Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number:
December 31, 1995 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
----------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(12,780,724 shares outstanding as of March 22, 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 period 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (S 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K - [ ].
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the last reported sales price in NASDAQ National
Market System on March 22, 1996, was approximately $167,000,000. Shares of
Common Stock held by each executive officer and director have been excluded in
that such persons may be deemed to be affiliates.
Materials have been incorporated by reference into this Report from the
following documents: (1) materials from the registrant's Proxy Statement
relating to its 1995 Annual Meeting of Shareholders have been incorporated by
reference into Part III and Part IV and (2) documents from the registrant's Form
S-1 Registration Statements (Nos. 2-70437 and 33-70054), Form S-3 Registration
Statements (Nos. 33-58161, 33-61437 and 333-01735), Form S-8 Registration
Statements (Nos. 2-94805, 33-40353 and 33-73620), Annual Reports on Form 10-K
for the years December 31, 1984 and 1988, and current reports on Form 8-K dated
July 17, 1987, August 3, 1988 have been incorporated by reference into Part IV,
Item 14. Portions of the Annual Report to Shareholders for the year ended
December 31, 1995 are incorporated by reference into Part II.
INTER-TEL, INCORPORATED
1995 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
Item 1 Business 4
Item 2 Properties 19
Item 3 Legal Proceedings 19
Item 4 Submission of Matters to a Vote
of Security Holders 19
PART II
Item 5 Market for the Registrant's Common Stock
and Related Stockholder Matters 20
Item 6 Selected Financial Data 22
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 23
Item 8 Financial Statements and Supplementary
Data 29
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 43
PART III
Item 10 Directors and Executive Officers of the
Registrant 43
Item 11 Executive Compensation 43
Item 12 Security Ownership of Certain Beneficial
Owners and Management 43
Item 13 Certain Relationships and Related
Transactions 43
PART IV
Item 14 Exhibits, Financial Statement Schedule
and Reports on Form 8-K 44
PART I
ITEM 1. BUSINESS
The Company
Inter-Tel is a single point of contact, full service provider of
digital communication platforms, computer telephone integration (CTI), unified
messaging software, long distance and network services, network and data
products and leasing services. Because of the modular design and high level of
software content in the Company's products, including its AXXESS and Inter-Tel
Axxent systems, customers can readily increase the size and functionality of
their systems as their future telecommunications needs change.
The Company has developed a broad distribution network of direct sales
offices, dealers and value added resellers (VARs) which sell the Company's
products to small-to-medium-size organizations and to divisions or departments
of larger organizations, including Fortune 500 companies, large service
organizations and governmental agencies. The Company has 25 direct sales offices
in the United States, one in the United Kingdom, one in Japan and a growing
network of hundreds of dealers and VARs who purchase directly from the Company.
The Company is also in the process of expanding its international dealer
network.
The Company's strategy is to offer to its customers, through a broad
distribution network, the Total Solution for their communications needs--a
single source for their full range of telephony requirements, and to provide to
its market segment, on a cost-effective basis, advanced technologies that have
achieved acceptance in the market for larger systems.
Industry Background
Recent changes in telecommunication laws should help to define the
focus of information services in the future. The Telecommunication Act of 1996
and AT&T's announcement that it will divide itself into three enterprises will
have an impact on the communication industry. The Telecommunication Act of 1996
opens the market for telephone and cable television services, forcing telephone
companies to open their networks to competitors and giving consumers a choice of
local phone carriers. Conversely, local phone companies are now able to offer
long distance services. In addition, cable companies can offer telephone
services and Internet access.
These events injected an element of confusion into the market. This
should provide an opportunity for Inter-Tel to offer additional products and
services to its customers and to supply solutions to a fragmented marketplace.
Because of the complex communication offerings available today, customers should
benefit from a single source solution. Inter-Tel's philosophy is to provide this
total communication solution through its offering of advanced products and
services, and to provide the technologies that companies seek to eliminate the
confusion and expense of dealing with multiple vendors.
Products and Services
The company's broad spectrum of products and services span six market
segments, including:
Digital Communication Platforms
Computer Telephone Integration
Voice Processing and Unified Messaging Software
Network Services and Long Distance
Network and Data Products
Flexible Financing
Digital Communication Platforms
Inter-Tel offers an extensive line of digital communication platforms
and software to meet the requirements of small-to-medium-sized companies. The
Inter-Tel Axxent and AXXESS incorporate the power and flexibility of Computer
Telephone Integration (CTI) technology. Using this technology, companies can
tailor applications to enhance their operations.
Because Inter-Tel's digital communication platforms conform to
established computer telephony industry standards such as MAPI, TAPI and TSAPI
and interface standards such as MVIP and SCSA, customers can choose from a
variety of either system level or desktop applications. In addition, advanced
digital services, including T-1 and Integrated Services Digital Network
("ISDN"), are used with Inter-Tel's platforms, providing some of the best
combinations of services available.
AXXESS
The Company commenced commercial shipments of the AXXESS system in the
fourth quarter of 1993. In 1994, the Company released AXXESS version 2.0, a
system that supports a total of 12 to 120 telephones and trunk lines. AXXESS
version 3.0, released in the third quarter 1995, expanded the system to 256
ports and enhanced the AXXESSORY Talk voice processing system by adding fax
applications. AXXESS version 4.0, scheduled for release second quarter 1996,
will expand the system to 512 ports and add such advanced capabilities as
primary rate ISDN support, integrated call recording and voice prompts in
multiple languages. The suggested retail price for the AXXESS system ranges from
approximately $10,000 to $400,000.
The system incorporates fully-digital processing and transmission to
the desktop and open architecture interfaces which allow the system to be
integrated with and controlled by attached computers such as PCs and
workstations. The system incorporates over one million lines of proprietary,
object-oriented C++ software developed by the Company, which facilitates
upgrades and incorporation of additional features and functionality.
AXXESS system telephones incorporate user-friendly, 6 by 16 character
LCD displays with menu keys that permit the user to select from multiple menu
choices or access additional menu screens. AXXESSORY Talk, the integrated voice
processing application, permits push-button selection of voice processing
commands to appear on the LCD display, as well as voice-prompted selections
through the telephone keypad. Version 4.0 of the system is multi-lingual,
offering English or Japanese voice prompts and LCD displays and allowing the
user to switch from one language to the other. Additional languages can be added
in the future.
The open architecture interface permits tight integration with a PC or
workstation system bus, using several industry-standard interfaces to provide
efficient access to voice processing and other applications on the PC or
workstation. Applications include database look-up (which utilizes Caller-ID
information to retrieve customer information automatically from a computerized
database), automated attendant, interactive voice response, automatic call
distribution (which queues and prioritizes incoming calls), and call accounting
(which permits the monitoring of telephone usage and toll cost). The AXXESS
system is managed through a Microsoft Windows-based interface on a PC to
facilitate installation, system configuration and programming.
The AXXESS system utilizes advanced software to configure and utilize
real-time digital signal processing ("DSP") semiconductor components
incorporated into the system hardware. The use of DSPs and related software
lowers system costs, permits higher functionality and increases system
flexibility. For example, DSPs can be configured by the system manager for
different combinations of speakerphones, conference capabilities and other
DSP-based facilities. The system's speakerphones incorporate full-duplex
technology, which permits speakerphones to transmit in both directions at the
same time without the necessity to override one speaker's voice to prevent
feedback interference.
The AXXESS software is written in a high-level, object-oriented
language which can operate on many commonly used processors. Accordingly, the
software can be readily ported to other hardware platforms. The Company intends
to port the AXXESS software to faster microprocessors which will permit the
AXXESS to grow to a much larger size, in order to enhance the functionality and
performance of these larger systems and to permit a migration path from the
smaller AXXESS system as a customer's system requirements increase.
Inter-Tel Axxent
The Company introduced its newest product line, the Inter-Tel Axxent,
in the third quarter of 1995. The system supports 16 lines and 8 trunks.
Software version 2.0, scheduled to be released third quarter 1996, will increase
the system capacity to 24 lines and 12 trunks. Small businesses are demanding
advanced telephony applications formerly reserved only for large corporations.
The Inter-Tel Axxent is designed to bring many of the advanced features and
functionality of the AXXESS system to smaller installations on a cost-effective
basis while enabling users to migrate to an AXXESS system as their
telecommunications needs evolve. The Inter-Tel Axxent provides leading edge
capabilities such as computer telephone integration, DSP technology, real-time
ACD reporting, and integrated voice processing. Housed in a compact PC type
mid-tower, the Inter-Tel Axxent platform also offers the convenience of a
default database so the system is fully operational as soon as it is plugged in.
Basic database programming can also be performed through the digital telephone
terminals. The system is sold through direct sales offices and direct dealers to
professional businesses such as doctors, lawyers, and architects. The suggested
retail price ranges from approximately $3,000 to $20,000.
In addition to its line of digital communication platforms, the Company
continues to have success in its direct sales offices and dealer distribution
channels with its traditional IMX and G-Series family of products. These
products economically bring advanced communication services to the company's
customers, however, without the advantages of the open architecture capabilities
of the AXXESS and Inter-Tel Axxent. These products include:
GLX and GLX+
GMX-48
IMX 1224/2448/2460
IMX/GMX 256
IMX/GMX 416/832
Inter-Tel also distributes other leading telecommunications products
from its Factored Products Division through its direct sales offices, dealers
and VARs. Factored Products represents products that Inter-Tel has endorsed as
the leading communications peripherals utilized in many day-to-day functions.
Businesses require telecommunications products to provide increased
productivity, ease of operations and reliability. Many of these products
interface with Inter-Tel telephone systems. Inter-Tel's product selection
consists of videoconferencing, battery backup, headsets, surge protection,
paging equipment, wireless communications and data multiplexers.
Computer Telephone Integration (CTI)
CTI technology links two of the most important business tools -- the
computer and the telephone -- into one seamless environment for the
communication needs of a company. CTI technology allows users to perform
multiple tasks, from data handling to answering telephone calls, on the desktop
PC. Inter-Tel is bringing CTI technology to many diverse companies through
desktop and system level applications. Its advanced communication platforms
enable users to process calls using their PC and Windows interface.
AXXESSORY Connect software provides a Windows interface for the AXXESS
platform, allowing users to answer phone calls from their desktop PCs. Using the
desktop interface, AXXESSORY Connect provides industry standard protocols to
integrate with other Windows applications such as personal information managers.
Incoming calls will trigger a "screen pop" containing customer records or other
pertinent information to a user, reducing wait times and enhancing customer
service. Inter-Tel is working with a number of third party software developers
to create a seamless working environment for database, personal organizer and
terminal emulation programs with AXXESSORY Connect.
In addition, system level applications can help companies manage calls
at peak efficiency. Automatic Call Distribution, for example, routes incoming
calls, based on various criteria, to call center agents. It also collects,
analyzes and reports real-time call-processing information.
The market for CTI is rapidly expanding. As CTI technology becomes more
widespread, Inter-Tel will continue to work to create products and services that
are intended to help companies increase their productivity.
Voice Processing and Unified Messaging Software
The manner in which companies process their information can be as
important as the information itself. Inter-Tel has developed its own voice
processing software that integrates tightly with communication platforms.
Inter-Tel offers the following voice processing platforms to work with
its communication platforms: AXXESSORY Talk, Axxent Talk, and the IVX500. All
three platforms include the open, industry-standard Multi-Vendor Interface
Protocol ("MVIP"), a standard for connecting multi-vendor PC-based boards in
voice processing, data switching and video applications. AXXESSORY Talk also
offers a fax back feature, which allows customers to have documents faxed to
them, freeing employees from spending valuable time at the fax machine.
As the need to merge different types of messages continues to evolve,
Inter-Tel is developing unified messaging software. Unified messaging software
integrates e-mail, fax and voice mail through one universal in-box at both the
PC and the phone. Using a Graphical User Interface (GUI) such as Windows, users
are able to see and control all of the different types of messages they have
received.
Inter-Tel is developing unified messaging software to work in
conjunction with the Microsoft Exchange messaging client, which is included with
Windows 95. Inter-Tel's software will conform to the Messaging Application
Programming Interface (MAPI) standard developed by Microsoft and will work with
the AXXESSORY Talk digital voice processing platform.
The first release, scheduled for 1996, will provide users with access
to voice mail from their PCs and will be used in conjunction with Microsoft
Exchange and a GUI media player to play back messages. The system will have the
ability to pull voice messages over to the PC as an object, allowing the user to
embed voice messages into e-mail or fax messages.
Unified messaging should provide the flexibility to retrieve messages
anywhere from a phone or a PC connected to a modem.
Network Services and Long Distance
Effective communication begins with effective network services. These
services include domestic and international long distance, dedicated services
such as T-1 and ISDN, and videoconferencing, which can enhance the way a company
sends and receives information. Inter-Tel provides these services and more
through its NetSolutions division.
Using digital fiber optic technology and high capacity T-1, 56K and
ISDN facilities, NetSolutions provides advanced telecommunication solutions.
Also, as part of its long distance service, Inter-Tel NetSolutions offers a
feature-rich calling card that can be used worldwide. Offering both cost
efficiency and reliability, the NetSolutions calling card provides the
convenience and features of its long distance services. One telephone call
accesses the network, and individual account codes help track calls for easy
account management.
In addition, Inter-Tel NetSolutions offers call accounting services
which feature detailed invoices and customized reports that can help customers
identify individual costs, potential needs and specific calling patterns. Each
month, customers can receive three reports--area code summary, traffic summary,
and frequently called numbers--in addition to their billing statement.
Specialized management reports are also available that address many diverse
business needs.
As company travel budgets continue to shrink, videoconferencing is also
becoming more accepted in today's business environment. Videoconferencing
services can help companies save time and money by reducing business travel and
allowing for fast, efficient decision-making. Along with group and desktop
platforms offered by Inter-Tel's Factored Products division, NetSolutions
provides videoconferencing network services including ISDN, Switched 56, and T-1
to businesses of any size.
Network And Data Products
Inter-Tel's networking solutions connect computers within a building or
across the country. Local Area Networks (LANs) and Wide Area Networks (WANs) are
the means by which data and communication are relayed throughout organizations.
Inter-Tel designs, installs and services total communication and data
packages, including LANs and WANs, that help companies effectively relay
information. Inter-Tel has the resources and technology to get different types
of equipment "talking" to each other. As the importance and quantity of data
traffic has steadily increased, the successful transmission of data traffic has
become the primary reason for companies to create strong, efficient LANs and/or
WANs.
Flexible Financing
Inter-Tel combines all of its products and services with a full range
of affordable financing programs. With Inter-Tel, customers can acquire their
telephony and computer platforms, software applications and services, as well as
financing, all from a single source.
Inter-Tel's Totalease program provides the customer with a total system
solution at a fixed monthly cost. The Totalease includes full system maintenance
and training, fixed equipment add-on and upgrade provisions, risk of loss,
guaranteed renewal options and other services. With Totalease, Inter-Tel manages
the responsibilities and risks associated with ownership of communications
equipment. Customers can then focus their time on their business.
Inter-Tel also offers a full line of lease purchase financing. Lease
terms range from 24 to 84 months with $1.00, fixed and fair market value
purchase options. In addition, Inter-Tel offers customized financing packages
and new business leases for customers with special financial needs. By offering
this type of financing to acquire Inter-Tel products and services, the customer
can maintain a direct, long term relationship with Inter-Tel.
Leasing is a viable option for businesses that want technology without
paying up front acquisition costs. Inter-Tel's leasing programs provide a total
solution at a set monthly cost, making advanced technology affordable.
Sales and Distribution
The Company has developed a broad distribution network of direct sales
offices, dealers and value added resellers (VARs) which market the Company's
products to small to medium size organizations and divisions or departments of
larger organizations. In the United States, the Company has 25 direct sales
offices and a growing network of hundreds of dealers who purchase systems
directly from the Company. Direct dealers are typically located in geographic
areas in which the Company does not maintain direct sales offices. The Company
is additionally pursuing distribution of its products through value added
resellers (VARs). These resellers have traditionally sold complex data solutions
to customers, and the Company is seeking to leverage this distribution to
capitalize on the merging of the computer and telephony industries. The Company
maintains a dealer support office and direct sales office in the United Kingdom
and has a network of approximately 20 dealers in the United Kingdom and Europe.
In addition, in 1993 the Company opened a dealer support office and direct sales
office in Japan and is in the process of establishing dealers in Asia.
The Company believes that its success depends in part upon the strength
of its distribution channels and the ability of the Company to maintain close
access to its end user customers. In recent periods, the Company has sought to
improve its access to end user customers by effecting strategic acquisitions of
resellers of telephony products and services in markets in which the Company has
existing direct sales offices and in other strategic markets. To this end, in
1995 the Company acquired American Telcom Corp. of Georgia, Inc. and Access
West, Inc.. The Company has expanded its direct sales office personnel from a
total of 367 persons at December 31, 1991 to a total of 473 at December 31,
1995.
The Company's sales through its direct sales offices as a percentage of
total sales have increased slightly from 58.7% of net sales in 1992 to 59.1% of
net sales in 1995. Sales to distributors, dealers, and VARs have decreased from
34.0% of net sales in 1992 to 31.5% of net sales in 1995. Sales through the
Company's long distance and network services operation have increased from 3.9%
of net sales in 1992 to 4.4% of net sales in 1995.
Sales of systems through the Company's direct dealers typically
generate lower gross margins than sales through the Company's direct sales
organization, although direct sales typically require higher levels of sales,
marketing, general and administrative expenses. Accordingly, the Company's
margins may vary from period to period depending upon the mix of dealer and
direct sales. Direct dealers and VARs typically enter into non-exclusive
reseller contracts for a term of one or more years. The Company generally
provides support and other services to the reseller pursuant to the terms of the
agreement. The agreements often include requirements that the reseller meet or
use its best efforts to meet minimum annual purchase quotas. The Company's
experience is that dealers and VARs maintain low inventories of the Company's
products and, accordingly, the Company has experienced insignificant stock
rotation returns and price protection credits to date.
International sales, which to date have been made through the Company's
United Kingdom and Japan subsidiaries, accounted for approximately 1.7%, of net
sales in 1995. In order to sell its products to customers in other countries,
the Company must comply with local telecommunications standards. The Company's
new AXXESS system can be readily altered through software modifications, which
the Company believes will facilitate compliance with these local regulations.
However, the Company has experienced delays in the United Kingdom in achieving
final regulatory approval of its products. In addition, the AXXESS system has
been designed to support multi-lingual functionality, and currently supports
English and Japanese. The Company is presently establishing dealer networks in
Japan and Asia and is expanding its dealer network in the United Kingdom and
Europe.
Research and Development
The Company's research and development efforts over the last several
years have been focused primarily on developing new products like the Inter-Tel
Axxent system, enhancing the CTI capabilities of the AXXESS product, as well as
expanding the capacity of the Company's AXXESS and AxxessoryTalk systems.
Current efforts are related to support of industry standard CTI interfaces,
development of additional applications and features, and the development of a
LAN-based Communications Server incorporating the Company's Call Processing and
Voice Processing software. New applications under development include Primary
and Basic Rate ISDN, telecommunications networking, and unified messaging
software. The software-based architecture of the AXXESS system facilitates
maintenance and support, upgrades, and incorporation of additional features and
functionality.
The Company had a total of 73 personnel engaged in research and
development as of December 31, 1995. Research and development expenses were
$5,763,517; $4,536,882 and $4,114,385 for 1995, 1994 and 1993, respectively.
Manufacturing
The Company manufactures substantially all of its systems through third
party subcontractors located in the United States, China, and the Philippines.
These subcontractors use both standard and proprietary integrated circuits and
other electronic devices and components to produce telephone switches,
telephones and printed circuit boards to the Company's engineering
specifications and designs. The suppliers also inspect and test the equipment
before delivering them to the Company, which performs systems integration,
software loading, final testing and shipment. The Company maintains written
agreements with its principal suppliers. The Company provides a forecast
schedule to its suppliers and revises the forecast on a periodic basis.
Foreign manufacturing facilities are subject to changes in governmental
policies, imposition of tariffs and import restrictions, and other factors
beyond the Company's control. Certain of the microprocessors, integrated
circuits and voice processing interface cards used in the Company's systems are
currently available from a single or limited sources of supply. From time to
time, the Company experiences delays in the supply of components and finished
goods. Delay or lack of supply from existing sources or the inability to develop
alternative sources if and when required in the future could materially and
adversely affect operating results.
Customer Service and Support
The Company believes that customer service and support is a critical
component of customer satisfaction and the success of the Company's business.
The Company operates a Technical Support "hotline" to provide a full range of
telephone support to its distributors, dealers and end user customers, free of
charge through a toll-free number. The Company also provides on-site customer
support and, through remote diagnostic procedures, has the ability to detect and
correct system problems from its Technical Support facilities.
Information taken from customer call records allows feedback into
Inter-Tel's Quality First continuous improvement process, thus providing a road
map for continuous product and service enhancements. Each direct sales office is
given a periodic service activity report summarizing the reasons that
technicians are asking for assistance and common issues that give rise to
technical inquiries. This allows them to analyze trends in their service
operations and provide better customer service.
Quality
The Company believes that the quality of its systems, customer service
and support, and other aspects of its organization is a critical element of
meeting the needs of its customers. Through its Quality First continuous
improvement process initiated in 1991, Inter-Tel implements quality processes
throughout its business operations. The Company has established formal
procedures to ensure responsiveness to customer requests, to monitor response
times and to measure customer satisfaction. The Company has also established
means by which all end users, including customers of the Company's resellers,
can make product enhancement requests directly to the Company. The Company
supports its dealers and VARs through an extensive training program at the
Company's facility and at dealer sites, a toll-free telephone number for sales
and technical support, and the provision of end user marketing materials. The
Company typically provides a one year warranty on its systems to end users. In
manufacturing, the Company continuously monitors the quality of the products
produced on its behalf by the Company's manufacturing subcontractors, and is
extending the Company's Quality First continuous improvement process to its
suppliers.
Competition
The market for the Company's products is highly competitive and in
recent periods has been characterized by pricing pressures and business
consolidations. The Company's competitors include AT&T and Northern Telecom, as
well as Comdial, Executone, Iwatsu, Mitel, NEC, Nitsuko, Panasonic, ROLM,
Toshiba and others. Many of these competitors have significantly greater
financial, marketing and technical resources than the Company. The Company also
competes against the regional Bell operating companies (RBOCs), which offer
systems produced by one or more of the aforementioned competitors and also offer
Centrex systems in which automatic calling facilities are provided through
equipment located in the telephone company's central office.
The Telecommunication Act of 1996 and AT&T's announcement that it will
divide itself into three enterprises will have an impact on competition in the
communication industry. The Telecommunication Act of 1996 opens the market for
telephone and cable television services, forcing telephone companies to open
their networks to competitors and giving consumers a choice of local phone
carriers. Conversely, local phone companies are now able to offer long distance
services. In addition, cable companies can offer telephone services and Internet
access. These changes 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.
In the market for voice processing applications, including voice mail,
the Company competes against Centigram Communications Corporation, Octel
Corporation, AVT and other competitors, certain of which have significantly
greater resources than the Company. In the market for long distance services,
the Company competes against AT&T, MCI, US Sprint and other competitors, many of
which have significantly greater resources than the Company. With the recent
Telecommunications Act, the Company will also compete with RBOCs and cable
companies for long distance business. Key competitive factors in the sale of
telephone systems and related applications include performance, features,
reliability, service and support, name recognition, distribution capability and
price. The Company believes that it competes favorably in its markets with
respect to the performance, features and price of its systems, as well as the
level of service and support that the Company provides to its customers. Certain
of the Company's competitors have significantly greater name recognition and
distribution capabilities than the Company, although the Company believes that
it has developed a competitive distribution presence in certain markets,
particularly those where the Company has direct sales offices. The Company
expects that competition will continue to be intense in the markets addressed by
the Company, and there can be no assurance that the Company will be able to
continue to compete successfully.
Intellectual Property Rights
In addition to the factors discussed above, the Company's ability to
compete successfully depends on its ability to protect the proprietary
technology contained in its products. The Company relies principally upon a
combination of copyright and trade secret laws and contractual provisions to
establish and protect its proprietary rights in its systems. The Company
generally enters into confidentiality agreements with its employees and
suppliers, and limits access to its proprietary information. There can be no
assurance that these protections will be adequate to deter misappropriation of
the Company's technologies or independent third party development of similar
technologies or product features.
From time to time, the Company is subject to assertions that the
Company's products infringe the intellectual property rights of third parties.
Such claims could require the Company to expend significant sums in litigation,
could require the Company to pay damages, and could require the Company to
develop non-infringing technology or to acquire licenses to the technology which
is the subject of the claimed infringement.
Employees
As of December 31, 1995, the Company had a total of 928 employees, of
whom 739 were engaged in sales, marketing and customer support, 72 in quality,
manufacturing and related operations, 73 in research and development, and 44 in
finance and administration. The Company's future success will depend upon its
ability to attract, retain and motivate highly qualified employees, who are in
great demand. The Company believes that its employee relations are excellent.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
- ---- --- --------
Steven G. Mihaylo 52 Chairman of the Board of
Directors and Chief
Executive Officer
Thomas C. Parise 41 President and Chief
Operating Officer
Craig W. Rauchle 40 Executive Vice President
W. Kris Brown 42 Vice President
Michael J. Sargent 46 Vice President
Hiroshige Sugihara 36 Vice President
Ross McAlpine 44 President of Inter-Tel
Leasing, Inc.
Kurt R. Kneip 33 Vice President, Chief
Financial Officer, and
Secretary/Treasurer
Gary Edens 54 Director
Maurice H. Esperseth 70 Director
C. Roland Haden 55 Director
Norman Stout 38 Director
Kathleen R. Wade 42 Director
MR. MIHAYLO, the founder of the Company, has served as Chairman of the
Board of Directors of the Company since September 1983, as President from March
1984 until December 1994, and as Chief Executive Officer of the Company since
its formation in July 1969. Mr. Mihaylo also served as President of the Company
from July 1969 until September 1983 and as Chairman of the Board of Directors
from July 1969 to October 1982. Mr. Mihaylo also is a director of MicroAge, Inc.
and Microtest, Inc.
MR. PARISE was elected President of the Company in December 1994. He
has been Senior Vice President of the Company since 1986. He is also President
of Inter-Tel Integrated Services, Inc., a wholly owned research and development,
manufacturing and distribution subsidiary of the Company. Mr. Parise joined the
Company in 1981 and became Branch General Manager of the Phoenix Direct Sales
Office in 1982. In 1983, he became the Mountain Regional Vice President, and in
January 1985 he was appointed Vice President of Operations and Sales Support.
Mr. Parise also is a director of Globe Business Resources, Inc.
MR. RAUCHLE was elected Executive Vice President in December 1994. He
had been Senior Vice President of the Company and continues as President of
Inter-Tel DataCom, Inc., a wholly owned sales subsidiary of the Company. In
addition, he currently serves the Company and all subsidiaries in corporate
strategic planning and mergers and acquisitions activities. Mr. Rauchle joined
the Company in 1979 as Branch General Manager of the Denver Direct Sales Office
and in 1983 was appointed the Central Region Vice President and subsequently the
Western Regional Vice President. From 1990 to 1992, Mr. Rauchle served as
President of Inter-Tel Communications, Inc.
MR. BROWN became a Vice President of the Company in December 1994 when
he was promoted to President of Inter-Tel Communications, which is one of the
Company's Regional Direct Sales Subsidiaries. In 1987, he was promoted to
Regional Vice President of the Southeast Region. Mr. Brown joined the Company in
1985 as the General Manager of the Tampa office, the first direct office in
Florida, and has expanded the Florida direct offices to include Tallahassee, Ft.
Lauderdale and, most recently, North Miami. Mr. Brown obtained a B.A. in
Marketing in 1980 from the University of South Florida at Tampa.
MR. SARGENT was promoted to Vice President, Marketing and Strategic
Programs in January 1995. In this position, he is responsible for business
development and strategic analysis of current practices with the goal of
attaining substantial corporate growth. Mr. Sargent joined Inter-Tel in 1984 as
a software design engineer and progressed through sales engineering and sales
management, serving as the Director of Sales and Marketing for the past four
years. Mr. Sargent holds a Bachelor of Science Degree in Computer Systems
Engineering.
MR. SUGIHARA has been Vice President of the Company and President of
Inter-Tel Japan, Inc. since June 1993. Born in Osaka, Japan, Mr. Sugihara was
employed by Forval Corporation, a publicly traded Japanese company, from 1984 to
1992 and in 1989 established Forval America, Inc., where he served as Vice
President/Secretary/Treasurer and member of the Board of Directors.
MR. MCALPINE has served as President of Inter-Tel Leasing, Inc., a
wholly-owned subsidiary of the Company, since April 1993. He also served as Vice
President of Inter-Tel Communications, Inc. from April 1991 to April 1992 and
Treasurer since April 1992. He joined the Company in July 1991 when Inter-Tel
acquired Telecommunications Specialists, Inc. Prior to joining Inter-Tel, Mr.
McAlpine worked 17 years in the leasing and financial services industry. Mr.
McAlpine holds an undergraduate degree in Accounting from Southwest Texas State
University.
MR. KNEIP has served as Vice President and Chief Financial Officer of
the Company since September 1993. He was elected Secretary and Treasurer in
October 1994. He joined the Company in May 1992 as Director of Corporate Tax,
after seven years with the accounting firm of Ernst & Young. Mr. Kneip is a
Certified Public Accountant, and holds an undergraduate degree in Commercial
Economics from South Dakota State University and a Masters Degree in
Professional Accountancy from the University of South Dakota.
MR. EDENS was elected as a director of the Company in October 1994. He
has been a broadcasting media executive from 1970 to 1994, serving as Chairman
and Chief Executive Officer of Edens Broadcasting, Inc. from 1984 to 1994 when
that corporation's nine radio stations were sold. He presently is President of
The Hanover Companies, Inc., an investment firm. He is an active leader in
various business, civic and philanthropic organizations.
MR. ESPERSETH has been a director of the Company since October 1986.
Mr. Esperseth joined the Company in January 1983 as Senior Vice
President-Research and Development, after a 32-year career with GTE, and served
as Executive Vice President of Inter-Tel from 1986 to 1988. Mr. Esperseth
retired as an officer of the Company on December 31, 1989.
DR. HADEN has been a director of the Company since 1983. Dr. Haden has
been Vice Chancellor and Dean of Engineering of Texas A&M University since 1993.
Previously, he served as Vice Chancellor of Louisiana State University from 1991
to 1993, Dean of the College of Engineering and Applied Sciences at Arizona
State University from 1989 to 1991, Vice President for Academic Affairs at
Arizona State University from 1987 to 1988, and Dean of the College of
Engineering and Applied Sciences from 1978 to 1987. Dr. Haden holds a doctoral
degree in Electrical Engineering from the University of Texas and has served on
the faculties of the University of Oklahoma and Texas A & M University.
MR. STOUT was elected a director of the Company in October 1994. Mr.
Stout has been President of Superlite Block, a manufacturer of concrete block
since February 1993. Prior thereto he was employed by Bouhem-Fields, Inc. of
Dallas, Texas, a manufacturer of crushed stone, as Chief Executive Officer from
1990 to 1993 and as Chief Financial Officer from 1986 to 1990. Previously, Mr.
Stout was a Certified Public Accountant with Coopers & Lybrand.
MS. WADE was elected a director of the Company in April 1994. Ms. Wade
is a former director and Co-Chief Executive Officer of Continental Homes Holding
Corporation, having been employed by this multi-market production homebuilder
and mortgage company and its predecessor from 1978 to 1995. In September 1995
Ms. Wade resigned from Continental Homes and is currently acting as a consultant
to Continental Homes. Prior thereto, Ms. Wade, a Certified Public Accountant,
was employed by Ernst & Ernst, an international accounting firm.
The Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee, consisting of Directors Wade, Stout and
Esperseth, is charged with reviewing the Company's annual audit and meets with
the Company's independent auditors to review the Company's internal controls and
financial management practices. The Compensation Committee, consisting of
Messrs. Esperseth, Edens and Haden, recommends to the Board of Directors
compensation for the Company's key employees and administers the Company's stock
option plans.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters at 120 North 44th
Street, Suite 200, Phoenix, Arizona pursuant to a lease that expires in 2000. It
also maintains its distribution and support operations in an 85,000 square foot
building located in Chandler, Arizona pursuant to a lease that expires in 2008.
In addition, the Company leases sales and support offices in a total of 25
locations in the United States and two locations overseas. The Company's
aggregate monthly payments under these leases are currently $192,000. The
Company believes that its existing facilities are adequate to meet its current
needs and that additional or alternative space will be available as necessary in
the future on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company has no legal proceedings in process or pending for which it
believes an unfavorable outcome would have a material adverse impact on the
financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters are submitted to a vote of security holders in
addition to the proposal to elect the directors of Inter-Tel, Incorporated to
serve for the ensuing year. Please refer to the 1995 Proxy Statement for
detailed information regarding each of these proposals:
FIRST AMENDMENT TO
THE 1990 DIRECTORS STOCK OPTION PLAN
(Proposal No. 2)
Amend Section 4(b)(iii) of the Plan to read in full as follows:
"Each Eligible Director shall automatically receive, five (5) days after the
date of his or her election or reelection in 1996 only, an Option to purchase
2,500 additional shares of the Company's Common Stock. Beginning in 1996, and
continuing annually thereafter, each Eligible Director shall automatically
receive, five (5) days after the meeting of the Board of Directors for the
Company's third quarter of each year, an Option to purchase 2,500 additional
shares of the Company's Common Stock."
Approval of the Adoption of
an Amendment to Article IX, Paragraph 1 of
the Company's Restated Articles of Incorporation
(Proposal No. 3)
1. Paragraph 1 of Article IX of the Restated Articles of Incorporation is
amended in its entirety to reads as follows:
"The corporation shall indemnify any and all of its existing and former
directors and officers to the fullest extent permitted by Arizona law; provided,
however, that the corporation shall have the right to refuse indemnification in
any instance in which the person to whom indemnification would otherwise have
been applicable shall have unreasonably refused to permit the corporation, at
its own expense and through counsel of its own choosing, to defend him or her in
the action."
Approval of the Adoption of
an Amendment to Article IX, Paragraph 2 of
the Company's Restated Articles of Incorporation
(Proposal No. 4)
2. Paragraph 2 of Article IX is amended in its entirety to read as
follows:
"Director Liability: The liability of a director or former director to
the corporation or its shareholders shall be eliminated to the fullest extent
permitted by Section 10-202.B.1 of the Arizona Revised Statutes. If the Arizona
Business Corporation Act is amended to authorize corporate action further
eliminating or limiting the liability of directors, the liability of a director
of the corporation shall be eliminated or limited to the fullest extent
permitted by the Arizona Business Corporation Act, as amended. Any repeal or
modification of this Article IX, Paragraph 2 shall not adversely affect any
right or protection of a director of the corporation existing hereunder with
respect to any act or omission occurring prior to or at the time of such
repeal."
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
Inter-Tel Common Stock is traded over-the-counter (symbol INTL) and
since February 1983 has been included in the NASDAQ National Market System. As
of February 1, 1996 there were of record approximately 1,000 shareholders of the
Company's common stock. The Company believes there are approximately 2,000
additional beneficial holders of the Company's Common Stock. The following table
sets forth high and low closing prices reported by NASDAQ.
Inter-Tel has never paid a cash dividend on its common stock and
presently does not intend to do so. Future dividend policy will depend on
Company earnings, capital requirements for growth, financial conditions and
other factors.
1995 High Low
First Quarter 13 6 7/8
Second Quarter 16 1/8 11 9/16
Third Quarter 19 3/4 14 7/8
Fourth Quarter 17 3/8 13 7/8
1994 High Low
First Quarter 12 1/8 8 5/8
Second Quarter 11 8 1/2
Third Quarter 10 1/8 7
Fourth Quarter 9 3/4 6
Statements contained in this Form 10-K which are not historical facts
are forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those projected. Such risks and uncertainties include fluctuations in
customer demand, and timing and acceptance of new product introductions and
general economic conditions, as well as other risks detailed in the Company's
filings with the Securities and Exchange Commission, including its most recent
Form S-3, annual report and Proxy Statement filings.
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
Financial Summary (1)
(In thousands, except
per share amounts and ratios) For the years ended December 31,
1995 1994 1993 1992 1991
Net sales $148,846 $122,617 $102,377 $87,211 $71,509
Cost of sales 87,031 73,482 62,791 53,585 44,229
Research & development 5,764 4,537 4,114 3,928 3,638
Selling, general and
administrative 42,609 35,785 29,032 24,545 21,521
Special charge 1,315 (2) -- -- -- --
- -------------------------------------------------------------------------------------------------------
Operating income 12,127 (2) 8,813 6,440 5,153 2,121
- -------------------------------------------------------------------------------------------------------
Interest and other income 1,674 904 282 664 515
Interest expense (101) (120) (445) (727) (944)
- -------------------------------------------------------------------------------------------------------
Income before income taxes and
discontinued operations, 13,700 (2) 9,597 6,277 5,090 1,692
Income taxes 5,249 3,648 2,381 1,901 676
- -------------------------------------------------------------------------------------------------------
Income from continuing
operations 8,451 (2) 5,949 3,896 3,189 1,016
Loss from discontinued
operations -- -- -- -- (5,148)
- -------------------------------------------------------------------------------------------------------
Net income (loss) $8,451 (2) $5,949 $3,896 $3,189 $ (4,132)
- -------------------------------------------------------------------------------------------------------
Net Income (loss) per share:
Continuing operations $0.71 (2) $0.55 $0.43 $0.37 $0.12
Discontinued operations -- -- -- -- (.61)
- -------------------------------------------------------------------------------------------------------
Net income (loss) $0.71 (2) $0.55 $0.43 $0.37 $ (.49)
- -------------------------------------------------------------------------------------------------------
Average shares outstanding 11,953 10,852 8,982 8,612 8,405
- -------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $118,402 $67,418 $57,270 $37,568 $41,118
Working capital 75,511 37,245 34,198 12,514 8,228
Long-term debt -- -- 188 2,184 6,007
Shareholders' equity 85,045 45,098 38,542 19,382 16,806
- -------------------------------------------------------------------------------------------------------
KEY RATIOS
Current ratio 4.39 3.25 3.32 1.87 1.49
Term debt/equity -- -- -- 0.11 0.36
Return on equity-continuing operations 0.19 0.15 0.20 0.19 0.05
- -------------------------------------------------------------------------------------------------------
(1) Financial data for all periods have been restated to reflect the
acquisitions of American Telcom Corp. of Georgia, Inc. and Access West, Inc. in
May 1995, each accounted for as a pooling of interests.
(2) Operating income 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 $13.4 million and net income of approximately $9.3 million, or
$.78 per share, in the year ended December 31, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Inter-Tel provides single point of contact, total communication
solutions to small and medium sized businesses. Inter-Tel's products and
services include digital communication platforms and software, computer
telephone integration (CTI), unified messaging software, network services,
network and data products, and flexible financing. The Company's Common Stock is
quoted on the NASDAQ National Market System under the symbol INTL.
The Company has developed a network of direct sales offices, dealers
and value added resellers (VARs) which sells the Company's products, and in
recent periods the Company has focused on expanding its direct sales
capabilities and its dealer and VAR network. 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.
Sales of systems through the Company's dealers and VARs typically
generate lower gross margins than sales through the Company's direct sales
organization, although direct sales typically require higher levels of selling,
general and administrative expenses. In addition, the Company's long distance
and network services typically generate lower gross margins than sales of
software and system products. Accordingly, the Company's margins may vary from
period to period depending upon distribution channel and product mix. In the
event that sales through dealers or sales of long distance services increase as
a percentage of net sales, the Company's overall gross margin could decline.
This is possible, because other high margins products, like software, could
offset lower margin products.
The Company's operating results depend upon a variety of factors,
including the volume and timing of orders received during a period, the mix of
products sold and mix of distribution channels, general economic conditions,
patterns of capital spending by customers, the timing of new product
announcements and releases by the Company and its competitors, pricing pressures
and the availability and cost of products and components from the Company's
suppliers. In addition, the Company is subject to seasonality in its operating
results, as net sales for the first and third quarters are frequently less than
those experienced during the fourth and second quarters, respectively.
The markets served by the Company have been characterized by rapid
technological changes and increasing customer requirements. The Company has
sought to address these requirements through the development of software
enhancements and improvements to existing systems and the introduction of new
products and applications. The Company's research and development efforts over
the last several years have been focused primarily on developing new products
like the Inter-Tel Axxent system, enhancing the CTI capabilities of the AXXESS
digital communications platform, as well as expanding the capacity of the
Company's AXXESS and AxxessoryTalk systems. Current efforts are related to
support of industry standard CTI interfaces, development of additional
applications and features, and the development of a LAN-based Communications
Server incorporating the Company's Call Processing and Voice Processing
software. New applications under development include Primary and Basic Rate
ISDN, networking, and unified messaging. The software-based architecture of the
AXXESS system facilitates maintenance and support, upgrades, and incorporation
of additional features and functionality.
The Company offers to its customers a unique package of lease financing
and other services under the name Totalease. Totalease provides to customers
lease financing, maintenance and support services, long distance services, fixed
price upgrades and other benefits. The Company finances this program through the
resale of lease rental streams to financial institutions, and formerly through
its bank credit facility.
Net sales of the Company have increased substantially in each of the
past three years. Such increases were 21%, 20% and 17% in 1995, 1994 and 1993,
respectively, over the preceding year. All periods have been restated to reflect
the acquisitions of American Telcom Corp. of Georgia, Inc. and Access West, Inc.
in May 1995. Each transaction was accounted for as a pooling of interests.
Results of 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:
Year Ended December 31
1995 1994 1993
Net sales 100.0% 100.0% 100.0%
Cost of sales 58.5 59.9 61.3
---- ---- ----
Gross margin 41.5 40.1 38.7
Research and development 3.9 3.7 4.0
Selling, general and administrative 28.6 29.2 28.5
Special charge 0.9 0.0 0.0
--- --- ---
Operating income 8.1 7.2 6.2
Interest and other income 1.1 0.7 0.3
Interest expense 0.1 0.1 0.4
Income taxes 3.4 3.0 2.3
--- --- ---
Net income 5.7% 4.8% 3.8%
--- --- ---
Year Ended December 31, 1995 Versus Year Ended December 31, 1994
Net sales increased 21.4% to $148.8 million in 1995 from $122.6 million
in 1994. Sales from direct sales offices accounted for approximately $9.7
million of the increase, with wholesale distribution sales increasing
approximately $10.7 million. The remaining increases occurred in long distance
sales and other operations.
Gross profit increased to $61.8 million, or 41.5% of net sales in 1995
from $49.1 million, or 40.1% of net sales in 1994. This reflected the transition
to the direct dealer network and the expansion of AXXESS software and systems
sales.
Research and development expenses increased to $5.8 million, or 3.9% of
net sales in 1995 from $4.5 million, or 3.7% of net sales, in 1994. These
expenses in both 1995 and 1994 were directed principally to the continued
development of the AXXESS and Inter-Tel Axxent software and systems, unified
messaging and voice processing software applications and CTI applications.
Selling, general and administrative expenses increased to $42.6
million, or 28.6% of net sales in 1995, from $35.8 million, or 29.2% of net
sales, in 1994. This reflected increased incentive and other compensation, costs
associated with the implementation of new information systems, additional
personnel to support the direct dealer network and expanded long distance
operations, and expenses associated with expansion of operations of the
Company's Asian subsidiary.
Interest and other income increased in 1995 principally from the
investment of the funds received from the August 1995 public offering and funds
generated through operating cash flow.
Net income increased 42.1% to $8.5 million, or $.71 per share, in 1995
after a special charge recognized in the second quarter, from $5.9 million, or
$.55 per share, in 1994. Without the special charge, net income would have been
$9.3 million, or $.78 per share, for the year. In addition, net income per share
in 1995 is based on an additional 2 million average shares outstanding in August
1995, reflecting the 1995 public stock offering.
The special charge reflects the costs associated with integrating the
operations of American Telcom Corp. of Georgia, Inc. and Access West, Inc. The
special charge principally includes costs associated with redundancy in
inventories, equipment abandonment, the combination and relocation of business
operations, employee reductions and the write-off of intangible assets.
Year Ended December 31, 1994 Versus Year Ended December 31, 1993
Net sales increased 19.8% to $122.6 million in 1994 from $102.4 million
in 1993. The increase in net sales was primarily attributable to increased sales
of telephone systems through the Company's direct sales offices and its dealer
network. The remaining increases occurred in long distance sales and other
operations. Wholesale shipments to the expanded direct dealer network more than
offset decreased shipments to Premier Telecom. Shipments to this former private
label distributor are no longer significant.
Gross profit increased to $49.1 million, or 40.1% of net sales, in 1994
from $39.6 million, or 38.7% of net sales, in 1993. This increase in gross
margins reflected the transition from Premier and other distributors to the
direct dealer network and the expansion of AXXESS software and systems sales.
Research and development expenses increased to $4.5 million, or 3.7% of
net sales in 1994 from $4.1 million, or 4.0% of net sales, in 1993. These
expenses in both 1994 and 1993 were directed principally to the continued
development of the AXXESS software and systems and voice processing software
applications.
Selling, general and administrative expenses increased to $35.8
million, or 29.2% of net sales in 1994, from $29.0 million, or 28.5% of net
sales, in 1993. This reflected increased incentive and other compensation,
additional personnel to support the direct dealer network, and expenses
associated with the start up of the Company's Asian subsidiary.
Interest and other income increased in 1994 principally from the
investment for a full year of the funds received in the 1993 public offering and
funds generated through operating cash flow.
Net income increased 52.7% to $5.9 million, or $.55 per share, in 1994
from $3.9 million, or $.43 per share, in 1993. Net income per share in 1994 is
based on an additional 1.8 million average shares outstanding in 1994,
reflecting the 1993 public stock offering.
Discontinued Operations
In 1993, the Company sold a facility related to previously discontinued
operations subject to remediation related to fuel tank leakage. The Company had
reserved for such remediation approximately $400,000, which management believes
is adequate to cover such possible costs.
Inflation/Currency Fluctuation
Inflation and currency fluctuations have not previously had a material
impact on Inter-Tel's operations. International procurement agreements have
traditionally been denominated in U.S. currency. Moreover, a significant amount
of contract manufacturing has been or is expected to be moved to domestic
sources. The expansion of international operations in the United Kingdom and
Europe and anticipated increased sales in Japan and Asia and elsewhere could
result in higher international sales as a percentage of total revenues, but
international revenues are currently not significant.
Liquidity and Capital Resources
The Company continues to expand its dealer network, which has required
and is expected to require working capital for increased accounts receivable and
inventories. During 1995, receivables and inventories increased approximately
$17.7 million. This increase was principally funded by operating cash flow and
existing cash balances. The Company also expended approximately $7.9 million
during 1995 for property and equipment, principally relating to the
implementation of the Company's new MIS systems. At December 31, 1995, the
Company had $39.6 million in cash and equivalents, which represents an increase
of approximately $24.0 million from December 31, 1994.
The Company has a loan agreement with Bank One, Arizona, N.A. This
agreement provides for a $5 million, unsecured, revolving line of credit, which
is being used primarily to support international letters of credit to suppliers.
Outstanding balances bear interest at the bank's prime rate. In August 1995, The
Company received approximately $30.7 million from a public offering. The
proceeds were used in 1995 for working capital, capital expenditures and other
general corporate purposes. A portion of the net proceeds may be used to finance
acquisitions of resellers of telephony products, other strategic acquisitions or
corporate alliances. In the fourth quarter of 1993, the Company repaid all long
and short term debt from a portion of the net proceeds received from its 1993
public offering. The remaining proceeds were added to working capital.
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 $37.3 million and $19.9 remain unbilled at December 31, 1995 and 1994,
respectively. The Company is obligated to repurchase such income streams in the
event of defaults by lease customers and, accordingly, maintains reserves based
on 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 realizes 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 provide adequate working capital for the foreseeable future.
However, to the extent that additional funds may be 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 consider
additional financing. There can be no assurance that additional financing will
be available when required or on acceptable terms.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("Statement 121"), which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company will adopt Statement 121 in the first
quarter of 1996 and, based on current circumstances, does not believe the effect
of the adoption will be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Ernst & Young LLP, Independent Auditors
Shareholders and Board of Directors
Inter-Tel, Incorporated
We have audited the accompanying consolidated balance sheets of Inter-Tel,
Incorporated and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Inter-Tel,
Incorporated and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/Ernst & Young LLP
Phoenix, Arizona
March 20, 1996
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
(In thousands)
- --------------------------------------------------------------------------------
1995 1994
ASSETS
CURRENT ASSETS
Cash and equivalents $ 39,577 $ 15,530
Accounts receivable, less allowances of
$1,811 in 1995 and $1,172 in 1994 29,635 16,895
Inventories, less allowances of $1,975 in
1995 and $1,785 in 1994 20,505 15,567
Net investment in sales-leases 3,629 1,613
Prepaid expenses and other assets 4,467 4,176
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 97,813 53,781
PROPERTY, PLANT & EQUIPMENT 11,773 6,008
OTHER ASSETS 8,816 7,629
- --------------------------------------------------------------------------------
$ 118,402 $ 67,418
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 11,167 $ 5,534
Other current liabilities 11,135 11,002
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 22,302 16,536
DEFERRED TAX LIABILITY 7,228 3,057
OTHER LIABILITIES 3,827 2,727
SHAREHOLDERS' EQUITY
Common stock, no par value - authorized
30,000,000 shares, issued and
outstanding -- 12,764,681 shares
in 1995 and 10,658,025 shares in 1994 58,816 27,435
Retained earnings 26,500 18,049
Currency translation adjustment (112) (122)
- --------------------------------------------------------------------------------
85,204 45,362
Less receivable from Employee Stock Ownership Trust (159) (264)
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 85,045 45,098
- --------------------------------------------------------------------------------
$ 118,402 $ 67,418
See accompanying notes.
INTER-TEL, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years
Ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(In thousands, except per share data)
- --------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
NET SALES $ 148,846 $ 122,617 $ 102,377
Cost of sales 87,031 73,482 62,791
- --------------------------------------------------------------------------------
GROSS PROFIT 61,815 49,135 39,586
Research and development 5,764 4,537 4,114
Selling, general and administrative 42,609 35,785 29,032
Special charge 1,315 -- --
- --------------------------------------------------------------------------------
OPERATING INCOME 12,127 8,813 6,440
- --------------------------------------------------------------------------------
Other income 1,674 904 282
Interest expense (101) (120) (445)
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 13,700 9,597 6,277
INCOME TAXES
Current 1,007 2,929 1,279
Deferred 4,242 719 1,102
- --------------------------------------------------------------------------------
5,249 3,648 2,381
NET INCOME $ 8,451 $ 5,949 $ 3,896
- --------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.71 $ 0.55 $ 0.43
- --------------------------------------------------------------------------------
Average number of common
shares outstanding 11,953 10,852 8,982
- --------------------------------------------------------------------------------
See accompanying notes.
INTER-TEL, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY Years Ended December 31, 1995, 1994 and 1993
(In thousands)
- -------------------------------------------------------------------------------------------
Currency Receivable
Common Retained Translation From
Stock Earnings Adjustment ESOP Total
----- -------- ---------- ---- -----
Balance at December 31, 1992 $11,863 $8,204 $(181) $(456) $19,430
Issuance of 1,800,000 shares
of common stock 14,766 14,766
Exercise of stock options 283 283
Tax benefit from stock options 110 110
Stock issued in acquisition 82 82
Net income 3,896 3,896
Loss on currency translation (112) (112)
Collection from ESOP 87 87
- --------------------------------------------------------------------------------------------
Balance at December 31, 1993 27,104 12,100 (293) (369) 38,542
Exercise of stock options 187 187
Tax benefit from stock options 103 103
Stock issued in acquisition 41 41
Net income 5,949 5,949
Gain on currency translation 171 171
Collection from ESOP 105 105
- --------------------------------------------------------------------------------------------
Balance at December 31, 1994 27,435 18,049 (122) (264) 45,098
Issuance of 2,000,000 shares
of common stock 30,670 30,670
Exercise of stock options 503 503
Tax benefit from stock options 208 208
Net income 8,451 8,451
Gain on currency translation 10 10
Collection from ESOP 105 105
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------------------
Balance at December 31, 1995 $58,816 $26,500 $(112) $(159) $85,045
- --------------------------------------------------------------------------------------------
See accompanying notes.
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
(In thousands)
- -------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 8,451 $ 5,949 $ 3,896
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,244 1,647 1,499
Provision for losses on receivables 1,570 936 781
Provision for inventory valuation 595 551 264
Net contribution to ESOP 105 105 87
Increase in other liabilities 1,111 603 1242
(Gain) loss on sale of property and equipment 16 (18) (14)
Deferred income taxes 4,242 719 1,102
Effect of exchange rate changes 10 171 (112)
Changes in operating assets and liabilities (17,575) (5,929) (3,464)
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 769 4,734 5,281
- -------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Additions to property and equipment (7,904) (3,834) (1,080)
Proceeds from sale of property and equipment 9 63 254
Cash used in acquisitions -- (131) (812)
- -------------------------------------------------------------------------------
NET CASH USED IN INVESTING
ACTIVITIES (7,895) (3,902) (1,638)
- -------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from credit line -- -- 81,857
Payments on credit line -- -- (85,681)
Proceeds from new term notes -- -- 110
Payments on long-term debt -- (188) (2,637)
Net proceeds from stock offering 30,670 -- 14,766
Proceeds from exercise of stock options 503 187 283
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 31,173 (1) 8,698
- -------------------------------------------------------------------------------
INCREASE IN CASH AND EQUIVALENTS 24,047 831 12,341
CASH AND EQUIVALENTS AT BEGINNING
OF YEAR 15,530 14,699 2,358
- -------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $ 39,577 $ 15,530 $ 14,699
- -------------------------------------------------------------------------------
See accompanying notes.
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Description of Business: The Company is in the business of developing
and providing telephone systems, voice processing and long distance calling
services to businesses principally throughout the United States, as well as
providing leasing, support and maintenance services through a direct sales and
reseller network.
Principles of Consolidation: The consolidated financial statements
include the accounts of Inter-Tel, Incorporated and all significant subsidiaries
(the Company). Intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Equivalents: Cash and equivalents include all highly liquid
investments with a remaining maturity of three months or less at date of
acquisition. Excess cash and equivalents are primarily invested in mutual funds
comprised of foreign and domestic high quality dollar denominated money market
instruments rated A-1 by Standard & Poor's Ratings Group, or equivalent.
Inventories: Inventories, consisting principally of telephone systems,
computer equipment and related components, are stated at the lower of cost
(first-in, first-out method) or market.
Property, Plant and Equipment: Property, plant and equipment is stated
at cost. Depreciation is computed using the straight-line method over the
estimated useful life of the related property. Leasehold improvements are
depreciated over the shorter of the related lease terms or the estimated useful
lives of the improvements.
Excess of Purchase Price Over Net Assets Acquired: Purchase prices of
acquired businesses that are accounted for as purchases have been allocated to
the assets and liabilities acquired based on the estimated fair market values on
the respective acquisition dates. Based on these values the excess purchase
prices over the fair market value of the net assets acquired are being amortized
over 5 to 40 years. Accumulated amortization through December 31, 1995 was
$485,056.
Sales-Leases: The discounted present values of minimum rental payments
under sales-type leases are recorded as sales, net of provisions for continuing
administration and other expenses over the lease period. The costs of systems
installed under these sales-leases, net of residual values at the end of the
lease periods, are recorded as costs of sales. Gains or losses resulting from
the sale of rental income from such leases are recorded as adjustments to the
original sales amounts.
Income Taxes: Deferred income taxes result from temporary differences
in the recognition of revenues and expenses for financial reporting and income
tax purposes.
Advertising: The cost of advertising is expensed as incurred. The
Company incurred $318,000; $431,000; and $424,000 in advertising costs during
1995, 1994 and 1993, respectively.
Stock Based Compensation: The Company grants stock options for a fixed
number of shares to employees with an exercise price equal to the fair market
value of the shares at the date of grant. The company accounts for stock option
grants in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and accordingly, recognizes no
compensation expense for these stock option grants.
Impact of Recently Issued Accounting Standards: In March 1995, the
Financial Accounting Standards Board issued Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("Statement 121"), which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company will adopt
Statement 121 in the first quarter of 1996 and, based on current circumstances,
does not believe the effect of the adoption will be material.
Use of Estimates: The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Poolings of Interests: The financial statements for periods prior to
1995 have been restated to include the accounts of American Telcom Corp. of
Georgia, Inc. ("American Telcom") and Access West, Inc. ("Access West"). Each
corporation was acquired by the Company in pooling of interests transactions in
May 1995, in which 279,081 shares of Inter-Tel common stock were issued.
American Telcom and Access West did not constitute significant subsidiaries as
defined by the Securities and Exchange Commission. In the consolidated
statements of income, net sales and net income were increased/(decreased) as a
result of the restatement as follows:
(In thousands, except per share amounts) Year ended December 31,
1994 1993
Net sales $10,452 $9,853
Net income (136) (28)
Net income per share $(.03) $(.02)
Total shareholders' equity was decreased by $53,000 as of January 1,
1993 as a result of the restatement. The Company also recorded a special charge
of $1,315,000 in 1995 principally associated with integrating the acquired
companies.
Net Income Per Common Share: Net income per common share is based on
the weighted average number of common shares outstanding during each year and
common stock equivalents.
Reclassifications: Certain reclassifications have been made to the 1994
and 1993 financial statements to conform to the 1995 presentation.
NOTE B -- NET INVESTMENT IN SALES-LEASES
Net investment in sales-leases represents the value of sales-leases
presently held under the Company's Totalease program. The Company currently
sells the rental income from some of the sales-leases. The Company maintains
reserves against potential recourse following the resales based upon loss
experience and past due accounts. Activity during the years was as follows:
(In thousands) Year Ended December 31,
1995 1994 1993
Sales of rental income $25,106 $12,423 $9,586
Sold income remaining
unbilled at end of year 37,256 19,894 11,908
Allowance for uncollectible
minimum lease payments
and recourse liability at
end of year 1,513 1,198 911
The Company does not expect any significant losses from the recourse
provisions related to the sale of rental income. The Company is compensated for
administration and servicing of rental income sold.
NOTE C -- PROPERTY, PLANT & EQUIPMENT
December 31
(In thousands) 1995 1994
Computer systems and equipment $19,189 $11,919
Transportation equipment 1,879 1,932
Furniture and fixtures 2,717 2,393
Leasehold improvements 722 661
Land 130 130
------- ------
24,637 17,035
Less: Accumulated depreciation
and amortization 12,864 11,027
------- ------
$11,773 $6,008
======= ======
NOTE D -- OTHER ASSETS
December 31
(In thousands) 1995 1994
Long-term 8% note receivable
due in 2003 $1,324 $1,351
Net investment in sales-leases 6,108 4,158
Excess of purchase price over net
assets acquired, net 1,217 1,480
Other assets 167 640
------ ------
$8,816 $7,629
====== ======
NOTE E-- OTHER CURRENT LIABILITIES
December 31
(In thousands) 1995 1994
Compensation and employee benefits $5,396 $4,119
Other accrued expenses 3,638 4,726
Deferred revenues 2,101 2,157
------ -------
$11,135 $11,002
======= =======
NOTE F -- CREDIT LINE
The Company maintains a $5,000,000 unsecured bank credit line at prime
rate to cover international letters of credit and for other purposes. The credit
agreement matures in May 1996 and contains certain restrictions and financial
covenants. At December 31, 1995, $58,433 of the credit line was committed under
letter of credit arrangements.
NOTE G -- LEASES
Rental expense amounted to $2,881,592; $2,532,504 and $2,208,639 in
1995, 1994 and 1993 respectively.
Noncancellable operating leases are primarily for buildings. Certain of
the leases contain provisions for renewal options and scheduled rent increases.
At December 31, 1995, future minimum commitments under noncancellable leases,
including a five year lease for its headquarters facility and a 15 year lease
for its distribution and support facility, are: 1996 -- $2,486,605; 1997 --
$2,174,431; 1998 -- $1,925,415; 1999 -- $1,660,867; 2000 -- $1,152,295;
thereafter -- $2,917,836.
NOTE H -- INCOME TAXES
Effective January 1, 1993, the Company adopted Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes" ("Statement
109"). Under Statement 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined (and classified as current or long-term) based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of December
31, are as follows:
(In thousands) 1995 1994
Deferred tax liabilities:
Lease--sales and reserves $8,927 $4,466
Accelerated depreciation 161 29
--- ----
Total deferred tax liabilities 9,088 4,495
----- -----
Deferred tax assets:
Inventory basis differences 1,614 944
Accounts receivable reserves 611 409
Maintenance reserve 316 355
Accrued vacation pay 424 426
Foreign loss carryforwards 546 355
Other -- net 1,011 1,491
----- -----
Deferred tax assets 4,522 3,980
Less valuation reserve 546 355
--- ---
Net deferred tax assets 3,976 3,625
----- -----
Net deferred tax liabilities $5,112 $870
----- ---
During 1995 and 1994, the Company incurred losses of $857,000 and
$834,000 with respect to foreign operations. At December 31, 1995, the Company
had foreign loss carryforwards of approximately $1,600,000 which will begin to
expire in 1999. The valuation allowance increased by $191,000 in 1995 and
$355,000 in 1994 due to increases in foreign loss carryforward benefits.
Federal and state income taxes consisted of the following:
(In thousands) 1995 1994 1993
Federal $4,789 $3,045 $2,164
State 460 603 217
--- --- ---
$5,249 $3,648 $2,381
----- ----- -----
The principal reasons for the difference between total income tax
expense and the amount computed by applying the statutory federal income tax
rate to income before taxes are as follows:
1995 1994 1993
Federal tax at statutory rates
applied to pre-tax income 34% 34% 34%
State tax net of federal benefit 2 3 4
Valuation reserve increase
for foreign losses 2 3 -
Other - net - (2) -
-- -- ---
38% 38% 38%
-- -- --
During 1993, the Company disposed of an investment in a hotel and office complex
which made available related deferred tax benefits of approximately $2.6
million.
NOTE I -- EQUITY TRANSACTIONS
In a public offering in August 1995, the Company sold 2,000,000 shares
of previously unissued common stock. During November and December 1993, the
Company also sold 1,800,000 shares of previously unissued common stock.
Under the Company's Long-Term Incentive Plan, selected officers and key
employees are granted options to purchase common stock of the Company at not
less than fair market value at date of grant. The options are exercisable at the
end of their ten year term, but may become exercisable in annual installments if
predetermined performance goals and share market value increases are met. During
1994, previously granted options to purchase 420,000 shares at prices of $7.50
to $9.25 per share were canceled and options to purchase 605,000 shares were
granted to an expanded group of optionees at the then fair market value of $6.00
per share.
Under other previous stock option plans, directors, officers and key
employees may purchase common stock of the Company at amounts not less than the
fair market value at the date of grant. These options generally have a term of
five to ten years and are exercisable over four to five years commencing one
year from the date of grant.
Option activity for the past three years under all plans is as follows
Number of Shares
1995 1994 1993
Outstanding at beginning of year 824,500 720,250 322,150
Granted 160,512 627,000 598,000
Exercised (108,887) (98,750) (193,400)
Expired or canceled (28,625) (424,000) (6,500)
-------- -------- -------
Outstanding at end of year 847,500 824,500 720,250
------- ------- -------
Exercise price range $1.12-$14.50 $1.12-$9.63 $1.12-$9.25
Exercisable at end of year 167,083 75,000 78,750
At December 31, 1995, the Company has reserved 524,488 shares of Common
Stock for issuance in connection with the stock option plans. In addition, there
is an outstanding warrant for the purchase of 50,000 shares of common stock at
an exercise price of $4.25 per share, which expires September 25, 1997.
NOTE J -- RETIREMENT PLANS
The Company has two retirement plans for the benefit of all of its
employees. Under its 401(k) Retirement Plan, participants may contribute an
amount not exceeding 15 percent of compensation received during participation in
the Plan. The Company makes voluntary annual contributions to the Plan based on
a percentage of contributions made by Plan participants of up to 10 percent of
compensation. Contributions to the Plan totaled $328,000; $248,000 and $196,000
in 1995, 1994 and 1993, respectively.
In 1992, the Company initiated an Employee Stock Ownership Plan (ESOP),
advancing $500,000 to the ESOP Trust for the purpose of purchasing common stock
of the Company. The Trust purchased 153,500 shares of the Company's common stock
in July 1992. The loan is to be repaid over 5 years with 7.5% interest. As the
principal amount of the loan is repaid to the Company through Company annual
contributions, the equivalent number of shares released are allocated to
employees' accounts to be held until retirement. Total shares so allocated were
32,290; 30,037; and 27,942 in 1995, 1994 and 1993, respectively. Contributions
to the ESOP totaled $125,000 each in 1995, 1994 and 1993 and are based upon the
historic cost of the shares purchased by the ESOP.
NOTE K -- FINANCIAL INSTRUMENTS
Concentration of Credit Risk: Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash investments, trade accounts receivable, and net investment
in sales-leases. The Company maintains cash and equivalents not invested in
money market funds with a major bank in its marketplace. The Company performs
periodic evaluations of the relative credit standing of the financial
institution. Concentrations of credit risk with respect to trade accounts
receivable and net investment in sales-leases are limited due to the large
number of entities comprising the Company's customer base.
Fair Value of Financial Instruments: The carrying amount of cash and
equivalents, accounts receivable, net investment in sales-leases, and accounts
payable reported in the consolidated balance sheets approximate their fair
value.
NOTE L -- SUPPLEMENTAL CASH FLOW
(In thousands)
1995 1994 1993
Cash paid for:
Interest $ 101 $120 $445
Income taxes 1,885 1,673 511
----- ------ ---
Changes in operating assets
and liabilities:
Increase in receivables $ (16,325) $ (4,239) $(3,143)
Increase in inventories (5,533) (1,895) (4,172)
(Increase) decrease in prepaid
expenses and other assets (493) 1,131 (909)
(Increase) decrease in long-term
other assets ( 1,676) (2,402) 914
Increase in accounts
payable and other current
liabilities 6,452 1,476 3,846
------- ----- -----
$ (17,575) $ (5,929) $(3,464)
-------- ------- -------
NOTE M -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the quarterly results of operations for the years ended
December 31, 1995 and 1994 follows:
(In thousands, except per share amounts)
1995 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Net sales $34,559 $36,335 $37,760 $40,192
Gross margin 13,953 15,111 15,654 17,097
Net income 1,785 1,324 2,468 2,874
Net income per share $ .16 $ .12 $ .20 $ .22
Average number of
shares outstanding 11,068 11,191 12,295 13,258
1994 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Net sales $28,086 $30,379 $30,237 $33,915
Gross margin 10,693 12,265 11,757 14,420
Net income 1,133 1,517 1,317 1,982
Net income per share $ .10 $ .14 $ .12 $ .18
Average number of
shares outstanding 10,845 10,851 10,820 10,892
1995 and 1994 quarterly results for net income per share, when totaled, do not
equal the net income per share for the years ended December 31, 1995 and 1994,
respectively. The 1995 sum of quarterly results for net income per share total
$.70, although the total net income per share was actually $.71 per share.
Similarly, the 1994 sum of quarterly results for net income per share total
$.54, although the total net income per share was actually $.55 per share.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and the information included therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors and executive officers is
included at the end of Part I, Item 1 on Page 16 of this report
under the caption "Directors and Executive Officers of the
Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
to Pages 7 to 11 of the Company's Proxy Statement relating to its
1996 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference
to Page 6 of the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
The following consolidated financial statements of Inter-Tel,
Incorporated, and subsidiaries, are incorporated by reference to Pages 29 to 42
of this Form 10-K:
Report of Ernst & Young LLP, Independent Auditors
Consolidated balance sheets--December 31, 1995 and 1994
Consolidated statements of income--years ended December 31, 1995,
1994 and 1993
Consolidated statements of shareholders' equity--years ended December
31, 1995, 1994 and 1993
Consolidated statements of cash flows--years ended December 31,
1995, 1994 and 1993
Notes to consolidated financial statements
2. Financial Statement Schedules
The following consolidated financial statement schedule of Inter-Tel,
Incorporated, and subsidiaries is filed as part of this Report and
should be read in conjunction with the Consolidated Financial
Statements of Inter-Tel, Incorporated and subsidiaries, and the notes
thereto.
Schedule for the three years ended December 31, 1995:
Page No.
--------
Schedule II--Valuation and Qualifying Accounts 50
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or notes thereto.
3. Exhibits
3.1(10) Articles of Incorporation, as amended.
3.2(16) By-Laws, as amended.
10.15(1) Registrant's form of standard Distributor Agreement.
10.16(1) Registrant's form of standard Service Agreement.
10.34(2) 1984 Incentive Stock Option Plan and forms of Stock
Option Agreement.
10.35(3) Agreement between Registrant and Samsung Semiconductor
and Telecommunications Company, Ltd. dated October 17,
1984.
10.37(3) Tax Deferred Savings Plan.
10.51(11) 1990 Directors' Stock Option Plan and form of Stock
Option Agreement.
10.52(15) Inter-Tel, Incorporated Long-Term Incentive Plan and
forms of Stock Option Agreements.
10.53(12) Agreement between Registrant and Maxon Systems, Inc.
dated February 27, 1990.
10.54(12) Agreement between Registrant and Varian Tempe
Electronics Center dated February 26, 1991.
10.55(12) Agreement between Registrant and Jetcrown Industrial
Ltd. dated February 18, 1993.
10.56(13) Employee Stock Ownership Plan.
10.57(14) Loan and Security Agreement dated December 16, 1994
between Bank One, Arizona, N.A. and Registrant.
10.58(16) Development, Supply and License Agreement between
Registrant and QUALCOMM dated January 17, 1996.
- ---------------------
(1) Previously filed with Registrant's Registration Statement on Form S-1 (File
No. 2-70437).
(2) Previously filed with Registrant's Registration Statement on Form S-8 (File
No. 2-94805).
(3) Previously filed with Registrant's Annual Report on Form 10-K for the year
ended November 30, 1984 (File No. 0-10211).
(10) Previously filed with Registrant's Annual Report on Form 10-K for the year
ended December 31, 1988 (File No. 0-10211).
(11) Previously filed with Registrant's Registration Statement on Form S-8 (File
No. 33-40353).
(12) Previously filed with Registrant's Registration Statement on Form S-1 (File
No. 33-70054).
(13) Previously filed with Registrant's Registration Statement on Form S-8 (File
No. 33-73620).
(14) Previously filed with Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994 (File No. 0-10211).
(15) Previously filed with Registrant's Proxy Statement dated March 23, 1994.
(16) Filed herewith.
(b) Reports on Form 8-K.
None
(c) Exhibits.
3.2 Amended By-Laws
11.1 Statement re: Computation of Per Share Earnings. (Page 53)
13.0 Annual Report to Security Holders.
22.1 List of Subsidiaries. (Page 52)
23.0 Consent of Independent Auditors. (Page 49)
24.1 Power of Attorney. (Page 48)
10.58 Development, Supply and License Agreement between
Registrant and QUALCOMM dated January 17, 1996.
27 Financial Data Schedule (Page 80)
See Item 14(a) (3) also.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report. See Item 8.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Inter-Tel, Incorporated, has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTER-TEL, INCORPORATED
BY: /S/ Steven G. Mihaylo
-----------------------
Steven G. Mihaylo
Chairman and Chief Executive Officer
Dated: March 29, 1996
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
- ---------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
ADDITIONS
- ---------------------------------------------------------------------------------------
Charged Charged to
Balance at to Other Charged to Balance
Beginning Costs & Accounts Deductions at End of
DESCRIPTION of Period Expenses Describe Describe Period
- ---------------------------------------------------------------------------------------
Year ended December 31, 1995
Deducted from asset accounts:
Allowance for doubtful
accounts (4) $1,172 $797 $71 (3) $229(1) $1,811
----- --- ------ ------ -----
Allowance for lease
accounts $1,198 $780 $(71)(3) $394(1) $1,513
----- --- ------ ------ -----
Inventory allowance (4) $1,785 $595 -- $405(2) $1,975
----- --- ------ -----
Year ended December 31, 1994
Deducted from asset accounts:
Allowance for doubtful
accounts (4) $704 $704 $(105)(3) $131(1) $1,172
--- --- -------- ------ -----
Allowance for lease
accounts $911 $236 $105 (3) $54(1) $1,198
--- --- ------- ----- -----
Inventory allowance (4) $1,237 $551 -- $3(2) $1,785
----- --- ---- -----
Year ended December 31, 1993
Deducted from asset accounts:
Allowance for doubtful
accounts (4) $583 $489 $(125)(3) $243(1) $704
--- --- -------- ------ ---
Allowance for lease
accounts $677 $296 $125 (3) $187(1) $911
--- --- ------- ------ ---
Inventory allowance (4) $980 $264 -- $7(2) $1,237
--- --- ---- -----
- ---------------------------------------------------------------------------------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Inventory written off.
(3) Reclassed between appropriate valuation and qualifying accounts.
(4) Adjusted for poolings of American Telcom Corp. of Georgia, Inc. and Access
West, Inc.