UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File Number:
June 30, 1998 0-10211
INTER-TEL, INCORPORATED
Incorporated in the State of Arizona I.R.S. No. 86-0220994
120 North 44th Street, Suite 200
Phoenix, Arizona 85034-1822
(602) 302-8900
Common Stock
(27,119,854 shares outstanding as of June 30, 1998)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
<PAGE>
INDEX
INTER-TEL, INCORPORATED AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--June 30, 3
1998 and December 31, 1997
Condensed consolidated statements of operations--three 4
and six months ended June 30, 1998 and June 30, 1997
Condensed consolidated statements of cash flows 5
--three and six months ended June 30, 1998 and
June 30, 1997
Notes to condensed consolidated financial 6
statements--June 30, 1998
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II. OTHER INFORMATION 20
SIGNATURES 21
2
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PART I. FINANCIAL INFORMATION
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands) June 30, December 31,
1998 1997
---- ----
ASSETS
CURRENT ASSETS
Cash and equivalents $ 66,691 $ 88,868
Accounts receivable - net 37,627 33,737
Inventories 18,494 22,688
Net investment in sales-leases 13,037 9,196
Prepaid expenses and other assets 6,415 5,977
--------- ---------
TOTAL CURRENT ASSETS 142,264 160,466
PROPERTY & EQUIPMENT 25,449 19,910
OTHER ASSETS 22,240 18,100
--------- ---------
$ 189,953 $ 198,476
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 14,619 $ 15,552
Other current liabilities 25,094 21,424
--------- ---------
TOTAL CURRENT LIABILITIES 39,713 36,976
DEFERRED TAXES AND OTHER LIABILITIES 8,328 15,898
SHAREHOLDERS' EQUITY
Common stock 100,856 99,402
Retained earnings 41,332 46,471
Equity adjustment for foreign
currency translation (276) (271)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 141,912 145,602
--------- ---------
$ 189,953 $ 198,476
========= =========
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
(In thousands, except Three Months Six Months
per share amounts) Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 70,509 $ 54,823 $ 136,374 $ 105,145
Cost of sales 37,121 30,422 71,115 58,574
--------- --------- --------- ---------
GROSS PROFIT 33,388 24,401 65,259 46,571
Research & development 2,828 2,134 5,256 3,979
Selling, general and administrative 22,667 17,139 43,860 33,191
Special charge 897 -- 897 --
Purchased in-process research and
development and acquisition related
expenses 24,229 -- 24,229 --
--------- --------- --------- ---------
50,621 19,273 74,242 37,170
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (17,233) 5,128 (8,983) 9,401
Interest and other income 888 595 1,858 818
Interest expense (71) (17) (114) (24)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (16,416) 5,706 (7,239) 10,195
Income taxes (6,458) 2,282 (2,638) 4,101
--------- --------- --------- ---------
NET INCOME (LOSS) $ (9,958) $ 3,424 $ (4,601) $ 6,094
========= ========= ========= =========
NET INCOME (LOSS) PER SHARE
Basic $ (0.37) $ 0.13 $ (0.17) $ 0.24
========= ========= ========= =========
Diluted $ (0.37) $ 0.13 $ (0.17) $ 0.23
========= ========= ========= =========
Average common shares outstanding 27,017 25,438 26,949 25,670
========= ========= ========= =========
Average common shares outstanding
assuming dilution 27,017 26,623 26,949 26,537
========= ========= ========= =========
</TABLE>
4
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
(In thousands, except Three Months Six Months
per share amounts) Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) $ (9,958) $ 3,424 $ (4,601) $ 6,094
Adjustments to reflect operating activities:
Purchased in-process research and
development 24,229 -- 24,229 --
Depreciation and amortization 1,524 1,171 2,808 2,240
Changes in operating assets and liabilities (3,395) (1,279) (6,838) (1,445)
Other (5,553) 2,439 (3,823) 4,234
-------- -------- -------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 6,847 5,755 11,775 11,123
INVESTING ACTIVITIES
Proceeds from disposal of property
and equipment -- 5 7 5
Cash used in acquisitions (26,748) -- (26,748) (825)
Additions to property and equipment (5,294) (4,711) (8,130) (6,420)
-------- -------- -------- --------
NET CASH USED IN INVESTING
ACTIVITIES (32,042) (4,706) (34,871) (7,240)
FINANCING ACTIVITIES
Payments for repurchase of common stock -- (17,493) -- (17,493)
Cash dividends paid (270) -- (537) --
Proceeds from sale of common stock 359 -- 359 --
Proceeds from exercise of stock options 640 274 1,097 347
-------- -------- -------- --------
NET CASH PROVIDED BY/(USED IN)
FINANCING ACTIVITIES 729 (17,219) 919 (17,146)
DECREASE IN CASH AND EQUIVALENTS (24,466) (16,170) (22,177) (13,263)
CASH AND EQUIVALENTS
AT BEGINNING OF PERIOD 91,157 41,843 88,868 38,936
-------- -------- -------- --------
CASH AND EQUIVALENTS
AT END OF PERIOD $ 66,691 $ 25,673 $ 66,691 $ 25,673
======== ======== ======== ========
</TABLE>
5
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 1998
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the results for the interim periods presented have been included. Operating
results for the three and six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1997.
NOTE B--EARNINGS PER SHARE
Diluted earnings per share assume that outstanding common shares were increased
by shares issuable upon the exercise of all outstanding stock options to which
market price exceeds exercise price less shares which could have been purchased
with related proceeds, if the effect would not be antidilutive.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
(In thousands, except Three Months Ended Six Months Ended
per share amounts) June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ (9,958) $ 3,424 $ (4,601) $ 6,094
======== ======= ======== =======
Denominator:
Denominator for basic earnings per
Share - weighted average shares 27,017 25,438 26,949 25,670
Effect of dilutive securities:
Employee and director stock options -- 1,185 -- 867
-------- ------- -------- -------
Denominator for diluted earnings per
Share - adjusted weighted average
Shares and assumed conversions 27,017 26,623 26,949 26,537
======== ======= ======== =======
Basic earnings (loss) per share $ (0.37) $ 0.13 $ (0.17) $ 0.24
======== ======= ======== =======
Diluted earnings (loss) per share $ (0.37) $ 0.13 $ (0.17) $ 0.23
======== ======= ======== =======
</TABLE>
NOTE C--ACQUISITIONS
During June, Inter-Tel purchased certain assets and assumed certain liabilities
of Telecom Multimedia Systems, Inc. ("TMSI") for approximately $25.1 million
plus related acquisition costs. TMSI, formerly a majority-owned subsidiary of
STM Wireless, Inc., specializes in developing digital signal processing-based
integrated software, hardware and systems to deliver compressed voice,
facsimile, data and other multimedia solutions over IP and frame relay networks
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for telecommunications applications. The aggregate purchase price was allocated
to the fair value of the assets and liabilities acquired, of which $24.2 million
($14.5 million after taxes) was written-off as purchased in-process research and
development since there was no alternative use. The TMSI transaction was
accounted for using the purchase method of accounting. The operations related to
TMSI were not significant to the Company's consolidated operations.
Inter-Tel also acquired Integrated Telecom Services Corporation ("ITS") at the
end of the second quarter of 1998. ITS is based in Louisville, Kentucky, and has
offices located in Lexington, Kentucky; Indianapolis, Indiana and Charleston,
West Virginia. ITS specializes in database design and systems integration for
small- to medium-size businesses which utilize advanced telecommunications
products and services. The ITS transaction was accounted for as a pooling of
interests transaction. A special charge of $897,000 ($538,000 after taxes) was
taken to reflect the costs associated with integrating the operations of ITS.
This special charge principally includes costs associated with redundancy in
inventories, equipment abandonment and the write-off of intangible assets. As
this acquisition was not deemed material to the overall operations of the
Company, the consolidated statements of operations were not restated for prior
periods. Accordingly, the net equity of ITS was added to the balance sheet and
statement of shareholders' equity as of December 31, 1997.
NOTE D--PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT AND ACQUISITION RELATED
CHARGES
During the second quarter of 1998, Inter-Tel completed two acquisitions (see
NOTE C above) which resulted in pre-tax charges of an aggregate of $25.1 million
($15.1 million after taxes), or $0.56 per diluted share. Including these
charges, the Company incurred net losses of $10.0 million ($0.37 per diluted
share) for the second quarter and $4.6 million ($0.17 per diluted share) for the
six months ended June 30, 1998.
The aggregate purchase price of the TMSI acquisition was allocated to the fair
value of the assets and liabilities acquired, of which $24.2 million, or $14.5
million after taxes, was written-off as purchased in-process research and
development. A special charge of $897,000 ($538,000 after taxes) was taken to
reflect the costs associated with integrating the operations of ITS. This
special charge principally includes costs associated with redundancy in
inventories, equipment abandonment and the write-off of intangible assets.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This interim report on Form 10-Q contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
statements include expectations, beliefs, intentions or strategies regarding
future operating results, future expenditures, future cash requirements, and
future industry conditions and involve risks and uncertainties. The Company's
actual results could differ materially from those projected in such
forward-looking statements as a result of many risk factors, including, without
limitation, those set forth under this section, entitled "Factors That May
Affect Future Results Of Operations" below and elsewhere in the report on Form
10-Q.
Overview
Inter-Tel is a single point of contact, full service provider of digital
business telephone systems, IP telephony products, CTI applications, voice
processing software and long distance calling services. Inter-Tel's products
include the AXXESS and Axxent digital business communication platforms, the
AXXESSORY Talk voice processing platform, the Inter-Tel InterPrise IP gateway
and software, the Inter-Tel Vocal'Net IP service provider gateway and the
Inter-Tel Vocal'Net Service Provider Software and Centralized Accounting
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Software. Inter-Tel's services include Inter-Tel NetSolutions, Inter-Tel's
resale long distance service and Inter-Tel.net, Inter-Tel's IP long distance
network service. The Company also provides maintenance, leasing and support
services for its products and services.
Results of Operations
Net sales for the second quarter of 1998 increased 28.6% to $70.5
million, compared to $54.8 million in the second quarter of 1997. Net sales
increased 29.7% to $136.4 million in the first six months of 1998, compared to
$105.1 million in the first six months of 1997. For the quarter and six months
ended June 30, 1998, sales from wholesale distribution and direct sales offices
accounted for approximately $13.9 million and $28.1 million of the increases,
respectively. The remaining increases occurred in long distance sales and other
operations.
The following table sets forth certain statement of operations data of
the Company expressed as a percentage of net sales for the periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 52.6 55.5 52.1 55.7
----- ----- ----- -----
Gross profit 47.4 44.5 47.9 44.3
Research and development 4.0 3.9 3.9 3.8
Selling, general and
administrative 32.1 31.3 32.2 31.6
Special charge 1.3 -- 0.7 --
In-process research and
development and related
acquisition expenses 34.4 -- 17.8 --
----- ----- ----- -----
Operating income (24.4) 9.3 (6.6) 8.9
Interest and other income 1.3 1.1 1.4 0.8
Interest expense (0.1) 0.0 (0.1) 0.0
Income taxes (9.2) 4.2 (1.9) 3.9
----- ----- ----- -----
Net income (loss) (14.1)% 6.2% (3.4)% 5.8%
===== ===== ===== =====
Gross profit for the second quarter of 1998 increased 36.8% to $33.4
million, or 47.4% of net sales, compared to $24.4 million, or 44.5% of net
sales, for the second quarter of 1997. Gross profit increased 40.1% to $65.3
million, or 47.9% of net sales, in the first six months of 1998 compared to
$46.6 million, or 44.3% of net sales, in the first six months of 1997. Gross
margin increased in the second quarter of 1998 primarily as a result of
increased sales of AXXESS digital communication platforms, call processing
software and voice processing software as a percentage of net sales. Gross
margins were offset in part by an increased percentage of sales through dealer
channels, which typically generate lower gross margins than sales of the
Company's products through its direct sales offices.
Research and development expenses for the second quarter of 1998
increased to $2.8 million, or 4.0% of net sales, compared to $2.1 million, or
3.9% of net sales, for the second quarter of 1997. Research and development
expenses increased to $5.3 million, or 3.9% of net sales, in the first six
months of 1998 compared to $4.0 million, or 3.8% of net sales, in the first six
months of 1997. The increases in absolute dollars and as a percentage of net
sales in both periods were primarily attributable to expenses relating to the
development and introduction of new products, including the continuing
development and improvement of the Company's AXXESS digital communication
platforms, call processing and voice processing software, CTI products, unified
messaging, and TCP/IP intranet and internet voice solutions (the Company's
Vocal'Net and Inter-Tel.net products). The Company expects that research and
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development expenses will continue to increase in absolute dollars as the
Company continues to develop new software and to enhance existing technologies
and products. These expenses may vary, however, as a percentage of net sales.
Selling, general and administrative expenses for the second quarter of
1998 increased to $22.7 million, or 32.1% of net sales, compared to $17.1
million, or 31.3% of net sales, for the second quarter of 1997. Selling, general
and administrative expenses increased to $43.9 million, or 32.2% of net sales,
in the first six months of 1998 compared to $33.2 million, or 31.6% of net
sales, in the first six months of 1997. The increases, both in absolute dollars
and as a percentage of sales, for the quarter and six months ended June 30,
1998, were attributable in part to costs associated with hiring incentives for
key employees, increased consulting expenses, expanding its technical training
staff, continued efforts to hire and train additional sales personnel throughout
Inter-Tel's direct sales offices, higher sales commissions paid to the Company's
sales force based upon increased levels of net sales, providing additional
marketing resources for the expanded dealer network and for network services and
long distance services. The Company expects that selling, general and
administrative expenses will continue to increase in absolute dollars, but may
vary as a percentage of net sales.
In June 1998, the Company purchased certain assets and liabilities of
Telecom Multimedia Systems, Inc. ("TMSI") for approximately $25.1 million plus
related acquisition costs. The aggregate purchase price was allocated to the
fair value of the assets and liabilities acquired, of which $24.2 million, or
$14.5 million after taxes, was written-off as purchased in-process research and
development.
A special pre-tax charge of $897,000, or $538,000 after taxes,
reflected the costs associated with integrating the operations of ITS, which was
acquired via a pooling of interests at the end of the second quarter in 1998.
This special charge principally reflected costs associated with redundancy in
inventories, equipment abandonment and the write-off of intangible assets.
Other income in both periods consisted primarily of interest income and
foreign exchange rate gains and losses. Income from interest increased in both
comparable periods of 1998 based on a higher level of invested funds,
principally from the proceeds generated from the Company's public stock offering
in December 1997. Other changes in other income primarily reflected differences
in net foreign exchange rate gains and losses.
Net loss for the second quarter was $9.96 million ($0.37 per diluted
share) reflecting the write-off of in-process research and development costs and
the special charge noted above, compared to net income of $3.4 million ($0.26
per diluted share) for the second quarter of 1997. Net loss for the six months
ended June 30, 1998 was $4.6 million, or $0.16 per diluted share, reflecting the
write-off of in-process research and development costs and the special charge,
compared to net income of $6.1 million, or $0.24 per diluted share, in the first
six months of 1997. Without the special charge and write-off of in-process
research and development costs, net income for the quarter ended June 30, 1998
would have been $5.1 million, or $0.18 per diluted share, which would have
constituted an increase of 49.5% compared to 1997. Moreover, without the special
charge and write-off of in-process research and development costs, net income
for the six months ended June 30, 1998 would have been $10.5 million, or $0.37
per diluted share, which would have constituted an increase of 71.9% compared to
1997. In addition, net income per share in 1998 is based on an additional 1.6
million and 1.8 million average shares outstanding for the quarter and six
months ended June 30, 1998, respectively, principally reflecting the Company's
public stock offering consummated in December 1997.
Inflation/Currency Fluctuation
Inflation and currency fluctuations have not previously had a material
impact on Inter-Tel's operations. International procurement agreements have
traditionally been denominated in U.S. currency. Moreover, a significant amount
of contract manufacturing has been moved to domestic sources. The expansion of
international operations in the United Kingdom and Europe and increased sales,
if any, in Japan and Asia and elsewhere could result in higher international
9
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sales as a percentage of total revenues; however, international revenues are
currently not a significant component of the Company's consolidated operations.
Liquidity and Capital Resources
At June 30, 198, the Company had $66.7 million in cash and equivalents,
which represents a decrease of approximately $22.2 million from December 31,
1997. The Company maintains a $7.0 million, unsecured revolving line of credit
with Bank One, Arizona, NA. The credit facility is annually renewable and is
available through June 1, 2000. Under the credit facility, the Company has the
option to borrow at a prime rate or adjusted LIBOR interest rate. Historically,
the credit facility has been used primarily to support international letters of
credit to suppliers. In December 1997, the Company received net proceeds of
approximately $59.2 million from a public stock offering of 3,000,000 common
shares. Approximately $25 million of the proceeds were used to purchase certain
assets of TMSI; the remaining proceeds may be used to develop and expand
Inter-Tel.net and for potential acquisitions, strategic alliances, working
capital and general corporate purposes.
Net cash provided by operating activities totaled $11.8 for the six
months ended June 30, 1998, compared to net cash provided by operating
activities of $11.1 million for the same period in 1997. This increase in cash
was primarily the result of profitable operations (excluding the write-off of
in-process research and development costs associated with TMSI acquisition and
the special charge related to the acquisition of ITS), and lower inventory
levels, offset in part by increased accounts receivable. During the first six
months of 1998, accounts receivable increased approximately $3.9 million, while
inventories decreased approximately $4.2 million. The Company continues to
expand its dealer network, which has required and is expected to continue to
require working capital for increased accounts receivable and inventories.
During the first six months of 1998, other assets and liabilities decreased
primarily as a result of the change in deferred taxes attributable to the
write-off of in-process research and development costs associated with the TMSI
acquisition.
Net cash used in investing activities, primarily in the form of
acquisitions and capital expenditures, totaled $34.9 million and $7.2 million
for the six months ended June 30, 1998 and 1997, respectively. This decrease in
cash in 1998 was primarily the result of the purchase of certain assets of TMSI
and related write-off of in-process research and development costs. Cash used in
acquisitions totaled approximately $26.7 million in the first six months of
1998. Capital expenditures totaled approximately $8.1 million for the same
period. The Company anticipates additional capital expenditures during 1998,
principally relating to anticipated increased volumes of operating leases
offered by the Company to its customers (which must be capitalized as fixed
assets by the Company), facilities expansion, and expenditures relating to
equipment and management information systems used in operations.
Net cash provided by financing activities totaled $919,000 for the six
months ended June 30, 1998 compared to net cash used of $17.1 million for the
same period in 1997. Net cash provided by financing activities during the 1998
period was primarily due to the exercise of stock options and stock issuances
pursuant to the Company's Employee Stock Purchase Plan, offset in part by cash
dividends paid. During the second quarter of 1997, the Company initiated a stock
repurchase program under which the Board of Directors authorized the repurchase
of up to 1,470,000 shares of the Company's common stock. The Company expended
approximately $17.5 million for stock repurchases in the second quarter of 1997,
which was funded primarily by existing cash balances. The Company reissued
treasury shares with a cost basis of approximately $2.0 million in connection
with stock option exercises and issuances. The proceeds received for the
treasury stock reissued was less than its cost basis. Accordingly, the
difference was recorded as a reduction to retained earnings. The Company's Board
of Directors has also recently authorized the repurchase of up to 2.5 millions
shares of the Company's common stock. No shares have been repurchased through
the first six months of 1998.
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The Company offers to its customers lease financing and other services,
including its Totalease program, through its Inter-Tel Leasing subsidiary. The
Company funds these programs in part through the sale to financial institutions
of rental income streams under the leases. Resold lease rentals totaling $114.1
million and $99.9 million remain unbilled at June 30, 1998 and December 31,
1997, respectively. The Company is obligated to repurchase such income streams
in the event of defaults by lease customers and, accordingly, maintains reserves
based upon loss experience and past due accounts. Although the Company to date
has been able to resell the rental streams from leases under its lease programs
profitably and on a substantially current basis, the timing and profitability of
lease resales could impact the Company's business and operating results,
particularly in an environment of fluctuating interest rates and economic
uncertainty. If the Company is required to repurchase rental streams and realize
losses thereon in amounts exceeding its reserves, its operating results will be
adversely affected.
The Company believes that its cash balances, working capital and
available credit facilities, together with anticipated ongoing cash generated
from operations, will be sufficient to develop and expand its Inter-Tel.net
network, to finance acquisitions of additional resellers of telephony products
and other strategic acquisitions or corporate alliances, and to provide adequate
working capital for at least the next twelve months. 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 the
Inter-Tel.net network or additional acquisitions, the Company will seek, if at
all, additional financing. There can be no assurance that additional financing
will be available when required or on acceptable terms.
Factors That May Affect Results of Future Operations
In addition to other information in this interim report on form 10-Q
(the "10-Q"), the following factors should be considered carefully in evaluating
the Company's business. The discussion in this 10-Q contains forward-looking
statements. Future events anticipated in the forward-looking statements
contained in this 10-Q are uncertain. Actual events, and the Company's actual
results, may differ materially from those predicted, assumed or discussed in
such forward-looking statements. Factors that may cause or contribute to such
differences include, but are not limited to, those discussed below and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The cautionary statements made in this 10-Q should be read as being
applicable to all related forward-looking statements, wherever they appear in
this 10-Q.
Rapid Technological Change; Dependence On Recently Introduced Products
The market for the Company's software, products and services is
characterized by rapid technological change and continuing demand for new
products, features and applications. Current competitors or new market entrants
may develop new products or product features that could adversely affect the
competitive position of the Company's products. Accordingly, the timely
introduction of new products and product features, as well as new
telecommunications applications, will be key factors in the Company's future
success.
During the past eighteen to twenty-four months, the Company introduced
unified messaging on its AXXESSORY Talk platform, developed a number of
enhancements to its existing AXXESS and AXXESSORY Talk platforms and introduced
Inter-Tel Vocal'Net. In July 1998, the Company also released the AXXESS 5.0
platform, which is a significant software upgrade and enhancement to its AXXESS
and AXXESSORY Talk platforms. The Company's future success will depend, in large
part, upon the successful introduction of the AXXESS 5.0 platform, as well as
future upgrades and enhancements to this networking platform. The Company's
future success will also depend upon market acceptance of the Company's other
new products or enhancements, including Inter-Tel Vocal'Net and certain other
products that the Company purchased from TMSI. There can be no assurance that
these introduced products and enhancements will be successful. In the event that
the Company were to fail to successfully introduce new software, products or
services or upgrades to its existing systems or products on a regular and timely
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basis, demand for the Company's existing software, products and services could
decline, which could have a material adverse effect on the Company's business
and operating results. Further, if the markets for IP network products or CTI
applications fail to develop, or grow more slowly than the Company anticipates,
or if the Company is unable for any reason to capitalize on any of these
emerging market opportunities, the Company's business, financial condition and
results of operations could be materially adversely affected.
Occasionally, new products contain undetected program errors or "bugs"
when released. Such bugs may result from defects contained in software products
offered by the Company's suppliers or other third parties that are intended to
be compatible with the Company's products, over which the Company has little or
no control. Although the Company seeks to minimize the number of bugs in its
products by its test procedures and quality control, there can be no assurance
that its new products will be error-free when introduced. Any significant delay
in the commercial introduction of the Company's products due to bugs, any design
modifications required to correct bugs or any impairment of customer
satisfaction as a result of bugs could have a material adverse effect on the
Company's business and operating results. In addition, new products often take
several months before their manufacturing costs stabilize, which may adversely
affect operating results for a period of time following introduction.
Developing Market for IP Network Telephony; Uncertain Regulatory Environment
The market for IP network voice communications products has only
recently begun to develop, is rapidly evolving and is characterized by an
increasing number of market entrants who have introduced or developed products
and services for Internet or other IP network voice communications. As is
typical in the case of a new and rapidly evolving industry, the demand for and
market acceptance of recently introduced IP network products and services are
subject to a high degree of uncertainty. There can be no assurance that voice
communications over IP networks will become widespread. Further, even if voice
communications over IP networks achieve broad market acceptance, there can be no
assurance that the Company's products, and particularly Inter-Tel Vocal'Net and
certain products that the Company purchased from TMSI, will achieve market
acceptance.
The adoption of voice communications over IP networks generally
requires the acceptance of a new way of exchanging information. In particular,
enterprises that have already invested substantial resources in other means of
communicating information may be reluctant or slow to adopt a new approach to
communications. The lack of control over IP network infrastructure and each
user's system configuration may cause users of IP network voice communications
delays in the transmission of speech, loss of voice packets and inferior sound
quality relative to standard telephony networks. If these factors cause the
market for IP network voice communications to fail to develop or to develop more
slowly than the Company anticipates, the Company's IP network telephony products
could fail to achieve market acceptance, which in turn could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The regulatory environment for IP network telephony is subject to
substantial uncertainty. There can be no assurance that the sale and use of IP
network telephony products such as Inter-Tel Vocal'Net and certain products that
the Company purchased from TMSI will not violate telecommunications or other
regulations in any of the countries in which such products are or will be
marketed and used. In the United States, the Company believes that there are
currently few laws or regulations directly applicable to voice communications
over IP networks or to access to, or commerce on, IP networks generally.
However, changes in the regulatory environment, particularly in regulations
relating to the telecommunications industry, could have a material adverse
effect on the Company's business. The increased commercial acceptance of voice
communications over IP networks, as well as other factors, could result in
intervention by governmental regulatory agencies in the United States or
elsewhere in the world under existing or newly enacted legislation and in the
imposition of fees, charges or taxes on users and providers of products and
services in this area. There can be no assurance that such intervention or
imposition of fees, charges or taxes would not have a material adverse effect
12
<PAGE>
upon the acceptance and attractiveness of IP network voice communications.
Moreover, legislative proposals from international, federal and state government
bodies could impose additional regulations and obligations upon on-line service
providers. The growing popularity and use of the Internet has increased public
focus and could lead to increased pressure on legislatures to impose such
regulations. The Company cannot predict the likelihood that any future
legislation or regulation will be enacted, nor the financial impact, if any, of
such resulting legislation or regulation. In the future, the Company may also
develop and introduce other products with new or additional telecommunications
capabilities or services, which could be subject to existing federal government
regulations or result in the imposition of new government regulations, either in
the United States or elsewhere.
Risks Associated with Inter-Tel Vocal'Net; Dependence Upon IP Network
Infrastructures; Risk of System Failure; Security Risks
In September 1997, the Company began commercial shipment of Inter-Tel
Vocal'Net, its stand-alone IP telephony gateway product and, to date, revenues
from the sale of this product have not been significant. To achieve market
acceptance, Inter-Tel Vocal'Net and certain products and technology that the
Company purchased from TMSI will be required to demonstrate their functionality,
scalability and reliability, of which there can be no assurance. In addition,
there can be no assurance that these products and technology will comply with
industry standards or that industry standards will not change and render
Inter-Tel Vocal'Net or the Company's other IP telephony products obsolete. In
the event that these products fail to achieve market acceptance, the Company's
business, financial condition and results of operations could be materially and
adversely affected.
The success of Inter-Tel Vocal'Net and other IP telephony products that
the Company purchased from TMSI will also depend upon, among other things, the
continued expansion of the Internet and other IP networks and their network
infrastructures. There can be no assurance that the infrastructure or
complementary products necessary to make the Internet a viable commercial
network will continue to be developed. In addition, there can be no assurance
that IP networks will retain their current volume, distance and
time-of-day-independent pricing structure, or that the costs of access to IP
networks, lack of capacity or poor voice transmission quality of IP networks
will not adversely affect the market for IP network products and services.
Moreover, critical issues concerning the commercial use of the Internet
(including security, reliability, cost, ease of use and access and quality of
service) remain unresolved and may affect the growth of IP network use. There
can be no assurance that the Internet will be able to meet additional demand or
its users' changing requirements on a timely basis, at a commercially reasonable
cost, or at all.
The Inter-Tel Vocal'Net gateway, the Vocal'Net Centralized Accounting
System ("CAS") and the product line that the Company purchased from TMSI can be
vulnerable to computer viruses or similar disruptive problems. Computer viruses
or problems caused by third parties could lead to interruptions, delays or
cessation of service. Further, inappropriate use of the Internet or other IP
networks by third parties could potentially jeopardize the security of
confidential information, such as credit card or bank account information or the
content of conversations over the IP network, which may deter certain persons
from ordering and using the Company's products. Until more comprehensive
security technologies are developed, the security and privacy concerns of
existing and potential users may inhibit the growth of IP networks in general
and the market for the Company's IP network products in particular.
Development and Maintenance of Inter-Tel.net Network
The Company is currently utilizing its Inter-Tel Vocal'Net technology
and certain IP technology acquired from TMSI to develop and expand its own IP
network, Inter-Tel.net, to carry voice traffic. The Inter-Tel.net network is in
its initial stages of deployment and, accordingly, is subject to a high degree
of risk. To date, the Inter-Tel.net network has established points of presence
in the San Francisco Bay Area, Washington, D.C., Chicago, New York, Phoenix,
Reno and Los Angeles. Certain products that the Company purchased from TMSI are
13
<PAGE>
also in the process of being tested and deployed in this network. If the market
for IP network products fails to develop or develops more slowly than the
Company anticipates, the Company's Inter-Tel.net network could become
financially burdensome to maintain or obsolete, either of which could materially
and adversely affect the Company's business, financial condition and results of
operations.
The Company is dependent on third-party suppliers of telecommunications
and Internet network transmission services for implementation of Inter-Tel.net
and does not currently have long-term contracts with such suppliers. The
Company's ability to expand Inter-Tel.net is dependent upon its ability to
obtain services from such suppliers. Certain of these third party suppliers are
or may become competitors of the Company, and such suppliers generally are not
subject to restrictions upon their ability to compete with the Company. To the
extent that any of these suppliers raise their rates or change their pricing
structure, the Company may be materially adversely affected. Also, the Company
faces the risk that there will be a disruption in the service provided by these
suppliers, and can give no assurance that there will not be a significant
disruption in such service in the future, thereby causing a disruption in the
services provided by the Company to its customers.
Moreover, although the Company has devoted, and intends to continue to
devote, substantial resources to improve the quality of telephone conversations
using Inter-Tel Vocal'Net, certain products and technology that the Company
acquired from TMSI, and the Inter-Tel.net network, there can be no assurance
that the problems of voice communications over the Inter-Tel.net network that
exist today, including delays in the transmission of speech, loss of voice
packets and sound quality inferior to that of standard telephony networks, will
be eliminated or reduced. In the event that the Company is unable to improve
upon the sound quality and other limitations of voice communications over the
Inter-Tel.net network and to offer such improvements to its customers on a
cost-effective basis, the Inter-Tel.net network could fail to achieve market
acceptance, and the Company's business, financial condition and results of
operations could be materially and adversely affected.
Highly Competitive Industry
The market for the Company's core PABX products is highly competitive
and in recent periods has been characterized by pricing pressures and business
consolidations. The Company's competitors include Lucent and NorTel, as well as
Comdial, Executone, Iwatsu, Mitel, NEC, Nitsuko, Panasonic, Siemens, Toshiba and
others. Many of these competitors have significantly greater financial,
marketing and technical resources than the Company. The Company also competes
against the RBOCs, which offer systems produced by one or more of the
aforementioned competitors and also offer Centrex systems in which automatic
calling facilities are provided through equipment located in the telephone
company's central office.
The Telecommunications Act of 1996 and AT&T's decision to divide itself
into three enterprises have impacted competition in the communications industry.
The Telecommunications Act opened the market for telephone and cable television
services, forcing telephone companies to open their networks to competitors and
giving consumers a choice of local phone carriers. Conversely, local phone
companies are now able to offer long distance services. In addition, cable
companies can offer telephone services and Internet access. These changes have
increased competition in the communications industry and have created additional
competition and opportunities in customer premise equipment, as these new
services and interfaces have become available.
In the market for voice processing applications, including voice mail,
the Company competes against AVT, Active Voice, Centigram, Lucent and other
competitors, certain of which have significantly greater resources than the
Company. In the market for long distance services, the Company competes against
AT&T, MCI, Sprint Corporation, Qwest Communications Corporation and other
competitors, many of which have significantly greater resources than the
Company. The Company will also compete with RBOCs, cable television companies,
14
<PAGE>
satellite and other wireless broadband service providers, and others for long
distance business as those companies gradually respond to the Telecommunications
Act. Key competitive factors in the sale of telephone systems and related
applications include price, performance, features, reliability, service and
support, name recognition and distribution capability. The Company believes that
it competes favorably in its markets with respect to the price, performance and
features of its systems, as well as the level of service and support that the
Company provides to its customers. Certain of the Company's competitors have
significantly greater name recognition and distribution capabilities than the
Company, although the Company believes that it has developed a competitive
distribution presence in certain markets, particularly those where the Company
has direct sales offices. The Company expects that competition will continue to
be intense in the markets addressed by the Company, and there can be no
assurance that the Company will be able to continue to compete successfully.
In the market for IP telephony products, the Company competes against
existing IP telephony gateway providers such as Lucent, NetSpeak Corporation,
VocalTec Communications Ltd., Vienna Systems Corporation and several others.
Several of these competitors have been active in developing and marketing IP
telephony products for a greater period of time than the Company and have
already established relationships with customers within their market. In
addition, the Company will likely face significant competition from vendors such
as Cisco Systems, Inc., Bay Networks, Inc., 3Com Corporation, Motorola, Inc. and
MICOM Communications Corp., as these established data vendors choose to enter
the market for IP telephony products. Such companies currently produce products
that, if equipped with voice capabilities, could represent a considerable threat
to the Company within that market. Moreover, should the market for IP telephony
products become fully developed or develop at a rapid rate, large companies such
as IBM and Microsoft could choose to develop proprietary software designed to
facilitate voice communication over an IP network.
As the Company enters the markets for local telephone service and IP
network access, it will face additional competition from RBOCs, cable companies
and other providers and existing IP carriers like IDC, which have larger
marketing and sales organizations, significantly greater financial and technical
resources and a larger and more established customer base than the Company. In
addition, RBOCs, cable companies and other providers have greater name
recognition, more established positions in the market and long standing
relationships with customers. Therefore, there can be no assurance that the
Company will compete successfully in these markets. Many of the Company's
current and potential competitors have longer operating histories, are
substantially larger, and have greater financial, manufacturing, marketing,
technical and other resources. A number also have greater name recognition and a
larger installed base of products than the Company. Competition in the Company's
markets may result in significant price reductions. As a result of their greater
resources, many current and potential competitors may be better able than the
Company to initiate and withstand significant price competition or downturns in
the economy. There can be no assurance that the Company will be able to continue
to compete effectively, and any failure to do so would have a material adverse
effect on the Company's business, financial condition and operating results.
Management of Growth; Implementation of New Management Information Systems
The growth in the Company's business has placed, and is expected to
continue to place, a significant strain on the Company's personnel, management
and other resources. The Company's ability to manage any future growth
effectively will require it to attract, train, motivate and manage new employees
successfully, to integrate new employees into its overall operations and to
continue to improve its operational, financial and management information
systems.
During the fourth quarter of 1996, the Company determined that the
limitations of the existing system software would prevent Inter-Tel from
establishing an integrated and centralized dispatch and telemarketing center. As
a result, the Company signed an agreement with a large, established software and
15
<PAGE>
database vendor to replace its existing MIS software and implement, maintain and
support alternate MIS software to be utilized throughout the Company.
Accordingly, during the fourth quarter of 1996, the Company wrote off the
software license and implementation costs relating to the system software being
replaced. The Company implemented various components of the new MIS software
during the second quarter and plans to roll-out additional components of the
software over the next six to twelve months.
The actions to replace the MIS software could result in additional
costs and delays associated with obtaining a fully functional MIS system,
including but not limited to the costs of procuring additional or alternate
hardware and software required but not available in the current system
configuration, and additional personnel. Any such cost or delay could have a
material adverse effect on the Company's business, financial condition and
operating results. In addition, implementation of this system software and the
transition from the current system software to the new information system
software will require substantial financial resources, time and personnel.
The Company has made strategic acquisitions in the past and expects to
continue to do so in the future. During June 1998, the Company completed its
purchase of certain assets of TMSI for cash of approximately $25 million plus
the assumption of certain liabilities and acquisition costs. The Company also
acquired Integrated Telecom Services Corporation ("ITS") in a pooling of
interests transaction in which the Company issued approximately 140,000 shares
of common stock. Acquisitions require a significant amount of the Company's
management attention and financial and operational resources, all of which are
limited. The integration of TMSI, ITS or any other acquired entities may also
result in unexpected costs and disruptions and significant fluctuations in, or
reduced predictability of, operating results from period to period. There can be
no assurance that an acquisition will not adversely affect the business
relationships of the Company or the acquired entity with its respective
suppliers or customers. Further, there can be no assurance that the Company will
be able to successfully integrate TMSI, ITS or any other acquired operations or
achieve any of the intended benefits of an acquisition. The Company's failure to
manage its growth effectively could have a material adverse effect on its
business, financial condition and operating results.
Dependence Upon Contract Manufacturers and Component Suppliers
The Company currently procures certain components used in its digital
communication platforms, including certain microprocessors, integrated circuits,
power supplies, voice processing interface cards and IP telephony cards from a
single source or limited sources of supply and, accordingly, product
availability could be limited. As the Company deploys its IP telephony products
and the Inter-Tel.net network, the Company expects that it will be required to
increasingly rely upon third party software and hardware suppliers. The Company
currently manufactures its products through a limited number of contract
manufacturers located in the United States, the Philippines, the People's
Republic of China and Mexico. Foreign manufacturing facilities are subject to
changes in governmental policies, imposition of tariffs and import restrictions
and other factors beyond the Company's control. Varian Associates, Inc.
("Varian") currently manufactures a significant portion of the Company's
products at Varian's Tempe, Arizona facility, including substantially all of the
printed circuit boards used in the AXXESS and Inter-Tel Axxent digital
communication platforms. From time to time, the Company has experienced delays
in the supply of components and finished goods, and there can be no assurance
that the Company will not experience such delays in the future. The Company's
reliance on third party manufacturers involves a number of additional risks,
including reduced control over delivery schedules, quality assurance and costs.
Any delay in delivery or shortage of supply of components or finished goods from
Varian or any other supplier, or the Company's inability to develop in a timely
manner alternative or additional sources if and when required, could damage the
Company's relationships with current and prospective customers and could
materially and adversely affect the Company's business, financial condition and
operating results. The Company has no long term agreements with its suppliers
that require such suppliers to provide fixed quantities of components or
finished goods at set prices. There can be no assurance that the Company will be
16
<PAGE>
able to continue to obtain components or finished goods in sufficient quantities
or quality or on favorable pricing and delivery terms in the future.
Product Protection and Infringement
The Company's future success will depend in part upon its proprietary
technology. Although the Company has applied to the U.S. Patent and Trademark
Office for a patent related to certain aspects of the Inter-Tel Vocal'Net
technology, the Company currently has no issued patents and relies principally
on copyright and trade secret law and contractual provisions to protect its
intellectual property. There can be no assurance that any patent, trademark or
copyright owned by or applied for by the Company, or intellectual property of
TMSI that the Company has agree to purchase, will not be invalidated,
circumvented or challenged or that the rights granted thereunder will provide
meaningful protection or any commercial competitive advantage to the Company.
Further, there can be no assurance that others will not develop technologies
that are similar or superior to the Company's technology or that duplicate the
Company's technology. As the Company expands its international operations,
effective intellectual property protection may be unavailable or limited in
certain foreign countries. There can be no assurance that the steps taken by the
Company will prevent misappropriation of its technology. Litigation may be
necessary in the future to enforce the Company's intellectual property rights,
to protect the Company's trade secrets, to determine the validity and scope of
the proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and operating results.
From time to time, the Company is subject to proceedings alleging
infringement by the Company of intellectual property rights, including patents,
trademarks, copyrights, or other intellectual property rights of others. If any
such claim is asserted against the Company, the Company may seek to obtain a
license under the third party's intellectual property rights. There can be no
assurance that a license will be available on terms acceptable to the Company or
at all. In the alternative, the Company could resort to litigation to challenge
any such claim. Any such litigation could require the Company to expend
significant sums, divert management's attention and require the Company to pay
significant damages, develop non-infringing technology or acquire licenses to
the technology which is the subject of the asserted infringement, any of which
could have a material adverse effect on the Company's business, financial
condition and operating results. In the event that the Company is unable or
chooses not to license such technology or decides not to challenge such third
party's rights, the Company could encounter substantial and costly delays in
product introductions while attempting to design around such third party rights,
or could find that the development, manufacture or sale of products requiring
such licenses could be foreclosed.
Reliance on Dealer Network
A substantial portion of the Company's net sales are made through its
network of independent dealers. The Company faces intense competition from other
telephone system and voice processing system manufacturers for such dealers'
business, as most of the Company's dealers carry products which compete with the
Company's products. The Company has no exclusive agreements with any of its
dealers. The loss of any significant dealer or group of dealers, or any event or
condition adversely affecting the Company's dealer network, could have a
material adverse effect on the Company's business, financial condition and
operating results.
Dependence on Key Personnel
The Company is dependent on the continued service of, and its ability
to attract and retain, qualified technical, marketing, sales and managerial
personnel. The competition for such personnel is intense, and the loss of any of
such persons, as well as the failure to recruit additional key technical and
17
<PAGE>
sales personnel in a timely manner, would have a material adverse effect on the
Company's business and operating results. There can be no assurance that the
Company will be able to continue to attract and retain the qualified personnel
necessary for the development of its business.
Risks of Providing Long Distance and Network Services
Inter-Tel depends on its supply of telecommunications services and
information from several long distance carriers. Because it does not own
transmission facilities, the Company relies on long distance carriers to provide
network services to the Company's customers and for billing information. Long
distance services are subject to extensive and uncertain governmental regulation
on both the federal and state level. There can be no assurance that the
promulgation of certain regulations will not materially and adversely affect the
Company's business, financial condition and operating results. Contracts with
the long distance carriers from which the Company currently resells services
typically have multi-year terms in which the Company's prices are relatively
fixed and have minimum use requirements. The market for long distance services
is currently experiencing and is expected to experience in the future
significant price competition, resulting in decreasing end-user rates. There can
be no assurance that the Company will meet minimum use commitments, will be able
to negotiate lower rates with carriers in the event of any decrease in end user
rates or will be able to extend its contracts with long distance carriers at
prices favorable to the Company. The Company's ability to continue to expand its
long distance services depends upon its ability to continue to secure reliable
long distance services from a number of long distance carriers and the
willingness of such carriers to continue to provide telecommunications services
and billing information to the Company on favorable terms.
Potential Fluctuations In Quarterly Results; Limited Backlog
The Company's quarterly operating results depend upon a variety of
factors, including the volume and timing of orders received during the quarter,
the mix of products sold, mix of distribution channels, general economic
conditions, patterns of capital spending by customers, the timing of new product
announcements and releases by the Company and its competitors, pricing
pressures, the cost and effect of acquisitions, and the availability and cost of
products and components from the Company's suppliers. The Company's customers
typically require immediate shipment and installation of platforms and software.
As a result, the Company has historically operated with a relatively small
backlog, and sales and operating results in any quarter are principally
dependent on orders booked and shipped in that quarter. Historically, a
substantial portion of the Company's net sales in a given quarter have been
recorded in the third month of the quarter, with a concentration of such net
sales in the last two weeks of the quarter. Market demand for investment in
capital equipment such as digital communication platforms and associated call
processing and voice processing software applications is largely dependent on
general economic conditions, and can vary significantly as a result of changing
conditions in the economy as a whole. The Company's expense levels are based in
part on expectations of future sales and, if sales levels do not meet
expectations, operating results could be adversely affected. Because sales of
digital communication platforms through the Company's dealers produce lower
gross margins than sales through the Company's direct sales organization,
operating results have varied, and will continue to vary based upon the mix of
sales through direct and indirect channels. Although the Company to date has
been able to resell the rental streams from leases under its Totalease program
profitably and on a substantially current basis, the timing and profitability of
lease resales from quarter to quarter could impact operating results,
particularly in an environment of fluctuating interest rates. Long distance
sales, which have lower gross margins than the Company's core business, have
grown in recent periods at a faster rate than the Company's overall net sales.
As a result, gross margins could be adversely affected in the event that long
distance calling services continue to increase as a percentage of net sales. In
addition, the Company is subject to seasonality in its operating results, as net
sales for the first and third quarters are frequently less than those
experienced, in the fourth and second quarters, respectively. As a result of
these and other factors, the Company has in the past experienced, and could in
18
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the future experience, fluctuations in sales and operating results on a
quarterly basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Volatility of Stock Price
The market price for the Company's Common Stock has been highly
volatile. The Company believes that factors such as announcements of
developments relating to the Company's business, fluctuations in the Company's
operating results, shortfalls in revenue or earnings relative to securities
analysts' expectations, announcements of technological innovations or new
products or enhancements by the Company or its competitors, general conditions
in the telecommunications industry or the national or worldwide economy, changes
in legislation or regulation affecting the telecommunications industry, an
outbreak of hostilities, developments in intellectual property rights and
developments in the Company's relationships with its customers and suppliers
could cause the price of the Company's Common Stock to fluctuate, perhaps
substantially. Many of such factors are beyond the Company's control. In
addition, in recent years the stock market in general, and the market for shares
of technology stocks in particular, have experienced extreme price fluctuations,
which have often been unrelated to the operating performance of affected
companies. There can be no assurance that the market price of the Company's
Common Stock will not experience significant fluctuations in the future,
including fluctuations that are unrelated to the Company's performance.
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Beginning in the
year 2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance.
The Company has evaluated its level of exposure to the risks and costs
associated with Year 2000 problems and is currently in the process of updating
its information systems to be Year 2000 compliant. Currently, the total costs of
the new information systems software implementation are being capitalized, and
the Company does not currently anticipate that the costs of becoming Year 2000
compliant will be material. The Company expects its information systems to be
Year 2000 compliant by the end of fiscal 1999, and anticipates no disruptions in
the services it provides to its customers as a result of Year 2000 problems.
However, no assurance can be given that the Company's software products will
contain all necessary date code changes necessary to prevent processing errors
potentially arising from calculations using the Year 2000 date, or that such
updates will be fully completed in a timely manner or that such disruptions will
not occur. Any disruption in manufacturing services provided by the Company as a
result of Year 2000 noncompliance would materially adversely affect the
Company's business, financial condition and results of operations. Moreover, the
Company could be adversely impacted by Year 2000 issues faced by major
distributors, suppliers, customers, vendors and financial service organizations
with which the Company interacts.
The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues in a variety of ways.
Many companies are expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase software products such as those offered
by the Company. Many potential customers may also choose to defer purchasing
Year 2000 compliant products until they believe it is absolutely necessary, thus
resulting in potentially stalled market sales within the industry. Conversely,
Year 2000 issues may cause other companies to accelerate purchases, thereby
causing an increase in short-term demand and a consequent decrease in long-term
demand for software products. Additionally, Year 2000 issues could cause a
19
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significant number of companies, including existing customers of the Company, to
reevaluate their current communications platform, IP network telephony or voice
processing software needs, and as a result consider switching to other systems
or suppliers.
Concentration of Ownership
As of June 30, 1998, Steven G. Mihaylo, the Company's Chairman of the Board of
Directors, Chief Executive Officer and President beneficially owned
approximately 20% of the outstanding shares of the Common Stock. As a result, he
has the ability to exercise significant influence over all matters requiring
shareholder approval. In addition, the concentration of ownership could have the
effect of delaying or preventing a change in control of the Company.
Any of the foregoing could result in a material adverse effect on the Company's
business, financial condition and operating results.
INTER-TEL, INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM l. LEGAL PROCEEDINGS--Not Applicable
ITEM 2. CHANGES IN SECURITIES--Not Applicable
ITEM 3. DEFAULTS ON SENIOR SECURITIES--Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
1. On April 23, 1998, at the Company's annual meeting of
shareholders, the shareholders of the Company elected the
following directors, each of whom was a nominee of the Company:
Name Votes For Votes Withheld
---- --------- --------------
Steven G. Mihaylo 22,705,275 27,550
J. Robert Anderson 22,696,653 36,172
Gary D. Edens 22,699,953 32,872
Maurice H. Esperseth 22,702,322 30,503
C. Roland Haden 22,705,497 27,328
Norman Stout 22,701,953 30,872
ITEM 5. OTHER INFORMATION
Pursuant to Rule 14a-4(c)(1) under the Securities Exchange Act of
1934, in connection with the Company's annual meeting of shareholders,
if a stockholder of the Company fails to notify the Company at lest 45
days prior to the month and day of mailing of the prior year's proxy
statement, then the proxies of management would be allowed to use
their discretionary voting authority when any such proposal is raised
at the Company's annual meeting of stockholders, without any
discussion of the matter in the proxy statement.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
Exhibit 27.1 - Financial Data Schedule for June 30, 1998
Exhibit 27.2 - Restated Financial Data Schedule for March 31, 1998
Exhibit 27.3 - Restated Financial Data Schedule for December 31, 1997
Reports on Form 8-K -- None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTER-TEL, INCORPORATED
Date August 14, 1998 /s/ Steven G. Mihaylo
---------------- -------------------------------------
Steven G. Mihaylo,
Chairman of the Board,
Chief Executive Officer and President
Date August 14, 1998 /s/ Kurt R. Kneip
---------------- -------------------------------------
Kurt R. Kneip,
Vice President
and Chief Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
INTER-TEL, INCORPORATED AND SUBSIDIARIES FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
INTER-TEL, INCORPORATED AND SUBSIDIARIES FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 30, 1998 RESTATED FOR A POOLING WITH "ITS" DURING THE SECOND
QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
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<TABLE> <S> <C>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
INTER-TEL, INCORPORATED AND SUBSIDIARIES FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1997 RESTATED FOR A POOLING WITH "ITS" DURING THE SECOND QUARTER
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