UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File Number:
September 30, 1995 0-10211
INTER-TEL, INCORPORATED
Incorporated in the State of Arizona I.R.S. No. 86-0220994
7300 West Boston Street
Chandler, Arizona 85226-3224
(602) 961-9000
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Common Stock
(12,760,681 shares outstanding as of September 30, 1995)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
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INDEX
INTER-TEL, INCORPORATED AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--September 30, 3
1995 and December 31, 1994
Condensed consolidated statements of income--three 4
and nine months ended September 30, 1995 and
September 30, 1994
Condensed consolidated statements of cash flows 5
--three and nine months ended September 30, 1995 and
September 30, 1994
Notes to condensed consolidated financial 6
statements--September 30, 1995
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II. OTHER INFORMATION 12
SIGNATURES 13
EXHIBIT 11.1 14
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (1)
(In thousands) September 30, December 31,
1995 1994
----------------------------
ASSETS
CURRENT ASSETS
Cash $ 38,452 $ 15,530
Accounts receivable - net 23,583 16,895
Inventories 20,711 15,567
Net investment in sales-leases 3,744 1,613
Prepaid expenses and other assets 3,532 4,176
--------- ---------
TOTAL CURRENT ASSETS 90,022 53,781
PROPERTY & EQUIPMENT 10,209 6,008
OTHER ASSETS 8,860 7,629
--------- ---------
$ 109,091 $ 67,418
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,699 $ 5,534
Other current liabilities 12,256 11,002
--------- ---------
TOTAL CURRENT LIABILITIES 18,955 16,536
OTHER LIABILITIES 8,173 5,784
SHAREHOLDERS' EQUITY
Common stock 58,567 27,435
Retained earnings 23,626 18,049
Equity adjustment for foreign currency
translation (45) (122)
--------- ---------
82,148 45,362
Less receivable from Employee Stock
Ownership Trust (185) (264)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 81,963 45,098
--------- ---------
$ 109,091 $ 67,418
========= =========
(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.
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (1)
(In thousands except Three Months Nine Months
per share amounts) Ended September 30, Ended September 30,
1995 1994 1995 1994
NET SALES $ 37,760 $ 30,237 $ 108,654 $ 88,702
Cost of sales 22,106 18,481 63,936 53,989
--------- --------- --------- ---------
GROSS PROFIT 15,654 11,757 44,718 34,714
--------- --------- --------- ---------
Research & development 1,488 1,127 4,368 3,262
Selling, general and administrative 10,675 8,726 31,017 25,495
Special charge -- -- 1,315 (2) --
--------- --------- --------- ---------
12,163 9,853 36,700 28,757
--------- --------- --------- ---------
OPERATING INCOME 3,491 1,904 8,018 (2) 5,957
Interest and other income 499 256 1,064 541
Interest expense (14) (34) (91) (96)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 3,976 2,126 8,991 (2) 6,402
INCOME TAXES 1,508 810 3,414 2,435
--------- --------- --------- ---------
NET INCOME $ 2,468 $ 1,317 $ 5,577 (2) $ 3,967
========= ========= ========= =========
NET INCOME PER SHARE $ 0.20 $ 0.12 $ 0.48 (2) $ 0.37
========= ========= ========= =========
Average number of common
shares outstanding 12,295 10,820 11,518 10,839
========= ========= ========= =========
(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 $9.3 million and net income of
approximately $6.4 million, or $.55 per share, in the nine months ended
September 30, 1995.
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
(In thousands) 1995 1994 1995 1994
---- ---- ---- ----
OPERATING ACTIVITIES
NET INCOME $ 2,468 $ 1,317 $ 5,577 $ 3,967
Adjustments to reflect operating activities:
Depreciation and amortization 583 608 1,691 1,377
Changes in operating assets and liabilities (5,471) (531) (13,157) (5,174)
Other 1,561 975 3,562 2,252
-------- -------- -------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (859) 2,369 (2,327) 2,422
INVESTING ACTIVITIES
Proceeds from disposal of property
and equipment 5 16 6 21
Additions to property and equipment (1,891) (1,600) (5,889) (2,603)
-------- -------- -------- --------
NET CASH USED IN INVESTING
ACTIVITIES (1,886) (1,584) (5,883) (2,582)
FINANCING ACTIVITIES
Net proceeds from sale of common stock 30,664 0 30,664 0
Proceeds from exercise of stock options 163 43 468 163
-------- -------- -------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 30,827 43 31,132 163
-------- -------- -------- --------
INCREASE IN CASH 28,082 828 22,922 3
CASH AT BEGINNING OF PERIOD 10,370 13,874 15,530 14,699
-------- -------- -------- --------
CASH AT END OF PERIOD $ 38,452 $ 14,702 $ 38,452 $ 14,702
======== ======== ======== ========
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1995
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the results for the interim periods presented have been included. Operating
results for the three and nine months ended September 30, 1995 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1995. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
l0-K for the year ended December 31, 1994.
NOTE B--INCOME PER SHARE
Primary income per share is based on the weighted average number of common
shares outstanding during each year and common stock equivalents.
NOTE C--RESTATEMENT FOR POOLING OF INTERESTS
The financial statements for all prior periods have been restated to include the
accounts of American Telcom Corp. of Georgia, Inc. ("American Telcom") and
Access West, Inc., ("Access West") which were acquired by the Company in
separate pooling of interests transactions in May 1995, in which 279,081 total
shares of Inter-Tel Common Stock were issued. Neither American Telcom nor Access
West constituted a significant subsidiary as defined under the regulations. In
the statements of income for the nine months ended September 30, 1994 net sales
increased by $8,724,000 and net income decreased by $102,000 as a result of the
restatement. The restatement reduced earnings per share by $.02 per share for
the nine months ended September 30, 1994. In the statements of income for the
three months ended March 31, 1995 net sales and net income increased by
$3,905,000 and $26,000, respectively, as a result of the restatement. The
restatement did not affect earnings per share for the period.
NOTE D - SPECIAL CHARGE
Year-to-date net income includes a special charge reflecting the costs
associated with integrating the operations of American Telcom and Access West.
The special charge, taken during the second quarter of 1995, 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.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results Of Operations
Net sales for the third quarter of 1995 increased by $7.5 million or
24.9% over the same quarter of 1994. The increase was primarily attributable to
increased shipments through the Company's direct dealer network and long
distance operations. For the nine months ended September 30, 1995, net sales
increased by $20.0 million or 22.5% over net sales for the nine months ended
September 30, 1994. For these periods, the increases were primarily attributable
to increased shipments of AXXESS systems and software products through the
Company's dealer network and direct sales offices, and an increase in sales of
long distance services.
Percentages to net sales for other operating accounts were as follows:
Three Months Nine months
Ended September 30, Ended September 30,
1995 1994 1995 1994
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 58.5 61.1 58.8 60.9
----- ----- ----- -----
Gross profit 41.5 38.9 41.2 39.1
Research and
development 3.9 3.7 4.0 3.7
Selling, general
and administrative 28.3 28.9 28.5 28.7
Special charge -- -- 1.2 --
----- ----- ----- -----
Operating income 9.3 6.3 7.4 6.7
Interest and other
income 1.3 0.8 1.0 0.6
Interest expense 0.0 0.1 0.1 0.1
Income taxes 4.0 2.7 3.1 2.7
----- ----- ----- -----
Net income 6.6 4.4 5.2 4.5
----- ----- ----- -----
Gross profit for the third quarter of 1995 increased 33.2% to $15.7
million from $11.8 million of the third quarter of 1994. Gross profit increased
to $44.7 million, or 41.2% of net sales, in the first nine months of 1995 from
$34.7 million, or 39.1% of net sales, in the first nine months of 1994. Gross
margin increased during both periods primarily as a result of a higher
percentage of sales derived from AXXESS systems and software, which was offset
in part by a higher percentage of sales through dealers and increased sales of
the company's long distance services.
Research and development expenses for the third quarter of 1995
increased to $1.5 million from $1.1 million for the third quarter of 1994.
Research and development expenses increased to $4.4 million, or 4.0% of net
sales, in the first nine months of 1995 from $3.3 million, or 3.7% of net sales,
in the first nine months of 1994. This increase in both comparable periods was
primarily attributable to expenses relating to the introduction of new products,
including the AXXESS version 3.0, the Inter-Tel Axxent and AxxessoryTalk version
3.0. The Company expects that research and development expenses will continue to
increase in absolute dollars as the Company continues to develop new and enhance
existing technologies and products. These expenses may vary, however, as a
percentage of net sales.
Selling, general and administrative expenses for the third quarter of
1995 increased 22.3% to $10.7 million from $8.7 million for the third quarter of
1994. Selling, general and administrative expenses increased to $31.0 million,
or 28.5% of net sales, in the first nine months of 1995 from $25.5 million, or
28.7% of net sales, in the first nine months of 1994. This increase in absolute
dollars in both periods was primarily attributable to the costs associated with
hiring and training sales personnel throughout Inter-Tel's direct sales
offices. Higher sales commissions were also paid based upon increased levels of
net sales. The Company expects that selling, general and administrative expenses
will increase in absolute dollars, but may vary as a percentage of net sales.
Interest and other income in both periods consisted primarily of
interest income.
Interest expense during 1995 has been virtually eliminated and other
income increased principally as a result of the temporary investment of the net
proceeds from public offerings of common stock in late 1993 and during August,
1995.
Net income for the third quarter of 1995 was $2.5 million ($.20 per
share) compared to net income of $1.3 million ($.12 per share) for the third
quarter of 1994, an increase of 87.5%. Net income increased 40.6% to $5.6
million, or $.48 per share, in the first nine months of 1995 from $4.0 million,
or $.37 per share, in the first nine months of 1994. Year-to-date net income
includes a special charge of approximately $815,000, or $.07 per share,
reflecting the costs associated with integrating the operations of the two
acquired companies. The special charge, taken during the second quarter of 1995,
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. Without this special charge,
the Company would have reported net income of $6.4 million, or $.55 per share,
in the nine months ended September 30, 1995, an increase of 60% over net income
of $4.0 million in the first nine months of 1994.
Inflation/Currency Fluctuation
Inflation and currency fluctuations have not previously had a material
impact on Inter-Tel's operations. International sales and procurement agreements
have traditionally been denominated in U.S. currency. Moreover, a significant
amount of contract manufacturing has been or is expected to be moved to domestic
sources. The expansion of international operations in the United Kingdom and
Europe and anticipated sales in Japan and Asia and elsewhere could result in
higher international sales as a percentage of total revenues, but international
revenues are currently not significant.
Liquidity and Capital Resources
The Company continues to expand its dealer network, which has required
and is expected to continue to require working capital for increased accounts
receivables and inventories. During the first nine months of 1995, accounts
receivable and inventories increased approximately $11.8 million. This increase
was principally funded by operating cash flow and existing cash balances. The
Company also expended approximately $5.9 million during the first nine months of
1995 for property and equipment. The Company intends to continue to make
significant capital expenditures through the end of 1995, principally relating
to the implementation of the Company's new MIS systems. At September 30, 1995,
the Company had $38.5 million in cash and equivalents, which represents an
increase of approximately $22.9 million from December 31, 1994.
The Company has a loan agreement with Bank One, Arizona, N.A. This
agreement provides for a $5.0 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 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. During the third quarter of
1995, the Company completed another secondary stock offering. A portion of the
net proceeds may be used to finance strategic acquisitions or corporate
alliances. The Company intends to use the balance of the net proceeds primarily
for working capital, capital expenditures relating to the upgrade of
infrastructure and other general corporate purposes.
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 $30.8 million and $19.9 million remain unbilled at September 30, 1995
and December 31, 1994, respectively. The Company is obligated to repurchase such
income streams in the event of defaults by lease customers and, accordingly,
maintains reserves based upon loss experience and past due accounts. Although
the Company to date has been able to resell the rental streams from leases under
the Totalease program profitably and on a substantially current basis, the
timing and profitability of lease resales could impact the Company's business
and operating results, particularly in an environment of fluctuating interest
rates. If the Company is required to repurchase rental streams and realize
losses thereon in amounts exceeding its reserves, its operating results will be
adversely affected.
The Company believes that its working capital and credit facilities,
together with the net proceeds from its recently announced pending public
offering and 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 are required in the future to
address working capital needs and to provide funding for capital expenditures,
expansion of the business or additional acquisitions, the Company will seek
additional financing. There can be no assurance that additional financing will
be available when required or on acceptable terms.
INTER-TEL, INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS--Not Applicable
ITEM 2. CHANGES IN SECURITIES--Not Applicable
ITEM 3. DEFAULTS ON SENIOR SECURITIES--Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
HOLDERS--Not Applicable
ITEM 5. OTHER INFORMATION--Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
11.1 -- Computation of Per Share Earnings
Exhibit 27.1 - Financial Data Schedule for September 30, 1995
Reports on Form 8-K -- None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTER-TEL, INCORPORATED
Date November 13, 1995 Steven G. Mihaylo
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Steven G. Mihaylo, Chairman of the
Board and Chief Executive Officer
Date November 13, 1995 Kurt R. Kneip
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Kurt R. Kneip, Vice President and
Chief Financial Officer