 1995. In the statements of income for the three months ended March 31, 1996 net sales and net income increased by $472,000 and $23,000, respectively, as a result of the restatement. The restatement did not affect earnings per share for the first quarter, but was dilutive by approximately $.01 per share for the six months ended June 30, 1996. 6 NOTE D - SPECIAL CHARGE Net income in the three months and nine months ended September 30, 1995 included a special charge reflecting the costs associated with integrating the operations of American Telcom Corp. of Georgia, Inc. and Access West, Inc. during May 1995. The special charge principally included costs associated with redundancy in inventories, equipment abandonment, the combination and relocation of business operations, employee reductions, and the write-off of intangible assets. Without this special charge, the Company would have reported net income of approximately $6.5 million, or $.56 per share, in the nine months ended September 30, 1995. PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Inter-Tel is a single point of contact, full service solutions integrator providing AXXESS and Axxent digital communication platforms, AxxessoryTalk voice processing platforms, call processing 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 for the third quarter of 1996 increased 24% to $47.4 million from $38.3 million in the third quarter of 1995. Net sales increased 21% to $133.4 million in the first nine months of 1996 from $110.4 million in the first nine months of 1995. For the nine months ended September 30, 1996, sales from direct sales offices accounted for approximately $9.4 million of the increase, with wholesale distribution increasing approximately $7.6 million. The remaining increases occurred in network and long distance sales and other operations. The following table sets forth selected statement of operations data expressed as a percentage of net sales for the periods indicated: 7 Three Months Nine months Ended September 30, Ended September 30, 1996 1995 1996 1995 ---- ---- ---- ---- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 58.6 58.5 56.5 58.7 ----- ----- ----- ----- Gross profit 41.4 41.5 43.5 41.3 Research and development 3.3 3.9 3.7 4.0 Selling, general and administrative 29.3 28.4 30.2 28.7 Special charge -- -- -- 1.2 ----- ----- ----- ----- Operating Income 8.8 9.2 9.6 7.4 Interest and other income 0.8 1.3 1.0 1.0 Interest expense 0.0 0.0 0.0 0.1 Income taxes 3.9 4.0 4.3 3.1 ----- ----- ----- ----- Net income 5.7 6.5 6.3 5.2 ----- ----- ----- ----- Gross profit for the third quarter of 1996 increased 23% to $19.6 million, or 41.4% of net sales, from $15.9 million, or 41.5% of net sales, for the third quarter of 1995. Gross profit increased to $58.0 million, or 43.5% of net sales, in the first nine months of 1996 from $45.6 million, or 41.3% of net sales, in the first nine months of 1995. Gross margin decreased slightly during the third quarter based on the different mix of sales of products and services, and customer concessions caused by problems incurred with the Company's new management information systems since the implementation of and conversion to the new systems in late 1995. Gross margin was higher for the nine months ended September 30, 1996 compared to the same period for 1995. 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, which was offset in part by a higher percentage of sales through dealers and increased sales of the company's network services and long distance calling services, in addition to the factors discussed above regarding the third quarter. Research and development expenses for the third quarter of 1996 increased to $1.6 million, or 3.3% of net sales, from $1.5 million, or 3.9% of net sales, for the third quarter of 1995. Research and development expenses increased to $4.9 million, or 3.7% of net sales, in the first nine months of 1996 from $4.4 million, or 4.0% of net sales, in the first nine months of 1995. The increases in both periods were primarily attributable to expenses relating to the development and introduction of new products, including the introduction of ISDN to the AXXESS digital communication platform, expansion of the AXXESS digital communication platform to 512 ports and the addition of ISDN primary rate capability, expansion of the Inter-Tel Axxent digital communication platform to 36 ports, AxxessoryTalk version 4.0 voice processing software, continuing development of other call processing and voice processing software, CTI products and a line of call processing, voice processing, unified messaging, and internet software which is designed to run under Microsoft Windows 8 NT on standard IBM compatible X86 servers. The Company expects that research and development expenses will continue to increase in the future in absolute dollars as the Company continues to develop new call processing and voice processing software and enhance existing technologies and products. These expenses may vary, however, as a percentage of net sales. Selling, general and administrative expenses for the third quarter of 1996 increased 27% to $13.9 million, or 29.3% of net sales, from $10.9 million, or 28.4% of net sales, for the third quarter of 1995. Selling, general and administrative expenses increased to $40.2 million, or 30.2% of net sales, in the first nine months of 1996 from $31.7 million, or 28.7% of net sales, in the first nine months of 1995. The increases, both in total dollars and as a percentage of sales, for the quarter and nine months ended September 30, 1996, were primarily attributable to the costs associated with the implementation of the Company's management information systems, including higher depreciation, maintenance, consulting fees, personnel costs and related expenses. In addition, the Company increased its sales and technical training staff, expanded its credit management group and made increases in receivables reserves. The Company continues to hire and train additional sales personnel throughout Inter-Tel's direct sales offices and to provide additional marketing resources and sales personnel for the expanded dealer network and for network services and long distance services. Higher sales commissions were also paid based upon increased levels of net sales. The Company expects that selling, general and administrative expenses will continue to increase in the future in absolute dollars, but may vary as a percentage of net sales. Interest and other income in both periods consisted primarily of interest income. Interest expense during the first nine months of 1996 was virtually eliminated and other income increased principally as a result of the temporary investment of the net proceeds from public offerings of common stock in late 1993 and during August, 1995. Net income for the third quarter increased 8% to $2.7 million ($.20 per share) compared to net income of $2.5 million ($.20 per share) for the third quarter of 1995. Net income increased 47% to $8.4 million, or $.63 per share in the first nine months of 1996, from $5.7 million, or $.49 per share, in the first nine months of 1995. The 1996 earnings per share calculations were affected by the issuance of an additional 2,000,000 shares of stock as a result of the Company's public offering of common stock that closed in August 1995. Net income in the second quarter of 1995 included a special charge of approximately $815,000, or $.07 per share, reflecting the costs associated with integrating the operations of the American Telcom Corp. of Georgia, Inc. and Access West, Inc. in May 1995. The special charge principally included costs associated with redundancy in inventories, equipment abandonment, the combination and relocation of business operations, employee terminations, and the write-off of intangible assets. 9 Inflation/Currency Fluctuation Inflation and currency fluctuations have not previously had a material impact on Inter-Tel's operations. International sales and procurement agreements have traditionally been denominated in U.S. currency. Moreover, a significant amount of contract manufacturing has been or is expected to be moved to domestic sources. The expansion of international operations in the United Kingdom and Europe and anticipated sales in Japan and Asia and elsewhere could result in higher international sales as a percentage of total revenues, but international revenues are currently not significant. Liquidity and Capital Resources The Company continues to expand its dealer network, which has required and is expected to continue to require working capital for increased accounts receivable and inventories. During the first nine months of 1996, accounts receivable and inventories increased approximately $8.9 million. This increase was principally funded by operating cash flow and existing cash balances. The Company also expended approximately $4.7 million during the first nine months of 1996 for property and equipment. At September 30, 1996, the Company had $35.0 million in cash and equivalents, which represents an increase of approximately $3.0 million from June 30, 1996, but a decrease of approximately $4.7 million from December 31, 1995. The Company has a loan agreement with Bank One, Arizona, NA which provides for a $5.0 million, unsecured revolving line of credit. The credit facility is annually renewable and is available through April 30, 1997. Under the credit facility, the Company has the option to borrow at a prime rate or adjusted LIBOR interest rate. During the nine months ended September 30, 1996, the credit facility was used primarily to support international letters of credit to suppliers. 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 $57.3 million and $37.3 million remain unbilled at September 30, 1996 and December 31, 1995, 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, together with cash generated from operations, will be sufficient to fund purchases of capital equipment, finance any cash acquisitions which the Company may consider and 10 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, prospective investors should carefully consider the following factors in addition to the other information presented in this Form 10-Q. Rapid Technological Change and Dependence on New and Timely Product Introductions The market for the Company's software, products and services is characterized by rapid technological change and continuing demand for new products, features and applications. Current competitors or new market entrants may develop new products or product features that could adversely affect the competitive position of the Company's products. Accordingly, the timely introduction of new products and product features, as well as new telecommunications applications, will be a key factor in the Company's future success. Occasionally, new products contain undetected errors or "bugs" when released. Such bugs may result from defects contained in software products offered by the Company's suppliers or other third parties that are intended to be compatible with the Company's products, over which the Company has little or no control. Although the Company seeks to minimize the number of bugs in its products by its test procedures and strict quality control, there can be no assurance that its new products will be error free when introduced. Any significant delay in the commercial introduction of the Company's products due to bugs, any design modifications required to correct bugs or any impairment of customer satisfaction as a result of bugs could have a material adverse effect on the Company's business and operating results. In addition, new products often take several months before their manufacturing costs stabilize, which may adversely affect operating results for a period of time following introduction. 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, and introduced a number of upgrades to its existing AxxessoryTalk and IVX-500 voice processing platforms. 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. 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. 11 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 certain of these components, including integrated circuits, are currently in limited supply. In addition, the Company currently manufactures its products through a limited number of contract manufacturers located in the United States, the Philippines and the People's Republic of China. Foreign manufacturing facilities are subject to changes in governmental policies, imposition of tariffs and import restrictions and other factors beyond the Company's control. Varian Associates, Inc. ("Varian") currently manufactures a significant portion of the Company's products at Varian's Tempe, Arizona facility, including substantially all of the printed circuit boards used in the AXXESS and Inter-Tel Axxent digital communications platforms. From time to time, the Company has experienced delays in the supply of components and finished goods, and there can be no assurance that the Company will not experience such delays in the future. The Company's reliance on third party manufacturers involves a number of additional risks, including reduced control over delivery schedules, quality assurance and costs. Any delay in delivery or shortage of supply of components or finished goods from Varian or any other supplier, or the Company's inability to develop in a timely manner alternative or additional sources if and when required, could damage the Company's relationships with current and prospective customers and could materially and adversely affect the Company's business and operating results. The Company has no long term agreements with its suppliers that require the suppliers to provide fixed quantities of components or finished goods at set prices. There can be no assurance that the Company will be able to continue to obtain components or finished goods in sufficient quantities or quality or on favorable pricing and delivery terms in the future. Competition The market for the Company's digital communications platforms is highly competitive and in recent periods has been characterized by pricing pressures and business consolidations. The Company's competitors include Lucent Technologies and Northern Telecom Limited ("NorTel"), as well as Comdial Corporation ("Comdial"), EXECUTONE Information Systems, Inc. ("Executone"), Mitel Corporation ("Mitel"), Panasonic, Siemens ROLM Communications Inc. ("ROLM"), Toshiba and others. The Company also competes against the regional Bell operating companies ("RBOCS"), which offer systems produced by one or more of the aforementioned competitors and also offer Centrex systems in which call processing facilities are provided through 12 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. 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 Siemens ROLM, which offer integrated voice processing systems under their own label as well as through various OEM arrangements. Certain of the Company's competitors may achieve marketing advantages by bundling their voice processing equipment with sales of telephone systems, or by designing their telephone systems so that they do not readily integrate with independent voice processing systems. Inter-Tel expects that the development of industry standards and the acceptance of open systems architectures in the voice processing market will reduce technical barriers to market entry and lead to increased competition. In the market for long distance services, the Company competes against AT&T Corp., MCI Telecommunications Corporation, Sprint Corporation and other suppliers, certain of which also supply the long distance calling and network services that the Company resells. Although the Company acquires a variety of long distance calling services in bulk from certain long distance carriers, there can be no assurance that the Company will be able to purchase long distance calling services on favorable terms from one or more of such providers in the future. In addition, a substantial majority of prospective new long distance customers for the Company currently purchase long distance calling services from the Company's competitors. The Company believes that it is likely to face increased competition in the long distance calling services market to the extent that telecommunications deregulation enables RBOCs to supply long distance calling and network services or 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. 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 13 employees into its overall operations and to continue to improve its operational, financial and management information systems. In particular, the Company implemented new management information systems (MIS) late in 1995. The new MIS systems significantly affect many aspects of the Company's business, including its accounting, operations, purchasing, sales and marketing functions. The Company has experienced some difficulty in the implementation of these MIS systems. This difficulty has increased the Company's costs, has had an adverse effect on the Company's ability to provide products and services to its customers on a timely basis, and, in addition, has caused some delay in coordinating accounting and financial results. There can be no assurance that the Company will successfully complete the total automation and integration of the MIS systems in their current configuration. In addition, one of the Company's primary MIS systems software vendors has filed for protection under Chapter 11 of the Bankruptcy Code in the U.S. District Court, District of Arizona, which may further complicate the steps necessary for a full integration. The Company is currently reviewing remedial steps and alternatives, including (1) methods to improve reliability of data and performance in the current MIS systems and configuration; (2) variations to the current configuration; and (3) the possibility of the selection of alternative providers. Any of such actions could result in additional costs and could result in further delays in obtaining fully-functional MIS systems, which could have a material adverse effect on the Company's business and operating results. The Company has made strategic acquisitions in the past and expects to continue to do so in the future. Acquisitions require a significant amount of the Company's management attention and financial and operational resources, all of which are limited. The integration of acquired entities may also result in unexpected costs and disruptions, and significant fluctuations in, or reduced predictability of, operating results from period to period. There can be no assurance that an acquisition will not adversely affect the business relationships of the Company or the acquired entity with their respective suppliers or customers. Further, there can be no assurance that the Company will successfully integrate the acquired operations or achieve any of the intended benefits of an acquisition. The Company's failure to manage its growth effectively could have a material adverse effect on its business and operating results. Product Protection and Infringement The Company's future success is dependent in part upon its proprietary technology. The Company has no patents and relies principally on copyright and trade secret law and contractual provisions to protect its intellectual property. There can be no assurance that any copyright owned by the Company will not be invalidated, circumvented or challenged or that the rights granted thereunder will provide competitive advantages to the Company. Further, there can be no assurance that others will not develop technologies that are similar or superior to the Company's technology or that duplicate the Company's technology. 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 14 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, which could require the Company to expend significant sums and could require the Company to pay significant damages, develop noninfringing 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 materially inhibited. 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 long term agreements with any of its dealers, and 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 and operating results. In recent years the Company has effected a number of strategic acquisitions 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. There can be no assurance that one or more of the Company's dealers will not be acquired by a competitor and that the loss of any such dealer so acquired will not adversely affect 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 15 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, such as regulations requiring the reduction of direct-dial billing rates, will not adversely affect the Company's business and operating results. The Company currently resells long distance services pursuant to contracts with four of the six largest long distance carriers with U.S. networks. These contracts 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. 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 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 level of the Company's operating expenses and the availability and cost of products and components from the company's suppliers. The Company's customers typically require the immediate shipment and installation of systems. 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 telephone systems and 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 as to future sales and, if sales levels do not meet expectations, operating results could be adversely affected. Because sales of systems 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 16 past and could in the future experience fluctuations in sales and operating results on a quarterly basis. 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. Concentration of Ownership As of October 31, 1996, the Company's Chairman of the Board of Directors and Chief Executive Officer beneficially owned approximately 21% of the outstanding shares of the Common Stock. As a result, he has the ability to exercise significant influence over all matters requiring shareholder approval. In addition, the concentration of ownership could have the effect of delaying or preventing a change in control of the Company. 17 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 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS--Not Applicable ITEM 5. OTHER INFORMATION--Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits: 11.1 -- Computation of Per Share Earnings Exhibit 27.1 - Financial Data Schedule for September 30, 1995 Reports on Form 8-K -- None 18 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 11-13-96 /s/ Steven G. Mihaylo -------------- ------------------------------------ Steven G. Mihaylo, Chairman of the Board and Chief Executive Officer Date 11-13-96 /s/ Kurt R. Kneip -------------- ------------------------------------ Kurt R. Kneip, Vice President and Chief Financial Officer 19 EX-11.1 2 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(Thousands except Three Months Nine Months per share amounts) Ended September 30, Ended September 30, 1996 1995 1996 1995 ---- ---- ---- ---- PRIMARY Average shares outstanding 12,929 11,804 12,872 11,100 Net effect of dilutive stock options--based on the treasury stock method using average market price 514 539 513 466 ------ -------- ------ -------- TOTAL 13,443 12,343 13,385 11,566 ====== ======= ====== ====== Net income $2,689 $ 2,500 $8,372 $5,701 ====== ======= ====== ====== Per share amount $ 0.20 $ 0.20 $ 0.63 $ 0.49 ====== ======= ====== ====== FULLY DILUTED Average shares outstanding 12,929 11,804 12,872 11,100 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 526 549 526 549 ------ -------- ------ -------- TOTAL 13,454 12,353 13,398 11,649 ====== ======= ====== ====== Net income $2,689 $ 2,500 $8,372 $ 5,701 ====== ======= ====== ====== Per share amount $ 0.20 $ 0.20 $ 0.62 $ 0.49 ====== ======= ====== ======
NOTE: Financial data for all periods have been restated to reflect three acquisitions in May 1996 and May 1995, each accounted for as a pooling of interests in which 318,366 total shares were issued. EX-27.1 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTER-TEL, INCORPORATED AND SUBSIDIARIES FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 U.S. DOLLARS 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1 34950 0 37946 3070 24373 108813 28805 15232 134328 26328 0 0 0 59557 34562 134328 133384 133384 75348 75348 0 0 43 14183 5811 8372 0 0 0 8372 0.63 0.62
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