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:
March 31, 1999 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
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Common Stock
(26,161,168 shares outstanding as of March 31, 1999)
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
--- ---
<PAGE>
INDEX
INTER-TEL, INCORPORATED AND SUBSIDIARIES
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--March 31, 3
1999 and December 31, 1998
Condensed consolidated statements of income--three 4
months ended March 31, 1999 and March 31, 1998
Condensed consolidated statements of cash flows 5
--three months ended March 31, 1999 and
March 31, 1998
Notes to condensed consolidated financial 6
statements--March 31, 1999
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II. OTHER INFORMATION 20
SIGNATURES 21
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PART I. FINANCIAL INFORMATION
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands) March 31, December 31,
1999 1998
--------- ---------
ASSETS
CURRENT ASSETS
Cash and equivalents $62,193 $63,124
Accounts receivable -- net 38,521 41,116
Inventories 19,735 19,663
Net investment in sales-leases 14,226 13,979
Prepaid expenses and other assets 3,882 2,781
----- -----
TOTAL CURRENT ASSETS 138,557 140,663
PROPERTY, PLANT & EQUIPMENT 23,722 22,198
EQUIPMENT HELD UNDER LEASE, NET 8,345 6,771
OTHER ASSETS 30,454 27,398
------ ------
$201,078 $197,030
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $17,799 $14,956
Other current liabilities 23,018 29,390
------ ------
TOTAL CURRENT LIABILITIES 40,817 44,346
DEFERRED TAXES AND OTHER LIABILITIES 6,292 5,026
OTHER LIABILITIES 5,810 4,972
SHAREHOLDERS' EQUITY
Common stock, no par value - authorized
100,000,000 shares, issued and outstanding
- 29,029,987 in 1998 104,539 104,539
Retained earnings 58,025 54,194
Accumulated other comprehensive
income (407) (196)
---- ----
162,157 158,537
Less: Treasury stock at cost (13,998) (15,851)
------- -------
TOTAL SHAREHOLDERS' EQUITY 148,159 142,686
$201,078 $197,030
======== ========
See accompanying notes.
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except Three Months Ended
per share amounts) March 31, 1999 March 31, 1998
-------------- --------------
NET SALES $65,525 $63,758
Cost of sales 33,853 32,617
------ ------
GROSS PROFIT 31,672 31,141
Research & development 3,307 2,428
Selling, general, and administrative 20,579 20,537
------ ------
23,886 22,965
OPERATING INCOME 7,786 8,176
Interest and other income 434 969
Interest expense (12) (9)
--- --
INCOME BEFORE TAXES 8,208 9,136
Income taxes 3,116 3,774
----- -----
NET INCOME $5,092 $5,362
====== ======
NET INCOME PER SHARE
Basic $.20 $.20
==== ====
Diluted $.19 $.19
==== ====
Average number of common shares
Outstanding - Basic 26,096 26,741
====== ======
Average number of common shares
Outstanding - Diluted 27,277 28,242
====== ======
See accompanying notes.
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
(In thousands) March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $5,092 $ 5,362
Adjustments to reflect operating activities:
Depreciation and amortization 2,123 1,252
Changes in operating assets and liabilities (6,807) (3,528)
Other 3,233 1,721
----- -----
NET CASH PROVIDED BY
OPERATING ACTIVITIES 3,641 4,807
INVESTING ACTIVITIES
Additions to property and equipment (2,069) (2,785)
Additions to operating leases (2,876) (47)
Proceeds from disposal of property and equipment -- 7
Cash used in acquisition (220) --
---- ----
NET CASH USED IN INVESTING ACTIVITIES (5,165) (2,825)
FINANCING ACTIVITIES
Cash dividends paid (260) (267)
Proceeds from exercise of stock options 853 457
--- ---
NET CASH PROVIDED BY FINANCING
ACTIVITIES 593 190
INCREASE (DECREASE) IN CASH
AND EQUIVALENTS (931) 2,172
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD 63,124 88,805
------ ------
CASH AND EQUIVALENTS AT
END OF PERIOD $62,193 $90,977
======= =======
</TABLE>
See accompanying notes.
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1999
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 months ending March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. 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, 1998.
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.
The following table sets forth the computation of basic and diluted earnings per
share:
(In thousands, except Three Months Ended
per share amounts) March 31, 1999 March 31, 1998
-------------- --------------
Numerator:
Net Income $5,092 $5,362
===== ======
Denominator:
Denominator for basic earnings per
share - weighted average shares 26,096 26,741
Effect of dilutive securities:
Employee and director stock options 1,181 1,501
----- -----
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 27,277 28,242
------ ------
Basic earnings per share $ 0.20 $ 0.20
------ ------
Diluted earnings per share $ 0.19 $ 0.19
------ ------
NOTE C - SEGMENT INFORMATION
The Company 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
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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 how to allocate resources and assess performance. The Company's
chief decision maker, as defined under SFAS 131, is the Chief Executive Officer.
To date, the Company has viewed its 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 and South America. As a result, the financial
information disclosed herein materially represents all of the financial
information related to the Company's principal operating segment.
The Company's revenues are generated predominantly in the United
States. Total revenues generated from U.S. customers totaled $64.1 million and
$61.7 million of total revenues for the quarters ended March 31, 1999 and 1998,
respectively. The Company's revenues from international sources were primarily
generated from customers located in the United Kingdom, Europe, Asia and South
America. In the first quarters of 1999 and 1998, revenues from customers located
internationally accounted for 2.2% and 3.2% of total revenues, respectively.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Inter-Tel is a single point of contact, full service provider of
digital business telephone systems, IP telephony products, CTI applications,
voice processing software and long distance calling services. Inter-Tel's
award-winning products and services include the AXXESS and Inter-Tel Axxent
digital business communication platforms, the AXXESSORY TALK voice processing
platform, the Inter-Tel Vocal'Net IP telephony gateway, the Inter-Tel Vocal'Net
Service Provider Software and Centralized Accounting Software, the InterPrise IP
telephone gateway and the Inter-Tel.net private IP long distance network. The
Company also provides maintenance, leasing and support services for its
products.
This Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of many risk
factors, including, without limitation, those set forth under "Factors That May
Affect Future Results Of Operations" below.
RESULTS OF OPERATIONS
Net sales increased 2.8% to $65.5 million in the first quarter of 1999
from $63.8 million in the first quarter of 1998. For the quarter ended March 31,
1999, sales from the Company's direct sales offices and from wholesale
distribution were comparable to 1998, increasing approximately $200,000. Sales
from long distance and IP sales increased $1.4 million. The remaining increases
occurred in leasing and other operations.
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The following table sets forth selected statements of income data as a
percentage of net sales:
Three months and year
Ended March 31,
1999 1998
---- ----
Net sales 100.0% 100.0%
Cost of sales 51.7 51.2
---- ----
Gross Profit 48.3 48.8
Research and development 5.0 3.8
Selling, general and administrative 31.4 32.2
---- ----
Operating Income 11.9 12.8
Interest and Other income 0.6 1.5
Interest expense 0.0 0.0
--- ---
Income before income taxes 12.5 14.3
Income Taxes 4.7 5.9
--- ---
Net Income 7.8% 8.4%
=== ===
Gross profit for the first quarter of 1999 increased 1.7% to $31.7
million, or 48.3% of net sales, from $31.1 million, or 48.8% of net sales, in
the first quarter of 1998. The decline in gross profit as a percent of sales was
due to a different sales mix of products and services, and sales through
different distribution channels. In particular, increases in sales of long
distance services as a percentage of total sales led to a lower gross profit as
a percentage of sales. In addition, competitive pricing pressures on smaller
Axxent telephone systems negatively impacted gross margins.
Research and development expenses for the first quarter of 1999
increased 36.2% to $3.3 million, or 5.0% of net sales, from $2.4 million, or
3.8% of net sales, for the first quarter of 1998. This increase was primarily
attributable to expenses relating to the continued development of the AXXESS
networking software and systems, the Inter-Tel Vocal'Net IP telephony gateway,
the Inter-Tel Vocal'Net Service Provider Software and Centralized Accounting
Software, the InterPrise IP telephone gateway and the Inter-Tel.net private IP
long distance network, and CTI applications. The Company expects that research
and development expenses will continue to increase in absolute dollars as the
Company continues to develop and enhance existing and new technologies and
products. These expenses may vary, however, as a percentage of net sales.
Selling, general and administrative expenses in the first quarter of
1999 increased to $20.6 million, or 31.4% of net sales, from $20.5 million, or
32.2% of net sales, in the first quarter of 1998. The increase in absolute
dollars was due to additional selling, incentive, training and other
compensation costs attributable to the increased sales through the Company's
direct sales offices, additional personnel and marketing expenses to support the
operations of Inter-Tel.net, the expanded direct dealer network and expanded
long distance operations. Although selling, general and administrative expenses
as a percentage of sales decreased compared to the first quarter of 1998,
expenses increased relative to the fourth quarter of 1998 due to lower than
anticipated sales volume. 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 and foreign exchange rate gains and losses, and decreased in the
first quarter of 1999 primarily due to lower investment income on lower cash
balances, reflecting the Company's purchase of its common stock in the third and
fourth quarters of 1998, the cash purchase of TMSI in the second quarter of 1998
and exchange rate losses compared to gains in 1998.
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Net income for the first quarter of 1999 was $5.1 million, or $.19 per
diluted share ($.20 per share-basic), compared to net income of $5.4 million, or
$.19 per diluted share ($.20 per share-basic) for the first quarter of 1998, a
decrease of 5.0%.
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 anticipated
increased sales in Japan and Asia and elsewhere could result in higher
international sales as a percentage of total revenues, but international
revenues are currently not significant.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had $62.2 million in cash and
equivalents, which represented a decrease of approximately $931,000 from
December 31, 1998. The Company maintains a $7.0 million unsecured revolving line
of credit with Bank One, Arizona, NA. This 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. The remaining cash balances may be
used to further 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 $3.6 million for the
three months ended March 31, 1999, compared to $4.8 million for the same period
in 1998. The operating cash flow in the first quarter of 1999 was primarily the
result of profitable operations including non-cash depreciation and amortization
charges. Cash used in operating assets and liabilities in the three month period
ended March 31, 1999 was $6.8 million, compared to cash used of $3.5 million in
the same period of 1998. During the first quarter of 1999, lower accounts
receivable were offset in part by increases in inventories, investment in
sales-leases, prepaid expenses and other assets. The Company expects to expand
sales through its direct sales office and dealer networks, which is expected to
require working capital for increased accounts receivable and inventories.
Net cash used in investing activities, primarily in the form of capital
expenditures and additions to operating leases offered to customers, totaled
$5.2 million in the three months ended March 31, 1999, compared to $2.8 million
for the same period of 1998. The Company anticipates additional capital
expenditures during 1999, principally relating to expenditures for equipment and
management information systems used in operations, facilities expansion and
anticipated increased volumes of operating leases offered by the Company to its
customers, which must be capitalized as fixed assets by the Company.
Net cash provided by financing activities totaled $593,000 in the three
months ended March 31, 1999 compared to $190,000 for the same period in 1998,
related primarily to proceeds from the exercise of stock options, less cash
dividends paid.
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 $136.1 million remained unbilled at March 31, 1999. The Company is
obligated to repurchase such income streams in the event of defaults by lease
customers, and accordingly, maintains reserves based on loss experience and past
due accounts. Although the Company to date has been able to resell the rental
streams from leases under the Totalease program profitably and on
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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 realizes losses thereon in
amounts exceeding its reserves, its operating results will be adversely
affected.
The Company believes that its working capital and credit facilities,
together with cash generated from operations, will be sufficient to 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 through
additional acquisitions, the Company will seek additional financing. There can
be no assurance that additional financing will be available when required or on
acceptable terms.
FACTORS THAT MAY AFFECT RESULTS OF FUTURE OPERATIONS
THIS QUARTERLY REPORT TO SHAREHOLDERS ON FORM 10-Q ("10-Q") CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS
CONTAINED IN THIS 10-Q THAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
INCLUDING WITHOUT LIMITATION STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS,
BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL FORWARD-LOOKING
STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE
COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY
SUCH FORWARD-LOOKING STATEMENTS. 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 DOCUMENT. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "FACTORS THAT MAY
AFFECT RESULTS OF FUTURE OPERATIONS" BELOW AND ELSEWHERE IN THIS DOCUMENT. IN
EVALUATING THE COMPANY'S BUSINESS, SHAREHOLDERS AND PROSPECTIVE INVESTORS SHOULD
CONSIDER CAREFULLY THE FOLLOWING FACTORS IN ADDITION TO THE OTHER INFORMATION
SET FORTH IN THIS DOCUMENT.
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 few years, 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 Gateway
Server and the Inter-Tel Vocal'Net Service Provider Package. 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 commercial
acceptance 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 the Inter-Tel InterPrise
products. There can be no assurance that any of 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 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
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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, design
modifications required to correct bugs or 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, and, accordingly, operating results
would be adversely affected 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 is
highly uncertain. 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, in light of the competitive pressures
developing in this market, there can be no assurance that the Company's
products, and particularly Inter-Tel Vocal'Net and the Inter-Tel InterPrise
products, 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 the Inter-Tel
InterPrise products will comply with telecommunications laws 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
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assurance that such intervention or imposition of fees, charges or taxes would
not have a material adverse effect 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 AND INTER-TEL INTERPRISE; DEPENDENCE
UPON IP NETWORK INFRASTRUCTURES; RISK OF SYSTEM FAILURE; SECURITY RISKS
Over the past 24 months, the Company has introduced the Inter-Tel
Vocal'Net Server, the Inter-Tel Service Provider Package, and Inter-Tel
InterPrise products. The Company has also introduced several new software
releases to provide new features and enhancements to the Inter-Tel Vocal'Net
product line. There can be no assurance the functionality, scalability, and
reliability of the Inter-Tel Vocal'Net, Inter-Tel Service Provider Package and
Inter-Tel InterPrise product lines will be accepted in the market. 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 acquired through its purchase of assets from Telecom Multimedia
Systems, Inc. ("TMSI") in June 1998 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 Inter-Tel Vocal'Net Service
Provider Package and the Inter-Tel InterPrise products 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.
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DEVELOPMENT AND MAINTENANCE OF INTER-TEL.NET NETWORK
The Company is currently utilizing its Inter-Tel Vocal'Net technology
and Inter-Tel InterPrise products to develop and expand its own IP network,
Inter-Tel.net, to carry voice traffic. The Inter-Tel.net network is in its early
stages of deployment and, accordingly, is subject to risks. 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, Atlanta, Houston
and Los Angeles. Certain products that the Company purchased from TMSI have been
or are in the process of being tested and deployed in this network. If the
domestic or international market for IP network products fails to develop or
develops more slowly than the Company anticipates, or should the business
experience difficulty in the integration of the TMSI technology, the Company's
Inter-Tel.net network could become financially burdensome to maintain or
obsolete, 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 these suppliers raise rates or change pricing structures, the
Company may be materially adversely affected. Also, the Company faces the risk
that there could 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 Inter-Tel InterPrise products,
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 and key systems 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 Company also expects to
compete against large data router companies, like Cisco Systems and 3Com, which
have acquired telecommunications technology during 1997 through 1999.
The Telecommunications Act of 1996 and AT&T's division 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
13
<PAGE>
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, 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 and other competitors, many of which have
significantly greater resources than the Company. The Company also competes with
RBOCs, cable television companies, satellite and other wireless broadband
service providers, and others for long distance business as those companies
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.
In the market for IP telephony products, the Company competes against
existing IP telephony gateway providers such as Lucent, NetSpeak Corporation,
VocalTec Communications Ltd., Nokia IP Products (formerly 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 likely faces significant
competition from vendors such as Cisco Systems, Inc., Nortel, 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, when equipped with voice capabilities, could represent a
considerable threat to the Company within that market. In addition, most of the
above data router vendors have greater name recognition, more established
positions in the market, and long-standing relationships with data network
customers. Moreover, should the market for IP telephony products become fully
developed or develop at a rapid rate, large computer companies such as IBM and
Microsoft, or large telephone companies such as AT&T, MCI, Sprint Corporation,
or Qwest, 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. 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
14
<PAGE>
would have a material adverse effect on the Company's business, financial
condition and operating results.
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.
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
database vendor to replace its existing MIS software and implement, maintain and
support the 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 1998 and plan to roll out additional components of the software during
1999.
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 has required and will continue to 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. In June 1998, the Company purchased certain
assets of TMSI for cash of approximately $25 million plus the assumption of
certain liabilities and acquisition costs. In the second quarter of 1998, the
Company also acquired Integrated Telecom Services Corporation ("ITS"), pursuant
to which the Company issued approximately 140,000 shares of common stock,
accounted for as a purchase transaction. In addition, in December 1998, the
Company acquired certain assets of Central Florida Communications, Inc.
("Southcom") for approximately $2.3 million. This asset acquisition was
accounted for using purchase accounting. In November 1998, the Company also
acquired certain assets of Telesystems, Inc. ("Telesystems") for approximately
$300,000. This asset acquisition was also accounted for using the purchase
method of accounting. 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, Southcom 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 have a positive impact on 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, Southcom, 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.
15
<PAGE>
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
relatively small number of suppliers and manufacturers and, accordingly, product
availability could be limited. However, the Company believes that alternate
sources of supply are available for virtually every component. All of the
Company's proprietary products are manufactured according to specifications and
conditions set by the Company. Each manufacturer must meet the Company's
specifications relating to the manufacturing process and quality assurance
before such manufacturer is selected by the Company. The Company currently
manufactures its products through 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 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 any supplier, or the Company's inability to develop in a timely
manner alternative or additional sources if and when required, could adversely
affect the Company's business, financial condition and operating results.
Although the Company does not have long-term supply contracts with any of its
contract manufacturers, to date it has been able to obtain supplies of
components and products in a timely manner. There can be no assurance that the
Company will be able to continue to obtain components or finished goods in
sufficient quantities or quality or on favorable pricing and delivery terms in
the future.
PRODUCT PROTECTION AND INFRINGEMENT
The Company's future success will depend in part upon its proprietary
technology. The Company currently holds patents for six telecommunication and
unified messaging products. The Company has also 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 also relies 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 agreed 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
16
<PAGE>
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. There can be no assurance that any such dealer will not
promote the products of the Company's competitors to the detriment of the
Company's products. 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
sales personnel in a timely manner, could 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.
17
<PAGE>
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; EXTENDED SALES CYCLE; 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.
In the past 12 months, the Company introduced AXXESS networking systems
and software, which are typically sold to larger customers at a higher average
selling price. Our AXXESS networking products have a relatively high sales price
per unit, and often represent a significant and strategic decision by an
enterprise regarding its communications infrastructure. Accordingly, the
purchase of our products typically involves significant internal procedures
associated with the evaluation, testing, implementation and acceptance of new
technologies. This evaluation process frequently results in a lengthy sales
process, typically ranging from three months to more than nine months, and
subjects the sales cycle associated with the purchase of our products to a
number of significant risks, including budgetary constraints and internal
acceptance reviews. The length of our sales cycle also may vary substantially
from customer to customer. While our customers are evaluating our products and
before they may place an order with us, we may incur substantial sales and
marketing expenses and expend significant management effort. Consequently, if
sales forecasted from a specific customer for a particular quarter are not
realized in that quarter, the Company's operating results could be materially
adversely affected.
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 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."
18
<PAGE>
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, the market for Internet-related products and
services 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 READINESS
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, 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
readiness.
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 with systems that are designed to be Year 2000 ready.
This decision was made in the ordinary course of managing the Company's
information resources and not specifically implemented to address Year 2000
readiness issues. The Company is in the process of upgrading its long distance
billing system, which is designed to be Year 2000 ready. In addition, the
Company is reviewing its lease billing and collections system, which has been
warranted to be Year 2000 ready. The Company has contracted outside vendors to
perform detailed reviews of the readiness of information systems devices in use
in the Company's business. This assessment is expected to be complete during the
second quarter. Anticipated upgrades or remediation performed for devices that
are not Year 2000 ready are included in the Company's capital expenditure budget
for 1999, and are expected to be completed before year-end. The total cost of
each system is being or will be capitalized and depreciated in the normal course
of business. The Company expects its critical information systems to be Year
2000 ready by the end of the second quarter, and secondary systems and devices
by the end of the third quarter. The Company currently anticipates no material
disruptions in the services it provides to its customers as a result of Year
2000 problems. If any of the above systems are not Year 2000 ready, however, the
Company's business, financial condition and results of operations could be
materially adversely affected.
No assurance can be given that the Company's software products,
including components manufactured and or developed by the Company's suppliers
and vendors, 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. Products currently manufactured by Inter-Tel
are designed to be Year 2000 ready and recent testing of such products by our
engineers have indicated that such products are Year 2000 ready, in accordance
with our test procedures. Costs to develop and update the Company's
19
<PAGE>
products for Year 2000 readiness have been part of the research and development
efforts on an ongoing basis. 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. If
any of the Company's products are not Year 2000 ready, or if certain non-ready
products are not replaced or upgraded, the Company's business, financial
condition and results of operations could be materially adversely affected.
Moreover, the Company could also be materially 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 readiness. These expenditures may result
in reduced funds available to purchase software products such as those offered
by the Company. Many of the Company's customers and potential customers are
requesting information about Year 2000 readiness of the Company's products.
These customers and potential customers may also choose to defer purchasing Year
2000 ready 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 customers to accelerate purchases with Year
2000 readiness warranties, 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 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. Any of the above items
for which the Company is unable to provide Year 2000 readiness to these
customers could materially adversely affect the Company's business, financial
condition and results of operations.
Inter-Tel is completing programs and has developed evolution strategies
for customers who own non-Year 2000 ready Inter-Tel products. Inter-Tel has
begun extensive efforts to alert customers who have such non-Year 2000 ready
products, including direct mailings, phone contacts and participation in user
and industry groups. Inter-Tel also has a Year 2000 web site that provides Year
2000 product information. Inter-Tel is continuing contingency planning to
address potential increases in demand for customer support resulting from the
Year 2000 date change.
CONCENTRATION OF OWNERSHIP
As of March 31, 1999, Steven G. Mihaylo, the Company's Chairman of
the Board of Directors, Chief Executive Officer and President beneficially owned
approximately 20.4% 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.
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
20
<PAGE>
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 least 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. Since the Company mailed its proxy statement for the 1999 annual
meeting of stockholders on April 26, 1999, the deadline for receipt of any
such stockholder proposal for the 1999 annual meeting of stockholders is
March 12, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
Exhibits:
Exhibit 27: Financial Data Schedule
Reports on Form 8-K: No reports filed during quarter
- --------------------------------------------------------------------------------
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
May 14, 1999 /s/ Steven G. Mihaylo
- --------------- --------------------------
Steven G. Mihaylo
Chairman of the Board, Chief Executive
Officer and President
May 14, 1999 /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
quarter ended March 31, 1999 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
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<PERIOD-START> JAN-01-1999
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