Exhibit 13.0
ANNUAL REPORT TO SECURITY HOLDERS
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, 2002 and 2001, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2002. Our audits also
included the financial statement schedule listed in the Index to consolidated
financial statements and schedule. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As discussed in Note A to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
February 14, 2003
1
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(In thousands, except share amounts)
2002 2001
--------- ---------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 84,923 $ 58,795
Short-term investments 40,916 3,000
--------- ---------
Total cash and short-term investments 125,839 61,795
Accounts receivable, net of allowances of $12,159 in 2002
and $11,858 in 2001 42,566 45,962
Inventories, net of allowances of $10,558 in 2002 and
$13,202 in 2001 11,329 20,848
Net investment in sales-leases, net of allowances of $516 in 2002
and $640 in 2001 13,344 13,799
Income taxes receivable 2,604 3,257
Deferred income taxes 2,377 8,467
Prepaid expenses and other assets 6,705 4,891
--------- ---------
TOTAL CURRENT ASSETS 204,764 159,019
PROPERTY, PLANT & EQUIPMENT 24,795 23,905
GOODWILL 17,646 13,656
PURCHASED INTANGIBLE ASSETS 7,416 5,003
NET INVESTMENT IN SALES-LEASES, net of allowances of $1,411 in
2002 and $1,206 in 2001 24,692 21,735
OTHER ASSETS 2,749 4,144
--------- ---------
$ 282,062 $ 227,462
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 23,089 $ 21,812
Other current liabilities 50,051 44,051
--------- ---------
TOTAL CURRENT LIABILITIES 73,140 65,863
DEFERRED TAX LIABILITY 16,320 17,390
LEASE RECOURSE LIABILITY 11,125 8,890
RESTRUCTURING RESERVE 1,049 3,060
OTHER LIABILITIES 6,525 5,422
SHAREHOLDERS' EQUITY
Common stock, no par value-authorized 100,000,000 shares;
issued - 27,161,823 shares; outstanding - 24,908,983 shares
at December 31, 2002 and 24,166,430 shares at December 31, 2001 111,639 108,968
Less: Shareholder loans (338) (942)
Retained earnings 89,643 54,877
Accumulated other comprehensive income 195 151
--------- ---------
201,139 163,054
Less: Treasury stock at cost - 2,252,840 shares in 2002 and
2,995,393 shares in 2001 (27,236) (36,217)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 173,903 126,837
--------- ---------
$ 282,062 $ 227,462
========= =========
See accompanying notes.
2
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2002, 2001 and 2000
(In thousands, except per share data)
2002 2001 2000
--------- --------- ---------
NET SALES $ 381,456 $ 385,655 $ 402,723
Cost of sales 186,983 211,161 236,046
Cost of sales - Executone restructuring -- -- 7,639
--------- --------- ---------
GROSS PROFIT 194,473 174,494 159,038
Research and development 19,340 17,556 19,489
Selling, general and administrative 128,284 128,604 124,664
Amortization of goodwill -- 1,876 2,228
Amortization of purchased intangible assets 1,122 677 576
In-process research and development -- -- 5,433
Other charges -- 5,357 45,245
--------- --------- ---------
148,746 154,070 197,635
--------- --------- ---------
OPERATING INCOME (LOSS) 45,727 20,424 (38,597)
--------- --------- ---------
Litigation settlement (net of costs except for taxes) 15,516 -- --
Write-down of investment in Inter-Tel.NET/Vianet (1,200) -- --
Equity share of Cirilium Corp.'s net losses -- -- (5,938)
Write-off of Cirilium Corp. investment -- -- (2,045)
Interest and other income 1,936 1,081 1,474
Foreign currency transaction gains (losses) 330 (337) (421)
Interest expense (156) (468) (213)
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 62,153 20,700 (45,740)
INCOME TAXES (BENEFIT)
Current 18,495 (3,647) (9,904)
Deferred 5,021 11,306 (6,913)
--------- --------- ---------
23,516 7,659 (16,817)
--------- --------- ---------
NET INCOME (LOSS) $ 38,637 $ 13,041 $ (28,923)
--------- --------- ---------
NET INCOME (LOSS) PER SHARE
Basic $ 1.58 $ 0.53 $ (1.10)
Diluted $ 1.49 $ 0.52 $ (1.10)
--------- --------- ---------
Weighted average basic common shares 24,444 24,488 26,273
Weighted average diluted common shares 25,864 25,240 26,273
--------- --------- ---------
See accompanying notes.
3
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2002, 2001 and 2000
(in thousands)
Accumulated
Share- Other
Common holder Retained Comprehensive Treasury
Stock Loans Earnings Income (loss) Stock Total
--------- --------- --------- ------------- --------- ---------
BALANCE AT DECEMBER 31, 1999 $ 106,853 $ (1,116) $ 75,835 $ 177 $ (13,628) $ 168,121
Net loss (28,923) (28,923)
Loss on currency translation (457) (457)
---------
Comprehensive loss (29,380)
Stock repurchase (6,711) (6,711)
Exercise of stock options (1,468) 3,496 2,028
Tax benefit from stock options 1,852 1,852
Shareholder loan repayments 98 98
Stock issued under ESPP (293) 1,346 1,053
Issuance of shares in acquisition 427 427
Dividends (1,052) (1,052)
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2000 109,132 (1,018) 44,099 (280) (15,497) 136,436
Net income 13,041 13,041
Gain on currency translation 431 431
---------
Comprehensive income 13,472
Stock repurchase (28,905) (28,905)
Exercise of stock options (509) 1,806 1,297
Tax benefit from stock options 263 263
Shareholder loan repayments 76 76
Stock issued under ESPP (91) 1,057 966
Issuance of treasury shares in
conversion of subsidiary stock (427) (471) 5,322 4,424
Dividends (1,192) (1,192)
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2001 108,968 (942) 54,877 151 (36,217) 126,837
Net income 38,637 38,637
Gain on currency translation 44 44
---------
Comprehensive income 38,681
Stock repurchase (16) 3 (13)
Exercise of stock options (1,626) 8,234 6,608
Tax benefit from stock options 2,671 2,671
Shareholder loan repayments 604 604
Stock issued under ESPP 228 744 972
Dividends (2,457) (2,457)
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2002 $ 111,639 $ (338) $ 89,643 $ 195 $ (27,236) $ 173,903
--------- --------- --------- --------- --------- ---------
See accompanying notes.
4
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
-------- -------- --------
OPERATING ACTIVITIES:
Net income (loss) $ 38,637 $ 13,041 $(28,923)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation of fixed assets 7,310 8,742 9,724
Amortization of goodwill and purchased intangibles 1,122 2,553 2,804
Amortization of patents included in R&D expenses 222 222 218
Non-cash portion of other charges 1,200 5,357 41,783
Provision for losses on receivables 4,177 6,260 6,793
Provision for losses on leases 6,356 5,840 4,927
Provision for inventory valuation 1,526 1,614 1,653
Increase in other liabilities (3,937) (1,289) 4,989
Gain (loss) on sale of property and equipment: 37 (39) 157
Deferred income taxes (benefit) 5,021 11,306 (6,913)
Effect of exchange rate changes 44 431 (457)
Purchased in-process research and development -- -- 5,433
Changes in operating assets and liabilities 15,480 20,968 (24,849)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 77,195 75,006 17,339
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of short-term investments (67,682) (3,000) --
Maturities and sales of short-term investments 29,766 -- --
Additions to property and equipment and equipment held under
lease (7,600) (7,988) (9,719)
Proceeds from sale of property and equipment
and equipment held under lease 328 173 39
Cash received from disposition of business segment -- -- 6,602
Cash used in acquisitions and joint ventures (11,377) (6,789) (2,855)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (56,565) (17,604) (5,933)
-------- -------- --------
FINANCING ACTIVITIES:
Cash dividends paid (2,192) (983) (1,054)
Payments on term debt (481) (1,548) (2,262)
Treasury stock purchases (13) (28,905) (6,711)
Proceeds from term debt -- 3,387 3,319
Proceeds from stock issued under the
Employee Stock Purchase Plan 972 966 1,053
Proceeds from exercise of stock options, including
shareholder loan repayments 7,212 1,373 2,126
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 5,498 (25,710) (3,529)
-------- -------- --------
INCREASE IN CASH AND EQUIVALENTS 26,128 31,692 7,877
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 58,795 27,103 19,226
-------- -------- --------
CASH AND EQUIVALENTS AT END OF YEAR $ 84,923 $ 58,795 $ 27,103
-------- -------- --------
See accompanying notes.
5
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS. Inter-Tel, incorporated in 1969, is a single point
of contact, full service provider of converged voice and data business
communications systems, voice mail systems and networking applications. We
market and sell voice processing and unified messaging software, call accounting
software, Internet Protocol (IP) telephony software, computer-telephone
integration (CTI) applications, local and long distance calling services, and
other communications services. Our products and services include the Axxess by
Inter-Tel, ECLIPSE(2) by Inter-Tel and Encore by Inter-Tel business
communication systems, with integrated voice processing and unified messaging
systems, IP telephony voice and data routers, and e-commerce software. We also
provide maintenance, leasing and support services for our products. Our
customers include business enterprises, government agencies and non-profit
organizations. Our common stock is quoted on the Nasdaq National Market System
under the symbol "INTL."
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Inter-Tel, Incorporated and all significant subsidiaries.
Intercompany accounts and transactions have been eliminated in consolidation.
CASH AND EQUIVALENTS AND SHORT-TERM INVESTMENTS. Cash and equivalents
include all highly liquid investments with a remaining maturity of three months
or less at date of acquisition. 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.
The Company accounts for short-term investments in accordance with
Financial Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company's short-term investments are classified
as available for sale, and have been recorded at fair value, which approximates
cost.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. Additional reserves or allowances for doubtful accounts
are recorded for our sales-type leases, discussed below in "Sales-Leases." We
establish and maintain reserves against estimated losses based upon historical
loss experience, past due accounts and specific account analysis. Management
reviews the level of the allowances for doubtful accounts on a regular basis and
adjusts the level of the allowances as needed. At December 31, 2002, our
allowance for doubtful accounts for accounts receivable were $12.2 million of
our $54.7 million in gross accounts receivable. If the financial condition of
our customers or channel partners were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
INVENTORIES. We value our inventories at the lower of cost or market. Cost
is determined by the first-in, first-out (FIFO) method, including material,
labor and overhead. Significant management judgment is required to determine the
reserve for obsolete or excess inventory. Inventory on hand may exceed future
demand either because the product is outdated, or obsolete, or because the
amount on hand is more than can be used to meet future need, or excess. We
currently consider all inventory that has no activity within one year as well as
any additional specifically identified inventory to be excess. We also provide
for the total value of inventories that we determine to be obsolete based on
criteria such as customer demand, product life-cycles, changing technologies and
market conditions. We write down our excess and obsolete inventory equal to the
difference between the cost of inventory and the estimated market value. At
December 31, 2002, our inventory reserves were $10.6 million of our $21.9
million gross inventories. If actual customer demand, product life-cycles,
changing technologies and market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is stated at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the related real and personal property, which range from 3 years
to 30 years. Leasehold improvements are depreciated over the shorter of the
related lease terms or the estimated useful lives of the improvements. Within
6
the category "computer systems and equipment," including database and enterprise
software, WAN and LAN equipment and software, personal computers, servers and
related software, the range for estimated useful lives is 3 years to 7 years.
GOODWILL AND OTHER INTANGIBLE ASSETS. On January 1, 2002, Inter-Tel adopted
SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. 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 values on the respective acquisition dates. Based on these
values, the excess purchase prices over the fair value of the net assets
acquired were allocated to goodwill.
Prior to January 1, 2002, Inter-Tel amortized goodwill over the useful life
of the underlying asset, not to exceed 40 years. On January 1, 2002, Inter-Tel
began accounting for goodwill under the provisions of SFAS Nos. 141 and 142 and
discontinued the amortization of goodwill. As at December 31, 2002, Inter-Tel
had gross goodwill of $22.7 million and accumulated amortization of $5.0
million. For the year ended December 31, 2002, Inter-Tel did not recognize
amortization expense related to goodwill. Inter-Tel completed two acquisitions
in 2002 and has not recorded any amortization for these acquisitions on amounts
allocated to goodwill in accordance with SFAS No. 141.
In assessing the recoverability of Inter-Tel's goodwill and other
intangibles, Inter-Tel must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets. If
these estimates or their related assumptions change in the future, Inter-Tel may
be required to record impairment charges for these assets not previously
recorded. Some factors considered important which could trigger an impairment
review include significant underperformance relative to expected historical or
projected future operating results, significant changes in the manner of use of
the acquired assets or the strategy for the overall business, Inter-Tel's market
capitalization relative to net book value, and significant negative industry or
economic trends.
The Company has tested goodwill for impairment using the two-step process
prescribed in SFAS No. 142. The first step is a screen for potential impairment,
while the second step measures the amount of the impairment, if any. Inter-Tel
performed the first of the required impairment tests for goodwill as of October
1, 2002 and determined that goodwill is not impaired and it is not necessary to
record any impairment losses related to goodwill and other intangible assets.
Net income, basic earnings per share and diluted earnings per share for
the years ended December 31, 2002, 2001 and 2000, respectively, adjusted to
exclude amortization expense for goodwill, are as follows (net of tax, in
thousands, except per share data):
Year Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
Reported net income $ 38,637 $ 13,041 $ (28,923)
Add back: goodwill amortization -- 694 819
---------- ---------- ----------
Adjusted net income $ 38,637 $ 13,735 $ (28,104)
========== ========== ==========
Reported earnings per share - basic $ 1.58 $ 0.53 $ (1.10)
Add back: goodwill amortization -- 0.03 0.03
---------- ---------- ----------
Adjusted earnings per share - basic $ 1.58 $ 0.56 $ (1.07)
========== ========== ==========
Reported earnings per share - diluted $ 1.49 $ 0.52 $ (1.10)
Add back: goodwill amortization -- 0.03 0.03
---------- ---------- ----------
Adjusted earnings per share - diluted $ 1.49 $ 0.54 $ (1.07)
========== ========== ==========
At December 31, 2002, goodwill, net of accumulated amortization, totaled
$17.7 million. Other acquisition-related intangibles, net of accumulated
amortization, totaled $7.4 million at December 31, 2002. Accumulated
amortization through December 31, 2002 was $9.0 million. This amount includes
$5.0 million of amortization of goodwill and $4.0 million of amortization of
other acquisition-related intangibles. Other acquisition-related intangibles,
comprised primarily of developed technology, customer lists and non-competition
agreements, are amortized on a straight-line basis over periods ranging from
5-17 years. See Note G to Consolidated Financial Statements for additional
information.
7
SALES-LEASES. For our sales-type lease accounting, we follow the guidance
provided by FASB Statement No. 13, Accounting for Leases and FASB Statement No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - A Replacement of FASB Statement No. 125. We
record the discounted present values of minimum rental payments under sales-type
leases as sales, net of provisions for continuing administration and other
expenses over the lease period. We record the lease sales at the time of system
sale and installation pursuant to Staff Accounting Bulletin No. 101, as
discussed above for sales to end user customers, and upon receipt of the
executed lease documents. 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. The net rental streams are sold to funding sources
on a regular basis with the income streams discounted by prevailing like-term
rates at the time of sale. Gains or losses resulting from the sale of net rental
payments from such leases are recorded as net sales. We establish and maintain
reserves against potential recourse following the resales based upon historical
loss experience, past due accounts and specific account analysis. The allowance
for uncollectible minimum lease payments and recourse liability at the end of
the year represent reserves against the entire lease portfolio. Management
reviews the adequacy of the allowance on a regular basis and adjusts the
allowance as required. These reserves are either netted in the accounts
receivable, current and long-term components of "Net investments in
Sales-Leases" on the balance sheet, or included in long-term liabilities on our
balance sheet for off-balance sheet leases.
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. We incurred
$443,000; $596,000; and $513,000 in advertising costs during 2002, 2001, and
2000, respectively.
REVENUE RECOGNITION. We recognize revenue pursuant to Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements." Accordingly,
revenue is recognized when all four of the following criteria are met: (i)
persuasive evidence that arrangement exists; (ii) delivery of the products
and/or services has occurred; (iii) the selling price is both fixed and
determinable and; (iv) collectibility is reasonably probable. Revenue derived
from sales of systems and services to end-user customers is recognized upon
installation of the systems and performance of the services, respectively,
allowing for use by our customers of these systems. Pre-payments for
communications services are deferred and recognized as revenue as the
communications services are provided.
For shipments to dealers and other distributors, our revenues are recorded
as products are shipped and services are rendered, because the sales process is
complete. These shipments are primarily to third-party dealers and distributors
and title passes when goods are shipped (free-on-board shipping point). Long
distance services revenues are recognized as service is provided.
SHIPPING AND HANDLING COSTS. EITF 00-10 "Accounting for Shipping and
Handling Fees and Costs," addresses the accounting for shipping and handling
fees and costs. Our policy is primarily not to bill customers for shipping
costs, unless the customer requests priority shipping. Any amounts billed are
recorded net in cost of goods sold. Billed shipping and handling costs in 2002
represented less than $1.1 million, or 0.3% of net sales, and are not a
significant component of our operations.
STOCK BASED COMPENSATION. We grant stock options for a fixed number of
shares to employees and directors with an exercise price equal to the fair
market value of the shares at the date of grant. We account for such stock
option grants using the intrinsic-value method of accounting in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB 25") and related Interpretations. Under APB 25, we generally
recognize no compensation expense with respect to such awards. Also, we do not
record any compensation expense in connection with our Employee Stock Purchase
Plan as long as the purchase price is not less than 85% of the fair market value
at the beginning or end of each offering period, whichever is lower.
The pro forma impact on net income and net income per share as if the fair
value of stock-based compensation plans had been recorded as a component of
compensation expense in the consolidated financial statements as of the date of
grant of awards related to such plans, pursuant to the provisions of the
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" and Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure an
amendment of FASB Statement No. 123," is disclosed as follows and in Note M.
8
Years Ended December 31,
--------------------------------------
(in thousands, except per share data) 2002 2001 2000
---------- ---------- ----------
Net income (loss), as reported $ 38,637 $ 13,041 $ (28,923)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (3,062) (2,446) (1,557)
---------- ---------- ----------
Pro forma net income (loss) $ 35,575 $ 10,595 $ (30,480)
========== ========== ==========
Earnings per share:
Basic - as reported $ 1.58 $ 0.53 $ (1.10)
Basic - pro forma $ 1.46 $ 0.43 $ (1.16)
Diluted - as reported $ 1.49 $ 0.52 $ (1.10)
Diluted - pro forma $ 1.38 $ 0.42 $ (1.16)
Pro forma results disclosed are based on the provisions of SFAS 123 using
the Black-Scholes option valuation model and are not likely to be representative
of the effects on pro forma net income for future years. In addition, the
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
our stock options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in our opinion, the estimating models
do not necessarily provide a reliable single measure of the fair value of our
stock options. See Note M for further discussion of the Company's stock-based
employee compensation.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS. For our foreign operations,
the local currency is the functional currency. All assets and liabilities are
translated at period-end exchange rates and all income statement amounts are
translated at an average of month-end rates. Adjustments resulting from this
translation are recorded in accumulated other comprehensive income. Foreign
currency transaction gains and losses also result from transactions denominated
in a currency other than U.S. dollars; gains and losses resulting from
remeasuring monetary assets and liability accounts that are denominated in
currencies other than a subsidiary's functional currency are included in other
income under the caption "Foreign currency transaction gains (losses)."
CONTINGENCIES. We are a party to various claims and litigation in the
normal course of business. Management's current estimated range of liability
related to various claims and pending litigation is based on claims for which
our management can estimate the amount and range of loss. Because of the
uncertainties related to both the amount and range of loss on the remaining
pending claims and litigation, management is unable to make a reasonable
estimate of the liability that could result from an unfavorable outcome. As
additional information becomes available, we will assess the potential liability
related to our pending litigation and revise our estimates. Such revisions in
our estimates of the potential liability could materially impact our results of
operations and financial position.
Divisions of the United States Department of Justice are investigating
other companies' and Inter-Tel's participation in a federally-funded "E-Rate
program" to connect schools and libraries to the Internet. The Justice
Department has not provided Inter-Tel with a description of the evidence on
which the investigations are based. Inter-Tel is presently unable to predict or
determine the final outcome of, or to estimate the potential range of loss (if
any) with respect to, the investigations. If Inter-Tel is convicted of any crime
or subjected to sanctions, or if penalties, damages or other monetary remedies
are assessed against Inter-Tel in connection with any investigations, our
business and operating results could be materially and adversely affected. Based
upon the information known at this time, we do not expect the investigations to
result in a material adverse impact upon the Company's business or financial
condition. Nevertheless, the early nature of the investigations makes it
difficult to determine whether the likelihood of a material adverse outcome is
unlikely.
9
USE OF ESTIMATES. The preparation of the consolidated financial statements
in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
RECLASSIFICATIONS. Certain reclassifications have been made to the 2001 and
2000 financial statements to conform to the 2002 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment or
Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and
the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations" for a disposal of a segment of a business. SFAS No. 144
was effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged. The Company's adoption of SFAS No. 144 had no effect on
the Company's financial position or results of operation.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
supersedes Emerging Issues Task Force ("EITF") No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 eliminates
the provisions of EITF No. 94-3 that required a liability to be recognized for
certain exit or disposal activities at the date an entity committed to an exit
plan. SFAS No. 146 requires a liability for costs associated with an exit or
disposal activity to be recognized when the liability is incurred. SFAS No. 146
is effective for exit or disposal activities that are initiated after December
31, 2002. The Company does not expect the adoption of this statement to have a
material impact on its results of operations or financial position.
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation -- Transition and Disclosure."
SFAS No. 148 amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition to SFAS No. 123's
fair value method of accounting for stock-based employee compensation. Statement
148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No.
28, "Interim Financial Reporting," to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. While SFAS No.
148 does not amend SFAS No. 123 to require companies to account for employee
stock options using the fair value method, the disclosure provisions of SFAS No.
148 are applicable to all companies with stock-based employee compensation,
regardless of whether they account for that compensation using the fair value
method of SFAS No. 123 or the intrinsic value method of APB Opinion No. 25. As
allowed by SFAS No. 123, the Company has elected to continue to utilize the
accounting method prescribed by APB Opinion No. 25 and has adopted the
disclosure requirements of SFAS No. 123 as of December 31, 2002. We do not
expect the adoption of this statement to have an impact on its results of
operations or financial position.
NOTE B - ACQUISITIONS, DISPOSITIONS AND RESTRUCTURING CHARGES
MCLEOD. On January 24, 2002, we acquired certain assets of McLeodUSA
Integrated Business Systems, Inc. ("McLeod") for cash plus the assumption of
various specific liabilities and related acquisition costs. Inter-Tel acquired
McLeod's voice customer base in Minnesota, Iowa and Colorado and DataNet
operations in South Dakota, which also included the related accounts receivable,
inventory and fixed assets along with assumption of scheduled specific
liabilities for warranty and maintenance obligations. The aggregate purchase
price of $7.9 million was allocated to the fair value of the assets and
liabilities acquired.
We recorded goodwill of approximately $4.0 million and other purchased
intangible assets of $0.5 million, for a total of $4.5 million, in connection
with the McLeod acquisition. The goodwill balance will be accounted for in
accordance with SFAS 141 and 142. The balances included in the $0.5 million in
other purchased intangible assets will be amortized over periods ranging from
two to five years from the date of the acquisition. During the year ended
10
December 31, 2002, the amortization of purchased intangible assets from McLeod
was approximately $138,000.
SWAN. On December 3, 2002, Inter-Tel Integrated Systems, Inc., our
wholly-owned subsidiary, acquired 100% of the capital stock of Swan Solutions
Limited (Swan) in England and Wales, for $4.0 million in cash. $3.0 million was
paid at closing, $250,000 is payable in six months and $250,000 is payable one
year from closing date. The remaining $500,000 is subject to the achievement of
five performance milestones at $100,000 each. As of March 10, 2003, the first of
the $100,000 milestones was achieved and paid to the Swan shareholders. Payments
relating to the achievement of performance milestones will be charged to
expense, in the period earned, if applicable. The Company recorded amortizable
intangible technology assets totaling $3.4 million in connection with this
acquisition. These technology assets are being amortized over 5 years.
CONVERGENT. On January 26, 2001, Inter-Tel Technologies, Inc., our
wholly-owned subsidiary, acquired certain assets of Convergent Communications
Services, Inc. (Convergent) for cash plus the assumption of various specific
liabilities and related acquisition costs. The Company acquired segments of the
voice customer base, accounts receivable, specified inventory and fixed assets,
and assumed liabilities for warranty, maintenance and specified leased premises
costs.
The adjusted purchase price paid by us in the Convergent transaction
included cash of $3.9 million plus assumption of specific liabilities totaling
$6.3 million. The final purchase price was adjusted pursuant to a settlement
agreement with Convergent representatives which specified the return of $6.7
million to Inter-Tel, representing funds from escrow and other amounts owed to
Inter-Tel by Convergent that were previously set aside by the bankruptcy court,
as well as adjustments for assets to be acquired and liabilities to be assumed.
The settlement payments only required adjustments or reallocations based on the
specified assets acquired and liabilities assumed in connection with the
purchase, and differences have been represented as adjustments to the net assets
acquired. The Company recorded goodwill of $880,000 and other intangible assets
of $120,000 in connection with this acquisition. Goodwill and intangibles were
amortized through December 31, 2001. The net goodwill balance of $810,000 as of
December 31, 2001 will no longer be amortized, but accounted for in accordance
with SFAS 141 and 142. The net balance of $98,000 in other intangible assets
will continue to be amortized for five years from the date of the acquisition.
MASTERMIND. On October 19, 2001, Inter-Tel Integrated Systems, Inc., our
wholly-owned subsidiary, acquired certain of the assets and assumed certain
stated liabilities from MasterMind Technologies, Inc. (MasterMind), for $2.0
million. $1.79 million was paid at or before closing with the balance placed
into a bonus pool with earn-out provisions for MasterMind shareholders and
employees based on performance parameters. The portion relating to employees who
have joined Inter-Tel will be charged to expenses. The Company recorded
amortizable intangible technology assets totaling $1.4 million in connection
with this acquisition. These technology assets are being amortized over 5 years.
Each of the acquisitions discussed above were not material business
acquisitions either individually or collectively and have been accounted for
using the purchase method of accounting. The results of operations of each of
these acquisitions have been included in our accompanying consolidated
statements of operations from the date of acquisitions.
INTER-TEL.NET/COMM-SERVICES/VIANET. During the second quarter of 2000,
Inter-Tel recorded a pre-tax charge associated with Inter-Tel.NET operations of
$2.0 million ($1.2 million after-tax), related to the write-down to net
realizable value of network equipment and lease termination costs of certain
redundant facilities. The reserves established at the time of the write-down
have been fully utilized as of December 31, 2001.
On July 24, 2001, Inter-Tel sold 83% of the stock of Inter-Tel.NET, Inc. to
Comm-Services Corporation for a note of $4.95 million, collateralized by
Comm-Services stock, other marketable securities of the shareholders of
Comm-Services and 100% of the net assets of Inter-Tel.NET. In connection with
the sale of 83% of Inter-Tel.NET, we assessed the fair value of the remaining
17% investment in Inter-Tel.NET. Pursuant to SFAS 121, we recorded a charge as
11
of the close of the second quarter of 2001 of $5.4 million ($3.4 million after
tax) associated with the impairment of our investment in Inter-Tel.NET. After
the impairment charge, the carrying value of our investment (the note receivable
from Vianet plus the 17% ownership interest in Vianet) totaled $3.7 million as
of December 31, 2001. The charge was primarily non-cash.
Inter-Tel's management has not participated in the management of
Inter-Tel.NET since the sale in July 2001. As a result, since July 24, 2001, we
have accounted for the remaining Inter-Tel.NET/Comm-Services investment using
the cost method of accounting. On December 30, 2001, Comm-Services entered into
a merger agreement with Vianet. Inter-Tel's 17% investment in Comm-Services was
converted to approximately 10% of Vianet stock and as a result, the loan for the
purchase was assumed by Vianet and Inter-Tel continued to hold collateral from
the former shareholders of Comm-Services until March 2003. During 2002, the net
investment in the notes receivable and 10% interest in Vianet (formerly
Comm-Services) was written down by $1.2 million and was recorded in other assets
at a carrying value of approximately $2.5 million as of December 31, 2002, which
approximated management's estimate of the related collateral value at that time.
During 1999, 2000 and 2001, Inter-Tel.NET entered into operating lease
agreements totaling approximately $6.5 million from an equipment vendor for
network equipment and software. The lease agreements required Inter-Tel.NET to
purchase vendor maintenance on their products. Inter-Tel originally guaranteed
the indebtedness. In February 2003, we executed an agreement with Vianet and
this vendor releasing Inter-Tel from its guarantee of any and all of these
obligations, and Inter-Tel and Vianet released the vendor from claims arising
from the failure of the network equipment and software previously leased. As
part of this agreement, Inter-Tel also received payment from the Vianet
shareholders of $1.45 million, in exchange for the release of the remaining
collateral and as payment of the loan. Inter-Tel also retained a collateral
interest in a Vianet shareholder's variable forward option contract that matures
in July 2003 for an amount up to $250,000. We have not recorded an asset for
this right as the amount is not guaranteed or reasonably estimable based on the
fluctuations of future stock prices. The value received in this transaction was
equivalent to our remaining investment value, less accruals for potential
obligations to the vendor discussed above.
Inter-Tel also retains its ownership interest in Vianet and will account
for the remaining investment interest of approximately 10% in Vianet using the
cost method of accounting.
EXECUTONE. On January 1, 2000 Inter-Tel purchased certain computer
telephony assets and assumed certain liabilities of Executone Information
Systems, Inc. (Executone). The Executone transaction was accounted for using the
purchase method of accounting. The aggregate purchase price was allocated to the
fair value of the assets and liabilities acquired, of which $5.4 million ($3.4
million after taxes) was written-off as purchased in-process research and
development. In connection with the Executone acquisition, we sold Executone's
manufacturing assets and liabilities to Varian of Tempe, Arizona at a net book
value of $6.6 million.
During the second quarter of 2000, we decided to close the primary
Executone facility in Milford, Connecticut and to recognize a restructuring
charge related to our exit plan and closure of the Executone operations. We have
accounted for the restructuring of the Executone operations, including severance
and related costs, the shut down and consolidation of the Milford facility and
the impairment of assets associated with the restructuring. We finalized our
plan for the exiting of activities and the involuntary termination or relocation
of the employees. Accrued costs associated with this plan were estimates,
although the original estimates made for the second quarter of 2000 for reserve
balances have not changed significantly as of December 31, 2002.
Exit costs associated with the closure of the Milford facility also
included liabilities for building, furniture and equipment lease, and other
contractual obligations. We are liable for the lease on the Milford buildings
through January 2005. Various other furniture, computer and equipment leases
terminated on varying dates through September 2002. To date, we have entered
into sublease agreements with third parties to sublease portions of the
facility. The reserve for lease and other contractual obligations is identified
in the table below.
The total restructuring charge from this event totaled $50.9 million. The
following tables summarize details of the restructuring charge in connection
with the Executone acquisition, including the description of the type and amount
of liabilities assumed, and activity in the reserve balances from the date of
the charge through December 31, 2002. Activity represents payments made or
amounts written off.
RESERVE
CASH/ RESTRUCTURING 2000 2001 2002 BALANCE
DESCRIPTION NON-CASH CHARGE ACTIVITY ACTIVITY ACTIVITY AT 12/31/02
----------- -------- -------- -------- -------- -------- -----------
(In thousands)
PERSONNEL COSTS:
Severance and termination Costs Cash $ (1,583) $ 1,558 $ 2 $ 20 $ (3)
Other Plant closure costs Cash (230) 30 200 -- --
LEASE TERMINATION AND OTHER
CONTRACTUAL OBLIGATIONS
(NET OF ANTICIPATED RECOVERY):
Building and equipment Leases Cash (7,444) 1,348 1,489 2,594 (2,013
Other contractual obligations Cash (1,700) -- 1,700 -- --
IMPAIRMENT OF ASSETS:
Inventories Non-Cash (3,454) 1,376 209 1,869 --
Prepaid inventory and other Expenses Non-Cash (2,485) 2,485 -- --
Accounts receivable Non-Cash (1,685) 521 245 88 (831)
Fixed assets Non-Cash (3,151) 2,942 -- 53 (156)
Net intangible assets Non-Cash (29,184) 29,184 -- -- --
-------- -------- -------- -------- --------
TOTAL $(50,916) $ 39,444 $ 3,845 $ 4,624 $ (3,003)
======== ======== ======== ======== ========
Included in the total Executone restructuring costs of $50.9 million is a $43.3
million restructuring charge for exit costs and asset impairment, and $7.6
million associated with the impairment of inventories, which has accordingly
been recorded as additional costs of sales.
NOTE C - PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE
During the first quarter of 2000, Inter-Tel completed the acquisition of
Executone (see NOTE B). The aggregate purchase price of the Executone
acquisition was allocated to the fair value of the assets and liabilities
acquired, of which $5.4 million ($3.4 million after taxes), or $0.13 per diluted
share, was written-off as purchased in-process research and development.
NOTE D - SHORT-TERM INVESTMENTS
The Company accounts for short-term investments in accordance with
Financial Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company's short-term investments are all
classified as available for sale, and have been recorded at fair value, which
approximates cost. At December 31, 2002 and December 31, 2001, $40.9 million and
$3.0 million, respectively, were recorded as short-term investments. Short-term
investments include certificates of deposit, auction rate certificates, auction
rate preferred securities, municipal preferred securities and mutual funds. The
auction rate securities are adjustable-rate securities with dividend rates that
are reset periodically by bidders through periodic "Dutch auctions" generally
conducted every 7 to 49 days by a trust company or broker/dealer on behalf of
the issuer. The Company believes these securities are highly liquid investments
through the related auctions; however, the collateralizing securities have
stated terms of up to thirty (30) years. These instruments are rated A or higher
by Standard & Poor's Ratings Group, or equivalent.
12
The Company's short-term investments are intended to establish a
high-quality portfolio that preserves principal, meets liquidity needs, avoids
inappropriate concentrations and delivers an appropriate yield in relationship
to the Company's investment guidelines and market conditions.
The following is a summary of available-for-sale securities:
December 31, 2002
---------------------------------------------
(in thousands) Gross Gross
Unrealized Unrealized Gross Fair
Cost Gains Losses Value
------- ------- ------- -------
Equity securities $27,900 $ -- $ -- $27,900
Municipal bonds and notes 7,875 -- -- 7,875
Certificate of deposit 5,000 -- -- 5,000
Mutual funds 141 -- -- 141
------- ------- ------- -------
$40,916 $ -- $ -- $40,916
======= ======= ======= =======
December 31, 2001
---------------------------------------------
(in thousands) Gross Gross
Unrealized Unrealized Gross Fair
Cost Gains Losses Value
------- ------- ------- -------
Equity securities $ 3,000 $ -- $ -- $ 3,000
Municipal bonds and notes -- -- -- --
Mutual funds -- -- -- --
-- -- -- --
------- ------- ------- -------
$ 3,000 $ -- $ -- $ 3,000
======= ======= ======= =======
The amortized cost and estimated fair value of the available-for-sale debt
securities at December 31, 2002, by maturity, are shown below. Expected
maturities will differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations without prepayment
penalties, and the Company views its available-for-sale securities as available
for current operations. Equity securities and mutual funds do not have stated
maturities and are therefore excluded from the table below. In addition,
although the debt securities have stated maturities of more than ten years,
these securities are highly liquid and are traded in "Dutch auctions" as
described above.
December 31, 2002
--------------------
(in thousands)
Estimated
Available-for-sale Description Cost Fair Value
------------------ ----------- ------- ----------
Due in less than one year Certificate of deposit $ 5,000 $ 5,000
Due from one to ten years None -- --
Due after ten years Debt securities 7,875 7,875
------- -------
$12,875 $12,875
======= =======
NOTE E - NET INVESTMENT IN SALES-LEASES
Net investment in sales-leases represents the value of sales-leases
presently held under our Total Solution program. We currently sell the rental
payments due to us from some of the sales-leases. We maintain reserves against
our estimate of potential recourse for the balance of sales-leases and for the
balance of sold rental payments remaining unbilled. The following table provides
detail on the total net balances in sales-leases (In thousands):
13
December 31
------------------------------
2002 2001 2000
-------- -------- --------
Lease balances included in consolidated accounts receivable,
net of allowances of $2,562 in 2002; $3,112 in 2001; and
$2,227 in 2000 $ 6,470 $ 7,924 $ 7,935
Net investment in Sales-Leases:
Current portion, net of allowances of $516 in 2002,
$640 in 2001; and $582 in 2000 13,344 13,799 14,629
Long-term portion, includes residual amounts of
$518 in 2002, $907 in 2001 and $807 in 2000,
net of allowances of $1,411 in 2002; $1,206 in
2001; and $921 in 2000 24,692 21,735 22,808
-------- -------- --------
Total investment in Sales-Leases, net of allowances
of $4,489 in 2002; $4,958 in 2001; and $3,730 in 2000 44,506 43,458 45,372
Soldrental payments remaining unbilled (subject to limited
recourse provisions), net of allowances of $11,125 in 2002;
$8,890 in 2001; and $7,697 in 2000 194,684 193,825 190,664
-------- -------- --------
Total balance of sales-leases and sold rental payments
remaining unbilled, net of allowances $239,190 $237,283 $236,036
======== ======== ========
Total allowances for entire lease portfolio (including
limited recourse liabilities) $ 15,614 $ 13,848 $ 11,427
======== ======== ========
Reserve levels are established based on portfolio size, loss experience,
levels of past due accounts and periodic, detailed reviews of the portfolio.
Recourse on the sold rental payments is contractually limited to a percentage of
the net credit losses in a given annual period as compared to the beginning
portfolio balance for a specific portfolio of sold leases. While our recourse is
limited, we maintain reserves at a level sufficient to cover all anticipated
credit losses. The aggregate reserve for uncollectible lease payments and
recourse liability represents the reserve for the entire lease portfolio. These
reserves are either netted from consolidated accounts receivable, netted against
current or long-term "investment in sales-leases" or included in long-term
liabilities for sold rental payments remaining unbilled. Sales of rental
payments per period:
Year Ended December 31
------------------------------
(In thousands) 2002 2001 2000
-------- -------- --------
Sales of rental payments $ 83,141 $ 86,788 $ 95,127
Sold payments remaining unbilled
at end of year $205,809 $202,715 $198,361
Sales of rental payments represents the gross selling price or total
present value of the payment stream on the sale of the rental payments to third
parties. Sold payments remaining unbilled at the end of the year represents the
total balance of leases that are not included in our balance sheet. We do not
expect to incur any significant losses in excess of reserves from the recourse
provisions related to the sale of rental payments. Inter-Tel is compensated for
administration and servicing of rental payments sold.
At December 31, 2002, future minimum lease payments related to the sold
rental streams remaining unbilled are: 2003 -- $68.9 million, 2004 -- $56.8
million, 2005 -- $42.1 million, 2006 - $27.6 million, thereafter -- $10.4
million.
At December 31, 2002, future minimum lease receipts due from customers
related to the lease portfolio included in our December 31, 2002 balance sheet
are: 2003 -- $14.3 million, 2004 -- $15.7 million, 2005 -- $4.2 million, 2006 -
$2.6 million, 2007 -- $1.6 million, thereafter - $1.1 million.
14
NOTE F - PROPERTY, PLANT & EQUIPMENT
December 31
-----------------
(In thousands) 2002 2001
------- -------
Computer systems, data processing and other
office equipment $40,089 $44,025
Transportation equipment 2,328 2,872
Furniture and fixtures 4,942 5,056
Leasehold improvements 4,215 3,770
Building 7,297 7,297
Land 2,499 2,629
------- -------
61,370 65,649
Less: Accumulated depreciation and amortization 36,575 41,744
------- -------
Net property, plant & equipment $24,795 $23,905
------- -------
NOTE G - GOODWILL AND PURCHASED INTANGIBLE ASSETS
December 31
-----------------
(In thousands) 2002 2001
------- -------
Goodwill $22,671 $18,681
Less: Accumulated amortization 5,025 5,025
------- -------
Net Goodwill 17,646 13,656
Purchased intangible assets:
Acquired developed technology 9,065 5,786
Customer lists and non-competition agreements 2,319 1,841
------- -------
11,384 7,627
Less: Accumulated amortization 3,968 2,624
------- -------
Net purchased intangible assets 7,416 5,003
------- -------
Net goodwill and purchased intangible assets $25,062 $18,659
------- -------
NOTE H - OTHER ASSETS
December 31
-----------------
(In thousands) 2002 2001
------- -------
Note receivable and investment in Vianet
(formerly Inter-Tel.Net) $ 2,500 $ 3,669
Other assets 249 475
------- -------
$ 2,749 $ 4,144
------- -------
Refer to Notes B and T to Consolidated Financial Statements for additional
information regarding our investment in Vianet and a subsequent event related to
this investment.
NOTE I - OTHER CURRENT LIABILITIES
December 31
-----------------
(In thousands) 2002 2001
------- -------
Compensation and employee benefits $18,325 $12,947
Customer deposits 5,331 5,251
Restructuring Charge 955 1,389
Deferred revenues 7,324 6,445
Miscellaneous taxes payable 2,569 3,934
Other accrued expenses 15,547 14,085
------- -------
$50,051 $44,051
------- -------
15
NOTE J - CREDIT LINE
We maintain a $10 million unsecured bank credit line at prime rate to cover
international letters of credit and for other purposes. The credit agreement
matures June 1, 2003 and contains certain restrictions and financial covenants.
At December 31, 2002, $544,841 of the credit line was committed under letter of
credit arrangements.
NOTE K - LEASES
Rental expense amounted to $9,800,000; $9,679,000; and $8,818,000 in 2002,
2001, and 2000, respectively. Noncancellable operating leases are primarily for
buildings. Certain of the leases contain provisions for renewal options and
scheduled rent increases. At December 31, 2002, future minimum commitments under
noncancellable leases, including our new headquarters facility and a 15 year
lease for our research and development facility and 63 month lease for our
distribution and support facility, are as follows: 2003 -- $9,390,000; 2004 --
$9,000,000; 2005 -- $4,939,000; 2006 - $3,185,000; 2007 -- $1,957,000 thereafter
- - $348,000.
NOTE L - INCOME TAXES
We account for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 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.
Significant components of our deferred tax liabilities and assets as of
December 31 are as follows:
December 31
(in thousands) -----------------
2002 2001
------- -------
Deferred tax liabilities:
Other $ 4,929 $ 4,944
Lease--sales and capitalized costs 36,739 32,027
------- -------
Total deferred tax liabilities 41,668 36,971
------- -------
Deferred tax assets:
Inventory basis differences 1,224 3,285
Accounts receivable reserves 4,244 2,789
Accrued vacation pay 1,524 1,223
Book over tax depreciation 277 771
Foreign loss carryforwards 537 956
In-process R&D write-off 5,949 6,581
Restructuring reserves 2,227 3,036
Lease receivable reserves 4,766 3,995
Other - net 7,510 6,226
------- -------
Deferred tax assets 28,258 28,862
Less valuation reserve 537 814
------- -------
Net deferred tax assets 27,721 28,048
------- -------
Net deferred tax liabilities $13,943 $ 8,923
------- -------
During 2002, 2001 and 2000, we recorded income of $295,000, a loss of
$437,000, and income of $226,000, respectively, from foreign operations. At
December 31, 2002, we had foreign loss carryforwards of approximately
$1,342,000, a portion of which began to expire in 2002. The valuation allowance
in 2002 decreased by $277,000 and $544,000 in 2001 due to expiration of foreign
loss carryforwards.
16
Federal and state income taxes (benefit) consisted of the following:
(In thousands) 2002 2001 2000
-------- -------- --------
Federal $ 20,206 $ 5,076 $(15,101)
State 2,584 2,583 (1,716)
Foreign 726 -- --
-------- -------- --------
$ 23,516 $ 7,659 $(16,817)
-------- -------- --------
The principal reasons for the difference between total income tax expense
(benefit) and the amount computed by applying the statutory federal income tax
rate to income before taxes are as follows:
2002 2001 2000
-------- -------- --------
Federal tax at statutory rates
Applied to pre-tax income 35% 35% (35)%
State tax net of federal benefit 2 5 (4)
Credit for research activities (1) (5) --
Other - net 2 2 2
---- ---- ----
38% 37% (37)%
---- ---- ----
NOTE M - EQUITY TRANSACTIONS
TREASURY STOCK. During the first quarter of 2001, we initiated a stock
repurchase program under which the Board of Directors authorized the repurchase
of up to 4,000,000 shares of our Common Stock. During the third quarter of 2000,
we initiated a stock repurchase program under which the Board of Directors
authorized the repurchase of up to 2,000,000 shares of Inter-Tel Common Stock.
Under these authorizations, we did not repurchase shares during 2002, other than
$13,000 expended to repurchase shares for cash pay-outs to former employees in
place of ESOP share distributions. During 2001, we purchased approximately
2,523,000 shares and expended approximately $28.9 million for stock repurchases,
which was funded primarily through existing cash balances. We also expended
approximately $6.7 million for repurchases of approximately 562,000 shares of
Inter-Tel's Common Stock during 2000, which was funded primarily through
existing cash balances. We reissued approximately 743,000, 671,000 and 379,000
shares in 2002, 2001 and 2000, respectively, through stock option and employee
stock purchase plan exercises and issuances, and stock issued in conversion of
subsidiary stock through an acquisition. The proceeds received for the stock
reissued were less than our total cost basis. Accordingly, the difference was
recorded as a reduction to retained earnings.
DIVIDEND POLICY. From December 31, 1997 through the third quarter of 2001,
we paid quarterly cash dividends (the "cash dividend") of $0.01 for every share
of Common Stock, to shareholders of record. We have made quarterly cash dividend
payments for each quarter since the dividend was declared in September 1997,
with dividend payments commencing on or about 15 days after the end of each
fiscal quarter. On October 23, 2001, our Board of Directors increased the cash
dividend from $0.01 to $0.02 for every share of Common Stock, payable quarterly
to shareholders of record beginning December 31, 2001. On July 16, 2002, our
Board of Directors increased the cash dividend from $0.02 to $0.03 for every
share of Common Stock, payable quarterly to shareholders of record beginning
September 30, 2002. Prior to the cash dividend, we had declared no cash
dividends on our Common Stock since incorporation.
STOCK OPTION PLANS. In July 1990, we adopted the Director Stock Option Plan
("the Director Plan") and reserved a total of 500,000 shares of Common Stock for
issuance thereunder. Commencing with the adoption of the Plan through 2001, each
Eligible Director received a one-time automatic grant of an option to purchase
5,000 shares of our Common Stock. In addition, through 2001 each Eligible
Director was granted an option to purchase 5,000 shares upon the date five (5)
days after such person became Director, and an additional option to purchase
5,000 shares five (5) days after the date of the regularly scheduled board
meeting following the close of our third quarter. All options granted through
2001 had a five-year term and fully vested at the end of six months from the
grant date.
17
In July 2001, as approved by shareholders at the annual shareholders'
meeting in April 2002, the board of directors extended the term of the Director
Plan to 2010. Our shareholders also approved amendments to change the date of
the annual grant to directors under the Director Plan to five (5) business days
after the re-election of directors at the annual meeting of shareholders,
increased the initial automatic option grant and each annual option grant from
5,000 to 7,500 shares. The term of options granted under the Director Plan was
also increased from five (5) years to ten (10) years. These amendments did not
increase the number of shares authorized for the Director Plan. In each
instance, Director Plan options must be granted at not less than 100% of the
fair market value of our stock at the dates of grant.
In November 1993, the Board of Directors authorized the Inter-Tel,
Incorporated Long-Term Incentive Plan ("the 1994 Long Term Plan"). A total of
2,000,000 shares of Common Stock has been reserved for issuance under the 1994
Long Term Plan to selected officers and key employees. Options must be granted
at not less than 100% of the fair market value of our stock at the dates of
grant. Options generally vest over four or five years and expire five to ten
years from the date of grant.
In February 1997, the Board of Directors authorized the Inter-Tel,
Incorporated 1997 Long-Term Incentive Plan ("the 1997 Long Term Plan"). A total
of 2,400,000 shares of Common Stock has been reserved for issuance under the
1997 Long Term Plan to selected officers and key employees. Option must be
granted at not less than 100% of the fair market value of our stock at the dates
of grant. Options generally vest over four or five years and expire ten years
from the date of grant. In March 2000, the Board of Directors authorized an
amendment to the 1997 Long Term Plan to add 1,250,000 more shares of Common
Stock to the 1997 Long Term Plan for issuance to selected officers and key
employees and to limit our ability to reprice options under the 1997 Long Term
Plan.
On February 27, 2001 our Board of Directors authorized an amendment to the
1997 Long Term Plan, approved by the stockholders, that provides for an
automatic increase in the number of shares of Common Stock reserved thereunder
on the first day of each fiscal year equal to the lesser of (a) 2.5% of the
outstanding shares on that date, (b) 750,000 shares (subject to appropriate
adjustment for all stock splits, dividends, subdivisions, combinations,
recapitalizations and like transactions) or (c) a lesser amount as determined by
the Board of Directors (the "Renewal Feature"). For 2002, based on shares
outstanding at January 1, 2002 and as approved by the Board of Directors in
February 2002, this renewal feature provided for an increase of 604,161 shares
for issuance under the 1997 Long Term Plan. For 2003, based on shares
outstanding at January 1, 2003 and as approved by the Board of Directors in
February 2003, this renewal feature provided for an increase of 622,725 shares
for issuance under the 1997 Long Term Plan.
Under the 1994 and 1997 Long Term Plans, in some instances, predetermined
share market value increases must be met to allow acceleration of option vesting
provisions before the end of the option term.
In April 1998, the Board of Directors authorized the Inter-Tel,
Incorporated Acquisition Stock Option Plan (the Acquisition Plan). A total of
82,428 shares of Common Stock was reserved for issuance under the Acquisition
Plan to selected key employees hired as a result of the acquisition of TMSI. New
options must be granted at not less than 100% of the fair market value of our
stock at the dates of grant. Options generally vest over four or five years and
expire ten years from the date of grant. A portion of the options granted were
replacements for options held to purchase shares of stock of the selling
company; such replacement grants retained the original terms, including grant
dates for vesting purposes and the original grant prices, adjusted using the
applicable conversion ratio of the fair value of Inter-Tel's stock compared to
that of the selling company.
In March 2000, the Board of Directors authorized an additional 216,000
shares of Common Stock for issuance under the Acquisition Plan to selected
employees hired as a result of the acquisition of selected assets of Executone.
In February 2001, the Board of Directors authorized an additional 300,000 shares
of Common Stock for issuance under the Acquisition Plan to selected employees
hired as a result of the acquisition of selected assets of Convergent. In
addition, in October 2001, the Board of Directors authorized an additional
150,000 shares of Common Stock for issuance under the Acquisition Plan to
selected employees hired as a result of the acquisition of Mastermind
Technologies. Options in each instance must be granted at not less than 100% of
the fair market value of our stock at the dates of grant. Options vest over five
years and expire ten years from the date of grant.
18
Option activity for the past three years under all plans is as follows:
Number of Shares
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Outstanding at beginning of year 4,567,945 3,143,292 2,486,696
Granted 608,000 2,007,500 1,213,500
Exercised (710,304) (210,633) (279,654)
Expired or canceled (277,000) (372,214) (277,250)
---------- ---------- ----------
Outstanding at end of year 4,188,641 4,567,945 3,143,292
---------- ---------- ----------
Exercisable at end of year 1,628,533 1,458,388 1,188,356
Weighted-average grant price of
options granted $ 13.40 $ 12.26 $ 13.65
Weighted-average fair value (FAS 123)
of options granted during the year $ 9.32 $ 6.42 $ 6.83
At December 31, 2002, we have reserved 4,815,292 shares of Common Stock for
issuance in connection with the stock option plans.
As permitted under Statement of Financial Accounting Standards No. 123 (FAS
123) "Accounting for Stock-Based Compensation," we have elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations, in accounting for stock based awards to
employees. Under APB 25, we generally recognize no compensation expense with
respect to such awards.
The following table summarizes information about stock options outstanding
at December 31, 2002:
OPTIONS OUTSTANDING
Number Weighted-Average Weighted
Range of Outstanding Remaining Average
Exercise Price at 12-31-02 Contractual Life Exercise Price
-------------- ----------- ---------------- --------------
$ 2.24 - $ 4.31 138,179 2 years $ 3.00
$ 4.81 - $ 7.06 146,400 4 years $ 5.77
$ 7.25 - $13.44 2,487,020 7 years $10.36
$15.13 - $43.44 1,417,042 8 years $20.53
OPTIONS EXERCISABLE
Number Weighted-Average Weighted
Range of Outstanding Remaining Average
Exercise Price at 12-31-02 Contractual Life Exercise Price
-------------- ----------- ---------------- --------------
$ 2.24 - $ 4.31 138,179 2 years $ 3.00
$ 4.81 - $ 7.06 146,400 4 years $ 5.77
$ 7.25 - $13.44 835,040 7 years $10.13
$15.13 - $43.44 508,914 8 years $21.79
During 2002, the weighted average exercise price of options granted,
exercised, and expired or canceled was $19.18, $10.33 and $15.33, respectively.
Pro forma information regarding net income and net income per share, as
disclosed in Note A, has been determined as if the Company had accounted for its
employee stock-based compensation plans under the fair value method of SFAS No.
123.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model using the low end of reasonable assumptions
for input variables rather than attempting to identify a best-point estimate.
19
The option pricing model utilized the following weighted average assumptions for
2002, 2001 and 2000, respectively: risk free interest rates of 2.73% for 2002,
4.5% for 2001 and 5.5% for 2000; dividend yields of .75% for 2002, .50% for 2001
and .25% for 2000; volatility factors of the expected market price of our stock
averaged .576 for 2002, .766 for 2001 and .30 for 2000; and a weighted average
expected life of the option of 4 to 5 years for employee stock options which
vest over four to five year periods with a weighted average vesting period of
2.5 years and 1.5 years for director options which vest at the end of six months
from the grant date.
1997 EMPLOYEE STOCK PURCHASE PLAN. In April 1997, the Board of Directors
and stockholders adopted the Employee Stock Purchase Plan (the Purchase Plan)
and reserved 500,000 shares for issuance to eligible employees. In April 2002,
the Board of Directors and stockholders approved an amendment to the Plan to
increase the number of authorized shares by 500,000 shares for a total of
1,000,000 authorized thereunder. Under the Purchase Plan, employees are granted
the right to purchase shares of Common Stock at a price per share that is 85% of
the lesser of the fair market value of the shares at: (i) the participant's
entry date into each six-month offering period, or (ii) the end of each
six-month offering period. Employees may designate up to 10% of their
compensation for the purchase of stock. Under the Plan, we sold 61,562 shares
for approximately $972,000 ($15.80 per share) to employees in 2002, 108,742
shares for approximately $966,000 ($8.89 per share) to employees in 2001, and
105,944 shares for approximately $1,053,000 ($9.94 per share) to employees in
2000. At December 31, 2002, 574,649 shares remained authorized under the Plan.
STOCK OPTION LOANS. During 1999, selected officers and employees of
Inter-Tel were offered loans to acquire Inter-Tel common stock. Promissory Notes
were established to cover the cost of exercise of stock options, including
applicable taxes, or the cost of Inter-Tel common stock purchased in the open
market during May and June of 1999. The loans are interest-only notes with
balloon payments due on or before March 15, 2004. The loans bear interest at the
mid-term applicable federal interest rate, compounded annually. Interest
payments are due on or before March 15 of each anniversary beginning on March
15, 2000. The notes are full recourse loans and we retain the common stock
certificates as collateral. Several of the loans have been paid in full and
loans to only two officers remain outstanding. The outstanding balance of the
remaining loans at December 31, 2002 totaled $338,253.
NOTE N - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
(In thousands, except per share amounts) 2002 2001 2000
-------- -------- --------
Numerator:
Net income (loss) $ 38,637 $ 13,041 $(28,923)
-------- -------- --------
Denominator:
Denominator for basic earnings per
Share - weighted average shares 24,444 24,488 26,273
Effect of dilutive securities:
Employee and director stock options 1,420 752 --
-------- -------- --------
Denominator for diluted earnings per
Share - adjusted weighted average
shares and assumed conversions 25,864 25,240 26,273
-------- -------- --------
Basic income (loss) per share $ 1.58 $ 0.53 $ (1.10)
-------- -------- --------
Diluted income (loss) per share $ 1.49 $ 0.52 $ (1.10)
-------- -------- --------
In 2002, 2001 and 2000, options to purchase 280,580, 577,800 and 2,489,354
shares, respectively, of Inter-Tel stock were excluded from the calculation of
diluted net earnings per share because the exercise price of these options was
greater than the average market price of the common shares for the respective
fiscal years, and therefore the effect would have been antidilutive.
Additionally, in fiscal 2000, diluted loss per share included only
weighted-average shares outstanding as the inclusion of 689,000 additional
potential common stock equivalents would have been antidilutive since Inter-Tel
incurred a net loss for that period.
20
NOTE O - RETIREMENT PLANS
We have two retirement plans for the benefit of our employees. Under our
401(k) Retirement Plan, participants may contribute on an annual basis up to the
maximum amount allowed by the Internal Revenue Service. We make voluntary annual
contributions to the Plan of 50% of contributions made by Plan participants of
up to 6 percent of each participant's compensation. Our matching contributions
to the Plan totaled $1,567,000; $1,476,000; and $1,381,000; in 2002, 2001 and
2000, respectively.
In 1992, we 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 307,000 shares of Inter-Tel Common Stock in July
1992. The loan was paid in full during 1997. As the principal amount of the loan
was repaid to Inter-Tel through Company annual contributions, the equivalent
number of shares released were allocated to employees' accounts to be held until
retirement. Total shares so allocated were 32,380 in 1997. Contributions to the
ESOP totaled $62,500 in 1997, and were based upon the historic cost of the
shares purchased by the ESOP. After the final allocation of shares in 1997, the
ESOP plan was "frozen," so that all eligible participants as of July 1, 1997
became 100% vested in their accounts, regardless of length of service. No
further purchases are anticipated through the ESOP, and we do not anticipate
making future allocations of shares from this plan. In October 2002, our Board
of Directors authorized the termination of this plan, allowing one-time rollover
contributions to be made to participants in our 401(k) Retirement Plan, other
qualified plans or as early taxable distributions. We expect that the Plan
assets will be distributed in their entirety during 2003, as allowed pursuant to
a favorable determination letter that was issued by the Internal Revenue Service
on January 16, 2003.
NOTE P - SEGMENT INFORMATION
Inter-Tel adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in the fiscal year ended December 31, 1998. SFAS 131 establishes standards
for reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions as
to how to allocate resources and assess performance. The Company's chief
decision maker, as defined under SFAS 131, is the Chief Executive Officer.
Prior to 2000, we had viewed our operations as principally one segment:
telephone systems, telecommunications software and hardware, and related long
distance calling services. These services are provided through the Company's
direct sales offices and dealer network to business customers throughout the
United States, Europe, Asia, Mexico and South America. As a result, financial
information disclosed previously represented substantially all of the financial
information related to the Company's principal operating segment.
During 2000, the operations of Executone were identified separately in the
first and second quarters of 2000. Beginning in the 3rd quarter and directly as
a result of the charge and reorganization associated with the Executone
operations, we no longer account for or directly report the Executone operations
on a stand-alone basis. The operations have been integrated with the Company's
existing wholesale, and national and government account, operations.
In December 1999, Inter-Tel entered into an agreement with Hypercom
Corporation to jointly form Cirilium Corporation ("Cirilium"). Cirilium
comprises parts of Hypercom's data and Inter-Tel's packet telephony products and
services, including Inter-Tel's Vocal'Net gateway products and technology. As of
the close of the third quarter of 2000, we wrote off our remaining investment
and basis in Cirilium of $2.0 million. Total pre-tax losses from Cirilium from
all sources were $8.6 million ($0.21 per diluted share) during 2000. As a result
of the write-off, we do not expect to report the operations of Cirilium as a
separate business segment. Refer to the table below for a summary of the
operations for 2000.
During 2000, we determined that the operations of Inter-Tel.NET,
Inter-Tel's former IP long distance subsidiary, would be separately disclosed as
a business segment. The operations represented a more significant component of
21
the consolidated operations in 2000 compared to prior years and had a
significant impact on the revenues and net losses. On July 24, 2001, Inter-Tel
agreed to sell 83% of Inter-Tel.NET to Comm-Services Corporation. As a result,
since July 24, 2001, we have accounted for the remaining 17%
Inter-Tel.NET/Comm-Services investment using the cost method of accounting. On
December 30, 2001, Comm-Services entered into a merger agreement with Vianet.
Inter-Tel's 17% investment in Inter-Tel.NET/Comm-Services was converted to
approximately 10% of Vianet stock. Inter-Tel will account for the remaining 10%
investment in Vianet using the cost method of accounting.
Commencing the third quarter of 2001, we began disclosing as a separate
business segment operating results relating to local and long distance resale
services. Inter-Tel offers these services to its customers as part of a total
telephony solution approach. Results of operations for this segment, if the
operations were not included as part of the consolidated group, could differ
materially, as the operations are integral to the total telephony solution
offered by us to our customers.
For the years ended December 31, we generated income from business
segments, including charges, as follows:
RESALE OF
LOCAL AND
SUBTOTAL LONG
(In thousands, except per PRINCIPAL LITIGATION PRINCIPAL INTER-TEL.NET DISTANCE
share amounts) SEGMENT SETTLEMENT SEGMENT /VIANET SERVICES TOTAL
--------- --------- --------- --------- --------- ---------
2002
- ----
Net sales $ 351,414 $ -- $ 351,414 $ -- $ 30,042 $ 381,456
Gross profit 185,847 -- 185,847 -- 8,626 194,473
Operating income 41,837 -- 41,837 -- 3,890 45,727
Interest and other income 1,772 15,516 17,288 (1,200) 164 16,252
Gain on foreign currency transactions 330 -- 330 -- -- 330
Interest expense (155) -- (155) -- (1) (156)
Net income (loss) $ 27,371 $ 9,492 $ 36,863 $ (746) $ 2,520 $ 38,637
Net income (loss) per diluted share (1) $ 1.06 $ 0.37 $ 1.43 $ (0.03) $ 0.10 $ 1.49
Weighted average diluted shares (1) 25,864 25,864 25,864 24,444 25,864 25,864
Total assets $ 266,015 $ -- $ 266,015 $ -- $ 16,047 $ 282,062
Depreciation and amortization 8,574 -- 8,574 -- 80 8,654
RESALE OF
LOCAL AND
LONG
(In thousands, except per PRINCIPAL INTER-TEL.NET DISTANCE
share amounts) SEGMENT /VIANET SERVICES TOTAL
--------- --------- --------- ---------
2001
- ----
Net sales $ 346,094 $ 13,986 $ 25,575 $ 385,655
Gross profit (loss) 173,823 (5,892) 6,563 174,494
Charge (see Note B) -- (5,357) -- (5,357)
Operating income (loss) 30,911 (13,718) 3,231 20,424
Interest and other income 970 (1) 112 1,081
Loss on foreign currency transactions (337) -- -- (337)
Interest expense (293) (173) (2) (468)
Net income (loss) $ 19,688 $ (8,752) $ 2,105 $ 13,041
Net income (loss) per diluted share (1) $ 0.78 $ (0.36) $ 0.08 $ 0.52
Weighted average diluted shares (1) 25,240 24,488 25,240 25,240
Total assets $ 215,340 $ -- $ 12,122 $ 227,462
Depreciation and amortization 9,367 1,994 156 11,517
22
RESALE OF
LOCAL AND
EXECUTONE LONG
(In thousands, except per PRINCIPAL (CHARGES DISTANCE
share amounts) SEGMENT ONLY) CIRILIUM INTER-TEL.NET SERVICES TOTAL
--------- --------- --------- ------------- --------- ---------
2000
- ----
Net sales $ 353,313 $ -- $ -- $ 22,834 $ 26,576 $ 402,723
Cost of goods sold - Executone restructuring -- (7,639) -- -- -- (7,639)
Gross profit (loss) 173,328 (7,639) -- (11,212) 4,561 159,038
Charges and write-off of IPRD
(see Notes B and C) -- (48,710) -- (1,968) -- (50,678)
Operating income (loss) 37,546 (56,349) (574) (19,087) (133) (38,597)
Equity share of Cirilium losses -- -- (5,938) -- -- (5,938)
Write-off of Cirilium investment -- -- (2,045) -- -- (2,045)
Interest and other income 1,423 -- -- 2 49 1,474
Loss on foreign translation adjustments (421) -- -- -- -- (421)
Interest expense (128) -- -- (85) -- (213)
Net income (loss) $ 24,294 $ (35,631) $ (5,411) $ (12,122) $ (53) $ (28,923)
Net income (loss) per diluted share (1) $ 0.90 $ (1.36) $ (0.21) $ (0.46) $ (0.00) $ (1.10)
Weighted average diluted shares (1) 26,962 26,273 26,273 26,273 26,273 26,273
Depreciation and amortization 10,664 -- -- 1,878 204 12,746
(1) Options that are antidilutive because the exercise price was greater than
the average market price of the common shares are not included in the
computation of diluted earnings per share when a net loss is recorded. See
Note M for additional information.
Our revenues are generated predominantly in the United States. Total
revenues generated from U.S. customers totaled $371.3 million, $375.6 million,
and $392.1 million, of total revenues for the years ended December 31, 2002,
2001 and 2000, respectively. Revenues from international sources were primarily
generated from customers located in the United Kingdom, Europe, Asia, Mexico and
South America. In 2002, 2001 and 2000, revenues from customers located
internationally accounted for 2.7%, 2.6%, and 2.6% of total revenues,
respectively.
NOTE Q - FINANCIAL INSTRUMENTS
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially
subject Inter-Tel to significant concentrations of credit risk consist
principally of cash investments, trade accounts receivable, and net investment
in sales-leases. We maintain cash and equivalents not invested in money market
funds with a major bank in our marketplace. We perform 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 our
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.
23
NOTE R - SUPPLEMENTAL CASH FLOW
(In thousands) 2002 2001 2000
-------- -------- --------
CASH PAID FOR:
Interest $ 156 $ 468 $ 213
Income taxes paid (received) $ 15,424 $(11,398) $ 4,788
-------- -------- --------
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(Increase) decrease in receivables and current net
investment in sales-leases $ 1,907 $ 7,556 $ (3,857)
(Increase) decrease in inventories 9,759 14,647 (15,034)
(Increase) decrease in prepaid expenses and
other assets 1,577 15,620 (20,640)
(Increase) decrease in long-term net investment in
sales-leases and other assets (3,448) 927 14,224
Increase (decrease) in accounts payable and other
current liabilities 5,685 (17,782) 458
-------- -------- --------
$ 15,480 $ 20,968 $(24,849)
-------- -------- --------
NOTE S - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the quarterly results of operations for the years ended
December 31, 2002 and 2001 follows:
(In thousands, except per share amounts)
2002 1ST QTR 2ND QTR 3RD QTR 4TH QTR
---- -------- -------- -------- --------
Net sales $ 90,070 $ 95,948 $ 96,665 $ 98,774
Gross profit 45,054 48,475 49,050 51,895
Net income 15,395 7,035 7,543 8,664
Net income per share--Basic $ 0.64 $ 0.29 $ 0.31 $ 0.35
Net income per share--Diluted $ 0.60 $ 0.28 $ 0.29 $ 0.33
Weighted average basic common shares 24,179 24,270 24,544 24,783
Weighted average diluted common shares 25,550 25,562 26,033 26,307
2001 1ST QTR 2ND QTR 3RD QTR 4TH QTR
---- -------- -------- -------- --------
Net sales $ 93,702 $103,835 $ 93,487 $ 94,630
Gross profit 39,648 44,920 43,276 46,650
Net income 1,948 185 4,378 6,531
Net income per share--Basic $ 0.08 $ 0.01 $ 0.18 $ 0.27
Net income per share--Diluted $ 0.08 $ 0.01 $ 0.18 $ 0.26
Weighted average basic common shares 25,500 24,389 23,949 24,116
Weighted average diluted common shares 25,843 24,910 24,804 25,334
NOTE T - SUBSEQUENT EVENT
In February 2003, we executed an agreement with Vianet (See Note B) and the
vendor releasing Inter-Tel from its guarantee of any and all of these
obligations, and Inter-Tel and Vianet released the vendor from claims arising
from the failure of the network equipment and software previously leased. As
part of this agreement, Inter-Tel also received payment from the Vianet
shareholders of $1.45 million, in exchange for the release of the remaining
collateral and as payment of the loan. Inter-Tel also retained a collateral
interest in a Vianet shareholder's variable forward option contract that matures
in July 2003 for an amount up to $250,000. We have not recorded an asset for
this right as the amount is not guaranteed or reasonably estimable based on the
fluctuations of future stock prices. The value received in this transaction was
equivalent to our remaining investment value, less accruals for potential
obligations to the vendor discussed above.
Inter-Tel also retains its ownership interest in Vianet and will account
for the remaining investment interest of approximately 10% in Vianet using the
cost method of accounting.
24