-----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, LxXnPN5W7rlJ0pk0BEgO1yS6iq5g7M5Y6Ly1Fmz/kP8p4cMV4pZr4C5Q1Xr0I3kT lOzKmIvtE1JR36dYhuGDTw== 0000950147-97-000542.txt : 19970815 0000950147-97-000542.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950147-97-000542 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97661085 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 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------- FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended Commission File Number: June 30, 1997 0-10211 INTER-TEL, INCORPORATED Incorporated in the State of Arizona I.R.S. No. 86-0220994 120 North 44th Street, Suite 200 Phoenix, Arizona 85034-1822 (602) 302-8900 Common Stock (12,995,478 shares outstanding as of June 30, 1997) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- INDEX INTER-TEL, INCORPORATED AND SUBSIDIARIES Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets--June 30, 3 1997 and December 31, 1996 Condensed consolidated statements of income--Three 4 and six months ended June 30, 1997 and June 30, 1996 Condensed consolidated statements of cash flows 5 --Three and six months ended June 30, 1997 and June 30, 1996 Notes to condensed consolidated financial 6 statements--June 30, 1997 Item 2. Management's Discussion and Analysis of Financial 7 Condition and Results of Operations PART II. OTHER INFORMATION 17 SIGNATURES 17 EXHIBIT 11.1 18 2 PART I. FINANCIAL INFORMATION INTER-TEL, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) June 30, December 31, 1997 1996 ---- ---- ASSETS CURRENT ASSETS Cash and equivalents $25,673 $38,936 Accounts receivable - net 29,035 29,998 Inventories 23,001 21,280 Net investment in sales-leases 8,103 8,243 Prepaid expenses and other assets 5,005 7,008 -------- -------- TOTAL CURRENT ASSETS 90,817 105,465 PROPERTY & EQUIPMENT 15,660 11,189 OTHER ASSETS 17,071 15,957 -------- -------- $123,548 $132,611 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable 10,814 $8,915 Other current liabilities 15,330 16,841 -------- -------- TOTAL CURRENT LIABILITIES 26,144 25,756 DEFERRED TAXES AND OTHER LIABILITIES 13,637 11,921 SHAREHOLDERS' EQUITY Common stock 60,115 59,875 Retained earnings 39,630 35,464 Equity adjustment for foreign currency translation (520) (359) -------- -------- 99,225 94,980 Less: Treasury stock at cost (15,458) -- Receivable from Employee Stock Ownership Trust -- (46) -------- -------- TOTAL SHAREHOLDERS' EQUITY 83,767 94,934 -------- -------- $123,548 $132,611 ======== ======== 3 INTER-TEL, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except Three Months Six Months per share amounts) Ended June 30, Ended June 30, 1997 1996 1997 1996 ------- ------- -------- ------- NET SALES $54,823 $43,736 $105,145 $85,949 Cost of sales 30,422 24,628 58,574 47,529 ------- ------- -------- ------- GROSS PROFIT 24,401 19,108 46,571 38,420 Research & development 2,134 1,661 3,979 3,365 Selling, general and administrative 17,139 13,138 33,191 26,338 ------- ------- -------- ------- 19,273 14,799 37,170 29,703 OPERATING INCOME 5,128 4,309 9,401 8,717 Interest and other income 595 517 818 963 Interest expense (17) (29) (24) (33) ------- ------- -------- ------- INCOME BEFORE TAXES 5,706 4,797 10,195 9,647 Income taxes 2,282 2,013 4,101 3,964 ------- ------- -------- ------- NET INCOME $3,424 $2,784 $6,094 $5,683 ======= ======= ======== ======= NET INCOME PER SHARE $.26 $ .21 $.46 $ .43 ======= ======= ======== ======= Average number of shares outstanding 13,132 13,431 13,239 13,358 ======= ======= ======== =======
4 INTER-TEL, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands, except Three Months Six Months per share amounts) Ended June 30, Ended June 30, 1997 1996 1997 1996 ------- ------- ------- ------- OPERATING ACTIVITIES NET INCOME $3,424 $2,784 $6,094 $5,683 Adjustments to reflect operating activities: Depreciation and amortization 1,171 973 2,240 1,894 Changes in operating assets and liabilities (1,279) (8,906) (1,445) (16,136) Other 2,439 565 4,234 2,695 ------- ------- ------- ------- NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES 5,755 (4,584) 11,123 (5,864) INVESTING ACTIVITIES Proceeds from disposal of property and equipment 5 132 5 132 Cash used in acquisition -- -- (825) -- Additions to property and equipment (4,711) (873) (6,420) (2,470) ------- ------- ------- ------- NET CASH USED IN INVESTING ACTIVITIES (4,706) (741) (7,240) (2,338) FINANCING ACTIVITIES Payments for repurchase of common stock (17,493) -- (17,493) -- Proceeds from exercise of stock options 274 397 347 486 ------- ------- ------- ------- NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES (17,219) 397 (17,146) 486 DECREASE IN CASH AND EQUIVALENTS (16,170) (4,928) (13,263) (7,716) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 41,843 36,852 38,936 39,640 ------- ------- ------- ------- CASH AND EQUIVALENTS AT END OF PERIOD $25,673 $31,924 $25,673 $31,924 ======= ======= ======= =======
5 INTER-TEL, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 1997 NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods presented have been included. Operating results for the three and six months ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1996. NOTE B--INCOME PER SHARE Primary earnings per share assume that outstanding common shares were increased by shares issuable upon the exercise of all outstanding stock options to which market price exceeds exercise price less shares which could have been purchased with related proceeds. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in an increase in primary earnings per share for both the second quarter and six months ended June 30, 1997 and June 30, 1996 of $.01 and $.01 per share, respectively. The impact of Statement 128 on the calculation of fully diluted earnings per share for these quarters is not expected to be material. NOTE C--TREASURY STOCK During the second quarter of 1997, the Company initiated a stock repurchase program under which the Board of Directors authorized the repurchase of up to 1,470,000 shares of the Company's common stock. The Company expended approximately $17.5 million for stock repurchases in the second quarter of 1997, which was funded primarily by existing cash balances. The Company reissued treasury shares with a cost basis of approximately $2.0 million relating to stock option exercises and issuances. The proceeds received for the treasury stock reissued was less than its cost basis. Accordingly, the difference has been recorded as a reduction to retained earnings. 6 PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Inter-Tel is a single point of contact, full service solutions integrator providing AXXESS and Axxent digital communication platforms, AxxessoryTalk voice processing platforms, call processing software and voice processing software along with various other productivity enhancing software applications, computer-telephony integration ("CTI"), network services and long distance calling services, as well as maintenance, leasing and support services. The Company's Common Stock is quoted on the Nasdaq National Market under the symbol INTL. This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of many risk factors, including, without limitation, those set forth under "Factors That May Affect Future Results Of Operations" below. Results of Operations Net sales for the second quarter of 1997 increased 25.3% to $54.8 million from $43.7 million in the second quarter of 1996. Net sales increased 22.3% to $105.1 million in the first six months of 1997 from $85.9 million in the first six months of 1996. For the quarter and six months ended June 30, 1997, sales from wholesale distribution and direct sales offices accounted for approximately $8.2 million and $13.4 million of the increases, respectively. The remaining increases occurred in long distance sales and other operations. The following table sets forth certain statement of operations data of the Company expressed as a percentage of net sales for the periods indicated: Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of Sales 55.5 56.3 55.7 55.3 ---- ---- ---- ---- Gross profit 44.5 43.7 44.3 44.7 Research and development 3.9 3.8 3.8 3.9 Selling, general and administrative 31.3 30.0 31.6 30.7 ---- ---- ---- ---- Operating income 9.3 9.9 8.9 10.1 Interest and other income 1.1 1.2 0.8 1.1 Interest expense 0.0 0.1 0.0 -- Income taxes 4.2 4.6 3.9 4.6 ---- ---- ---- ---- Net income 6.2% 6.4% 5.8% 6.6% ==== ==== ==== ==== 7 Gross profit for the second quarter of 1997 increased 27.7% to $24.4 million, or 44.5% of net sales, from $19.1 million, or 43.7% of net sales, for the second quarter of 1996. Gross profit increased to $46.6 million, or 44.3% of net sales, in the first six months of 1997 from $38.4 million, or 44.7% of net sales, in the first six months of 1996. Gross margin increased in the second quarter of 1997 primarily as a result of higher sales of AXXESS digital communication platforms, call processing software and voice processing software as a percentage of net sales, which was offset in part by a higher percentage of sales through dealers and increased sales of the Company's network services and long distance calling services, which generally have a lower gross margin than sales of the Company's other products. Research and development expenses for the second quarter of 1997 increased to $2.1 million, or 3.9% of net sales, from $1.7 million, or 3.8% of net sales, for the second quarter of 1996. Research and development expenses increased to $4.0 million, or 3.8% of net sales, in the first six months of 1997 from $3.4 million, or 3.9% of net sales, in the first six months of 1996. The increases in absolute dollars in both periods were primarily attributable to expenses relating to the development and introduction of new products, including continuing development and improvement of AXXESS digital communication platforms, call processing and voice processing software, CTI products, unified messaging, and TCP/IP intranet and internet voice solutions (Vocal'Net and Inter-Tel.net). The Company expects that research and development expenses will continue to increase in absolute dollars as the Company continues to develop new software and to enhance existing technologies and products. These expenses may vary, however, as a percentage of net sales. Selling, general and administrative expenses for the second quarter of 1997 increased to $17.1 million, or 31.3% of net sales, from $13.1 million, or 30.0% of net sales, for the second quarter of 1996. Selling, general and administrative expenses increased to $33.2 million, or 31.6% of net sales, in the first six months of 1997 from $26.3 million, or 30.6% of net sales, in the first six months of 1996. The increases, both in dollars and as a percentage of sales, for the quarter and six months ended June 30, 1997, were attributable in part to cost associated with increases in sales from the direct sales offices, which typically generate higher selling, general and administrative expenses compared to sales through dealer channels. The Company also has expanded its technical training staff, increased its receivables reserves, and continues to hire and train additional sales personnel throughout Inter-Tel's direct sales offices and to provide additional marketing resources and sales personnel for the expanded dealer network and for network services and long distance services. Higher sales commissions were also paid based upon increased levels of net sales. The Company expects that selling, general and administrative expenses will continue to increase in absolute dollars, but may vary as a percentage of net sales. Other income in both periods consisted primarily of interest income and foreign exchange rate gains and losses. Income from interest decreased slightly in both comparable periods of 1997 based on lower invested funds. Other changes are primarily due to differences in net foreign exchange rate gains and losses. Net income for the second quarter increased 23.0% to $3.4 million ($.26 per share) compared to net income of $2.8 million ($.21 per share) for the second quarter of 1996. Net income increased 7.2% to $6.1 million, or $.46 per share, in the first six months of 1997 from $5.7 million, or $.43 per share, in the first six months of 1996. 8 Inflation/Currency Fluctuation Inflation and currency fluctuations have not previously had a material impact on Inter-Tel's operations. International procurement agreements have traditionally been denominated in U.S. currency. Moreover, a significant amount of contract manufacturing has been moved to domestic sources. The expansion of international operations in the United Kingdom and Europe and increased sales, if any, in Japan and Asia and elsewhere could result in higher international sales as a percentage of total revenues, but international revenues are currently not significant. Liquidity and Capital Resources At June 30, 1997, the Company had $25.7 million in cash and equivalents, which represents a decrease of approximately $13.3 million from December 31, 1996. The Company maintains a $7.0 million, unsecured revolving line of credit with Bank One, Arizona, NA. The credit facility is annually renewable and is available through July 31, 1998. Under the credit facility, the Company has the option to borrow at a prime rate or adjusted LIBOR interest rate. Historically, the credit facility has been used primarily to support international letters of credit to suppliers. Net cash provided by operating activities totaled $11.1 for the six months ended June 30, 1997, compared to net cash used by operating activities of $5.9 million for the same period in 1996. The increase in cash generated was primarily the result of profitable operations and reduced accounts receivable, which were partially offset by higher inventory levels. During the first six months of 1997, accounts receivable decreased approximately $963,000, while inventories increased approximately $1.7 million. Inventories increased in part due to higher revenues and related requirements to support additional sales locations. The Company continues to expand its dealer network, which has required and is expected to continue to require working capital for increased accounts receivable and inventories. Net cash used in investing activities, primarily in the form of capital expenditures, was $7.2 million and $2.3 million for the six months ended June 30, 1997 and 1996, respectively. Capital expenditures and cash used in an acquisition totaled approximately $6.4 million and $825,000, respectively, in the first six months of 1997. The Company anticipates additional capital expenditures during 1997, principally relating to expansion of facilities, equipment and management information systems used in operations. Net cash used in financing activities totaled $17.1 million compared to net cash generated of $486,000 for the same period in 1996. During the second quarter of 1997, the Company initiated a stock repurchase program under which the Board of Directors authorized the repurchase of up to 1,470,000 shares of the Company's common stock. The Company expended approximately $17.5 million for stock repurchases in the second quarter of 1997, which was funded primarily by existing cash balances. The Company reissued treasury shares with a cost basis of approximately $2.0 million relating to stock option exercises and issuances. The proceeds received for the treasury stock reissued was less than its cost basis. Accordingly, the difference has been recorded as a reduction to retained earnings. 9 The Company offers to its customers lease financing and other services, including its Totalease program, through its Inter-Tel Leasing subsidiary. The Company funds these programs in part through the sale to financial institutions of rental income streams under the leases. Resold lease rentals totaling $84.7 million and $66.0 million remain unbilled at June 30, 1997 and December 31, 1996, respectively. The Company is obligated to repurchase such income streams in the event of defaults by lease customers and, accordingly, maintains reserves based upon loss experience and past due accounts. Although the Company to date has been able to resell the rental streams from leases under its lease programs profitably and on a substantially current basis, the timing and profitability of lease resales could impact the Company's business and operating results, particularly in an environment of fluctuating interest rates and economic uncertainty. If the Company is required to repurchase rental streams and realize losses thereon in amounts exceeding its reserves, its operating results will be adversely affected. The Company believes that its existing working capital, anticipated cash flows from operations and credit facilities will be sufficient to fund purchases of capital equipment, finance cash acquisitions, repurchase shares of the Company's common stock which the Company may consider and provide adequate working capital for the foreseeable future. However, to the extent that additional funds are required in the future to address working capital needs and to provide funding for capital expenditures, stock repurchases, expansion of the business or additional acquisitions, the Company will seek additional financing. There can be no assurance that additional financing will be available when required or on acceptable terms. Factors That May Affect Results of Future Operations In evaluating the Company's business, shareholders should carefully consider the following factors in addition to the other information presented in this Form 10-Q. Rapid Technological Change And Dependence On New And Timely Product Introductions The market for the Company's software, products and services is characterized by rapid technological change and continuing demand for new products, features and applications. Current competitors or new market entrants may develop new products or product features that could adversely affect the competitive position of the Company's products. Accordingly, the timely introduction of new products and product features, as well as new telecommunications applications, will be a key factor in the Company's future success. Occasionally, new products contain undetected errors or "bugs" when released. Such bugs may result from defects contained in software products offered by the Company's suppliers or other third parties that are intended to be compatible with the Company's products, over which the Company has little or no control. Although the Company seeks to minimize the number of bugs in its products by its test procedures and strict quality control, there can be no assurance that its new products will be error free when introduced. Any significant delay in the commercial introduction of the Company's products due to bugs, any design modifications required to correct bugs or any impairment of customer satisfaction as a result of bugs could have a material adverse effect on the Company's business and operating results. In addition, new products often take several months before their manufacturing costs stabilize, which may adversely affect operating results for a period of time following introduction. 10 During the past twelve months, the Company introduced ISDN on its AXXESS digital communication platform, expanded the size of the Inter-Tel Axxent platform, introduced a number of upgrades to its existing AXXESSORY Talk and IVX-500 voice processing platforms and announced the introduction of the Vocal'Net Server product. In the event that the Company were to fail to successfully introduce new software, products or services or upgrades to its existing systems or products on a regular and timely basis, demand for the Company's existing software, products and services could decline, which could have a material adverse effect on the Company's business and operating results. Additionally, there can be no guaranty that future costs of accessibility, lack of capacity or voice transmission quality of the Internet will not adversely affect the ability of the Company to deliver all Internet products and services on a cost effective basis. There can be no assurance that the Company will be able to successfully develop new software, products, services, technologies and applications on a timely basis as required by changing market needs or that new software or products or enhancements thereto, including its recently announced products and upgrades, when introduced by the Company, will achieve market acceptance. The Company has recently developed and continues to develop products designed to address the emerging market for the convergence of voice and data applications, or computer telephony integration. If the computer telephony integration ("CTI") market fails to develop or grows more slowly than the Company anticipates, or if the Company is unable for any reason to capitalize on this emerging market opportunity, the Company's business and operating results could be materially adversely affected. Dependence Upon Contract Manufacturers and Component Suppliers Certain components used in the Company's digital communication platforms, including certain microprocessors, integrated circuits, power supplies and voice processing interface cards, are currently available from a single source or limited sources of supply, and product availability could be limited. In addition, the Company currently manufactures its products through a limited number of contract manufacturers located in the United States, the Philippines and the People's Republic of China. Foreign manufacturing facilities are subject to changes in governmental policies, imposition of tariffs and import restrictions and other factors beyond the Company's control. Varian Associates, Inc. ("Varian") currently manufactures a significant portion of the Company's products at Varian's Tempe, Arizona facility, including substantially all of the printed circuit boards used in the AXXESS and Inter-Tel Axxent digital communications platforms. From time to time, the Company has experienced delays in the supply of components and finished goods, and there can be no assurance that the Company will not experience such delays in the future. The Company's reliance on third party manufacturers involves a number of additional risks, including reduced control over delivery schedules, quality assurance and costs. Any delay in delivery or shortage of supply of components or finished goods from Varian or any other supplier, or the Company's inability to develop in a timely manner alternative or additional sources if and when required, could damage the Company's relationships with current and prospective customers and could materially and adversely affect the Company's business and operating results. The Company has no long term agreements with its suppliers that require the suppliers to provide fixed quantities of components or finished goods at set prices. There can be no assurance that the Company will be able to continue to obtain components or finished goods in sufficient quantities or quality or on favorable pricing and delivery terms in the future. 11 Competition The market for the Company's digital communications platforms is highly competitive and in recent periods has been characterized by pricing pressures and business consolidations. The Company's competitors include Lucent Technologies and Northern Telecom Limited ("NorTel"), as well as Comdial Corporation ("Comdial"), EXECUTONE Information Systems, Inc. ("Executone"), Mitel Corporation ("Mitel"), Panasonic, Siemens ROLM Communications Inc. ("ROLM"), Toshiba and others. The Company also competes against the regional Bell operating companies ("RBOCs"), which offer systems produced by one or more of the aforementioned competitors and also offer Centrex systems in which call processing facilities are provided through equipment located in the telephone company's central office. Competition by the RBOCs may increase significantly in the future, as the RBOCs have been granted the right to manufacture telephone systems and equipment themselves and/or to bundle the sale of equipment with telephone calling services. The Telecommunication Act of 1996 and the division of AT&T's operations into three enterprises has had an impact on competition in the communication industry. The Telecommunication Act of 1996 opened the market for telephone and cable television services, forcing telephone companies to open their networks to competitors and giving consumers a choice of local phone carriers. Conversely, local phone companies are now able to offer long distance services. In addition, cable television operators can now offer telephone services and Internet access. These changes will increase competition in the communication industry and will create additional competition and opportunities in customer premise equipment as these new services and interfaces become available. As the Company enters the markets for local telephone service and Internet access, it will face additional competition from RBOCs and other providers, which have larger marketing and sales organizations, significantly greater financial and technical resources and a larger and more established customer base than the Company. In addition, RBOCs and other providers have greater name recognition, more established positions in the market and long standing relationships with customers. Therefore, there can be no assurance that the Company will compete successfully in these markets. In the market for voice processing applications, including voice mail, the Company competes against Centigram Communications Corporation ("Centigram"), Octel Communications Corporation ("Octel"), Active Voice Corporation ("Active Voice"), Applied Voice Technology, Inc. ("AVT") and other competitors, including telephone systems manufacturers such as Lucent Technologies (which has agreed to acquire Octel), NorTel and ROLM, which offer integrated voice processing systems under their own label as well as through various OEM arrangements. Certain of the Company's competitors may achieve marketing advantages by bundling their voice processing equipment with sales of telephone systems, or by designing their telephone systems so that they do not readily integrate with independent voice processing systems. Inter-Tel expects that the development of industry standards and the acceptance of open systems architectures in the voice processing market will reduce technical barriers to market entry and lead to increased competition. In the market for long distance services, the Company competes against AT&T Corp., MCI Telecommunications Corporation, Sprint Corporation and other suppliers, certain of which also supply the long distance calling and network services that the Company resells. Although the Company acquires a variety of long distance calling services in bulk from certain 12 long distance carriers, there can be no assurance that the Company will be able to purchase long distance calling services on favorable terms from one or more of such providers in the future. In addition, a substantial majority of prospective new long distance customers for the Company currently purchase long distance calling services from the Company's competitors. The Company believes that it is likely to face increased competition in the long distance calling services market as a result of telecommunications deregulation, which enables RBOCs to supply long distance calling and network services, and enables RBOCs and others to bundle long distance, local telephone and wireless services. Moreover, the Company expects to face increased competition in the future because low technical barriers to entry will allow new market entrants. As Inter-Tel develops more server-based and CTI telecommunications products, Inter-Tel will face competition from large computer software companies, including IBM (Lotus), and Microsoft. In addition, the server-based telephony, internet telephony and CTI markets have shown increasing competition from small start-up software companies. Many of the Company's competitors are substantially larger, and have significantly greater financial and technical resources, name recognition and marketing and distribution capabilities, than the Company. The Company expects that competition will continue to be intense in the markets addressed by its products and services, and there can be no assurance that the Company will be able to compete successfully in the future. Management of Growth; Implementation of New Management Information Systems The growth in the Company's business has placed, and is expected to continue to place, a significant strain on the Company's personnel, management and other resources. The Company's ability to manage any future growth effectively will require it to attract, train, motivate and manage new employees successfully, to integrate new employees into its overall operations and to continue to improve its operational, financial and management information systems. The Company implemented a new MIS system late in 1995. The MIS system significantly affected many aspects of the Company's business, including its accounting, operations, purchasing, sales and marketing functions. Following the date of implementation, the Company experienced difficulty with the new MIS system software, which increased the Company's costs, had an adverse effect on the Company's ability to provide products and services to its customers on a timely basis and caused delays in coordinating accounting and financial results. During the fourth quarter of 1996, the Company determined that the limitations of the existing system software would prevent Inter-Tel from establishing an integrated and centralized dispatch and telemarketing center. As a result, during the fourth quarter of 1996, the Company decided to replace its MIS system software with an integrated solution from a more established vendor and accordingly wrote off the software license and implementation costs relating to the system software being replaced. Inter-Tel signed an agreement with a large, established software and database vendor to implement, maintain and support alternate MIS system software to be utilized throughout the Company. 13 The actions to replace the MIS system software could result in additional costs and delays in obtaining a fully functional MIS system, including but not limited to additional or alternate hardware and software required, but not available in the current system configuration, and additional personnel, which could have a material adverse effect on the company's business and operating results. In addition, implementation of this system software and the transition from the current system software to the new information system software will require substantial financial resources and personnel. The Company has made strategic acquisitions in the past and expects to continue to do so in the future. Acquisitions require a significant amount of the Company's management attention and financial and operational resources, all of which are limited. The integration of acquired entities may also result in unexpected costs and disruptions, and significant fluctuations in, or reduced predictability of, operating results from period to period. There can be no assurance that an acquisition will not adversely affect the business relationships of the Company or the acquired entity with their respective suppliers or customers. Further, there can be no assurance that the Company will successfully integrate the acquired operations or achieve any of the intended benefits of an acquisition. The Company's failure to manage its growth effectively could have a material adverse effect on its business and operating results. Product Protection and Infringement The Company's future success is dependent in part upon its proprietary technology. The Company relies principally on copyright and trade secret law and contractual provisions to protect its intellectual property. There can be no assurance that any copyright owned by the Company will not be invalidated, circumvented or challenged or that the rights granted thereunder will provide competitive advantages to the Company. Further, there can be no assurance that others will not develop technologies that are similar or superior to the Company's technology or that duplicate the Company's technology. As the Company expands its international operations, effective intellectual property protection may be unavailable or limited in certain foreign countries. There can be no assurance that the steps taken by the Company will prevent misappropriation of its technology. Litigation may be necessary in the future to enforce the Company's intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation or delays in product introductions or decisions to discontinue development, manufacture or sale of such products, could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business and operating results. Reliance on Dealer Network A substantial portion of the Company's net sales are made through its network of independent dealers. The Company faces intense competition from other telephone system and voice processing system manufacturers for such dealers' business, as most of the Company's dealers carry products which compete with the Company's products. The Company has no exclusive agreements with any of its dealers. The loss of any significant dealer or group of dealers, or any event or condition adversely affecting the Company's dealer 14 network, could have a material adverse effect on the Company's business and operating results. Risks of Providing Long Distance and Network Services Inter-Tel depends on a reliable supply of telecommunications services and information from several long distance carriers. Because it does not own transmission facilities, the Company relies on long distance carriers for the provision of network services to the Company's customers and for billing information. Long distance services are subject to extensive and uncertain governmental regulation on both the federal and state level. There can be no assurance that the promulgation of certain regulations will not adversely affect the Company's business and operating results. Contracts with the long distance carriers from which the Company currently resells services typically have a multi-year term in which the Company's prices are relatively fixed and have minimum use requirements. There can be no assurance that the Company will meet minimum use commitments, will be able to negotiate lower rates with carriers in the event of any decrease in end user rates or will be able to extend its contracts with long distance carriers at prices favorable to the Company. The Company's ability to continue to expand its long distance service operations will depend on its ability to continue to secure reliable long distance services from a number of long distance carriers and the willingness of such carriers to continue to make telecommunications services and billing information available to the Company on favorable terms. Dependence on Key Personnel The Company is dependent on the continued service of, and its ability to attract and retain, qualified technical, marketing, sales and managerial personnel. The competition for such personnel is intense, and the loss of any of such persons, as well as the failure to recruit additional key technical and sales personnel in a timely manner, would have a material adverse effect on the Company's business and operating results. There can be no assurance that the Company will be able to continue to attract and retain the qualified personnel necessary for the development of its business. Possible Volatility of Stock Price The Company believes that factors such as announcements of developments relating to the Company's business, fluctuations in the Company's operating results, general conditions in the telecommunications industry or the worldwide economy, changes in legislation or regulation affecting the telecommunications industry, an outbreak of hostilities, a shortfall in revenue or earnings from securities analysts' expectations, announcements of technological innovations or new products or enhancements by the Company or its competitors, developments in intellectual property rights and developments in the Company's relationships with its customers and suppliers could cause the price of the Company's common stock to fluctuate, perhaps substantially. Many of such factors are beyond the Company's control. In addition, in recent years the stock market in general, and the market for shares of technology stocks in particular, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. There can be no assurance that the market price of the Company's common stock will not experience significant fluctuations in the future, including fluctuations that are unrelated to the Company's performance. 15 Potential Fluctuations In Quarterly Results; Limited Backlog The Company's quarterly operating results depend upon a variety of factors, including the volume and timing of orders received during the quarter, the mix of products sold, mix of distribution channels, general economic conditions, patterns of capital spending by customers, the timing of new product announcements and releases by the Company and its competitors, pricing pressures and the availability and cost of products and components from the Company's suppliers. The Company's customers typically require immediate shipment and installation of platforms and software. As a result, the Company has historically operated with a relatively small backlog, and sales and operating results in any quarter are principally dependent on orders booked and shipped in that quarter. Moreover, market demand for investment in capital equipment such as digital communication platforms and associated call processing and voice processing software applications is largely dependent on general economic conditions, and can vary significantly as a result of changing conditions in the economy as a whole. The Company's expense levels are based in part on expectations of future sales and, if sales levels do not meet expectations, operating results could be adversely affected. Because sales of digital communication platforms through the Company's dealers produce lower gross margins than sales through the Company's direct sales organization, operating results have varied, and will continue to vary based upon the mix of sales through direct and indirect channels. Although the Company to date has been able to resell the rental streams from leases under its Totalease program profitably and on a substantially current basis, the timing and profitability of lease resales from quarter to quarter could impact operating results, particularly in an environment of fluctuating interest rates. Long distance sales have, in recent periods, grown at a faster rate than the Company's overall net sales and such sales have lower gross margins than the Company's core business. As a result, gross margins could be adversely affected in the event that long distance calling services continue to increase as a percentage of net sales. In addition, the Company is subject to seasonality in its operating results, as net sales for the first and third quarters are frequently less than those experienced in the fourth and second quarters, respectively. As a result of these and other factors, the Company has in the past and could in the future experience fluctuations in sales and operating results on a quarterly basis. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Concentration of Ownership As of June 30, 1997, the Company's Chairman of the Board of Directors and Chief Executive Officer beneficially owned approximately 23% of the outstanding shares of the Common Stock. As a result, he has the ability to exercise significant influence over all matters requiring shareholder approval. In addition, the concentration of ownership could have the effect of delaying or preventing a change in control of the Company. 16 INTER-TEL, INCORPORATED AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM l. LEGAL PROCEEDINGS--Not Applicable ITEM 2. CHANGES IN SECURITIES--Not Applicable ITEM 3. DEFAULTS ON SENIOR SECURITIES--Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS - Not Applicable ITEM 5. OTHER INFORMATION -- Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits: Exhibit 11.1 - Computation of Earnings Per Share Exhibit 27.1 - Financial Data Schedule for June 30, 1997 Reports on Form 8-K -- None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTER-TEL, INCORPORATED Date 8/14/97 /s/ Steven G. Mihaylo, --------- ---------------------------- Steven G. Mihaylo, Chairman of the Board and Chief Executive Officer Date 8/14/97 /s/ Kurt R. Kneip, --------- ---------------------------- Kurt R. Kneip, Vice President and Chief Financial Officer 17 EX-11.1 2 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(Thousands except Three Months Six Months per share amounts) Ended June 30, Ended June 30, 1997 1996 1997 1996 ---- ---- ---- ---- PRIMARY Average shares outstanding 12,719 12,874 12,835 12,843 Net effect of dilutive stock options--based on the treasury stock method using average market price 413 557 404 515 ------ -------- ------ -------- TOTAL 13,132 13,431 13,239 13,358 ====== ====== ====== ====== Net Income $3,424 $2,784 $6,094 $5,683 ====== ====== ====== ====== Per share amount $.26 $.21 $.46 $.43 ==== ==== ==== ==== FULLY DILUTED Average shares outstanding 12,719 12,874 12,835 12,843 Net effect of dilutive stock options--based on the treasury stock method using the quarter- end market price, if higher than the average market price 742 609 742 609 ------- -------- ------ -------- TOTAL 13,461 13,483 13,577 13,452 ====== ====== ====== ====== Net income $3,424 $2,784 $6,094 $5,683 ====== ====== ====== ====== Per share amount $.25 $.21 $.45 $.42 ==== ==== ==== ====
EX-27 3 FINANCIAL DATA SCHEDULE
5 INTER-TEL, INCORPORATED AND SUBSIDIARIES FINANCIAL DATA SCHEDULE (EXHIBIT 27.1) THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTER-TEL, INCORPORATED AND SUBSIDIARIES FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 U.S. DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1 25673 0 32456 3421 23001 90817 33143 17483 123548 26144 0 0 0 60115 (520) 123548 105145 105145 58574 58574 0 0 24 10195 4101 6094 0 0 0 6094 .46 .45
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