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, 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
Common Stock
(25,841,131 shares outstanding as of June 30, 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 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
1999 and December 31, 1998
Condensed consolidated statements of operations--three 4
and six months ended June 30, 1999 and June 30, 1998
Condensed consolidated statements of cash flows 5
--three and six months ended June 30, 1999 and
June 30, 1998
Notes to condensed consolidated financial 6
statements--June 30, 1999
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,
1999 1998
--------- ---------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 60,313 $ 63,124
Accounts receivable - net 48,338 41,116
Inventories 17,980 19,663
Net investment in sales-leases 13,512 13,979
Prepaid expenses and other assets 3,897 2,781
--------- ---------
TOTAL CURRENT ASSETS 144,040 140,663
PROPERTY & EQUIPMENT 26,059 22,198
EQUIPMENT HELD UNDER LEASE, NET 6,477 6,771
OTHER ASSETS 30,272 27,398
--------- ---------
$ 206,848 $ 197,030
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 16,819 $ 14,956
Other current liabilities 29,806 29,390
--------- ---------
TOTAL CURRENT LIABILITIES 46,625 44,346
DEFERRED TAXES 4,575 5,026
OTHER LIABILITIES 6,418 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
Less: shareholder loans (871) --
Retained earnings 63,506 54,194
Accumulated other comprehensive income (226) (196)
--------- ---------
166,948 158,537
Less: Treasury stock at cost (17,718) (15,851)
TOTAL SHAREHOLDERS' EQUITY 149,230 142,686
--------- ---------
$ 206,848 $ 197,030
========= =========
3
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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,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 77,788 $ 68,088 $ 143,313 $ 131,846
Cost of sales 38,269 35,453 72,122 68,070
--------- --------- --------- ---------
GROSS PROFIT 39,519 32,635 71,191 63,776
Research & development 3,725 2,828 7,032 5,256
Selling, general and administrative 24,625 22,003 45,204 42,540
Purchased in-process research and
development and acquisition
related expenses -- 22,755 -- 22,755
--------- --------- --------- ---------
28,350 47,586 52,236 70,551
--------- --------- --------- ---------
OPERATING INCOME (LOSS) 11,169 (14,951) 18,955 (6,775)
Interest and other income 491 877 925 1,846
Interest expense (13) (30) (25) (39)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 11,647 (14,104) 19,855 (4,968)
Income taxes 4,426 (5,461) 7,542 (1,687)
--------- --------- --------- ---------
NET INCOME (LOSS) $ 7,221 $ (8,643) $ 12,313 $ (3,281)
========= ========= ========= =========
NET INCOME (LOSS) PER SHARE
Basic $ 0.28 $ (0.32) $ 0.47 $ (0.12)
========= ========= ========= =========
Diluted $ 0.27 $ (0.32) $ 0.46 $ (0.12)
========= ========= ========= =========
Average common shares outstanding 25,826 26,877 25,961 26,810
========= ========= ========= =========
Average common shares outstanding
assuming dilution 26,711 26,877 26,994 26,810
========= ========= ========= =========
</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,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS) 7,221 $ (8,643) 12,313 $ (3,281)
Adjustments to reflect operating activities:
Purchased in-process research and development -- 22,755 -- 22,755
Depreciation and amortization 2,201 1,481 4,324 2,733
Changes in operating assets and liabilities (5,704) (3,218) (12,511) (6,746)
Other 3,701 (5,317) 6,934 (3,596)
-------- -------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,419 7,058 11,060 11,865
INVESTING ACTIVITIES
Proceeds from disposal of property
and equipment and operating leases 1,999 -- 1,999 7
Cash used in acquisitions (500) (25,308) (720) (25,308)
Additions to property and equipment
and operating leases (4,435) (5,287) (9,380) (8,119)
-------- -------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (2,936) (30,595) (8,101) (33,420)
FINANCING ACTIVITIES
Payments for repurchase of common stock (6,682) -- (6,682) --
Cash dividends paid (262) (270) (522) (537)
Proceeds from Stock issued under the ESPP 421 359 421 359
Proceeds from exercise of stock options 160 640 1,013 1,097
-------- -------- -------- --------
NET CASH PROVIDED BY/(USED IN)
FINANCING ACTIVITIES (6,363) 729 (5,770) 919
DECREASE IN CASH AND EQUIVALENTS (1,880) (22,808) (2,811) (20,636)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 62,193 90,977 63,124 88,805
-------- -------- -------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 60,313 $ 68,169 $ 60,313 $ 68,169
======== ======== ======== ========
</TABLE>
5
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 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 and six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending 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, if the effect would not be antidilutive.
The following table sets forth the computation of basic and diluted earnings per
share:
(In thousands, except Three Months Ended Six Months Ended
per share amounts) ------------------- ------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------- --------- -------- --------
Numerator:
Net income (loss) $ 7,221 $ (8,643) $ 12,313 $ (3,281)
======== ========= ======== ========
Denominator:
Denominator for basic earnings per
share - weighted average shares 25,826 26,877 25,961 26,810
Effect of dilutive securities:
Employee and director stock options 885 -- 1,033 --
-------- --------- -------- --------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 26,711 26,877 26,994 26,810
======== ========= ======== ========
Basic earnings (loss) per share $ 0.28 $ (0.32) $ 0.47 $ (0.12)
======== ========= ======== ========
Diluted earnings (loss) per share $ 0.27 $ (0.32) $ 0.46 $ (0.12)
======== ========= ======== ========
NOTE C--ACQUISITIONS
Effective June 1998, Inter-Tel acquired certain assets and assumed certain
liabilities of Telecom Multimedia Systems, Inc. ("TMSI") for cash. The TMSI
acquisition was accounted for using the purchase method of accounting. The
aggregate purchase price of approximately $25 million plus related acquisition
costs was allocated to the acquired assets and liabilities based on fair values
at acquisition, of which $22.8 million ($13.7 million after taxes) was
written-off as purchased in-process research and development.
6
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NOTE D - 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 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 $76.1 million and $66.3
million of total revenues for the quarters ended June 30, 1999 and 1998,
respectively and $140.1 million and $128.0 million of total revenues for the six
months ended June 30, 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 second quarters of 1999
and 1998, revenues from customers located internationally accounted for 2.2% and
2.6% of total revenues, respectively. In the six months ended June 30, 1999 and
1998, revenues from customers located internationally accounted for 2.2% and
2.9% of total revenues, respectively.
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, under the section entitled
"Factors That May Affect Future Results Of Operations" below and elsewhere in
this 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 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 voice and
data routers and the Inter-Tel.net private IP long distance network. The Company
also provides maintenance, leasing and support services for its products.
7
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RESULTS OF OPERATIONS
Net sales for the second quarter of 1999 increased 14.2% to $77.8 million,
compared to $68.1 million in the second quarter of 1998. Net sales increased
8.7% to $143.3 million in the first six months of 1999, compared to $131.8
million in the first six months of 1998. For the quarter and six months ended
June 30, 1999, sales from wholesale distribution and direct sales offices
accounted for approximately $7.9 million and $8.1 million, respectively, of the
increase in net sales. The increase in net sales was also attributable to
increases in long distance sales and sales from leasing 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 Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 49.2 52.1 50.3 51.6
----- ----- ----- -----
Gross profit 50.8 47.9 49.7 48.4
Research and development 4.8 4.2 4.9 4.0
Selling, general and
administrative 31.6 32.3 31.5 32.3
In-process research and
development and related
acquisition expenses -- 33.4 -- 17.3
----- ----- ----- -----
Operating income 14.4 (22.0) 13.3 (5.2)
Interest and other income 0.6 1.3 0.6 1.4
Interest expense 0.0 0.0 0.0 0.0
Income taxes 5.7 (8.0) 5.3 (1.3)
----- ----- ----- -----
Net income (loss) 9.3% (12.7)% 8.6% (2.5)%
===== ===== ===== =====
Gross profit for the second quarter of 1999 increased 21.1% to $39.5
million, or 50.8% of net sales, compared to $32.6 million, or 47.9% of net
sales, for the second quarter of 1998. Gross profit increased 11.6% to $71.2
million, or 49.7% of net sales, in the first six months of 1999 compared to
$63.8 million, or 48.4% of net sales, in the first six months of 1998. Gross
margin increased in the second quarter of 1999 primarily as a result of sales
channel and product mix. A larger portion of the Company's sales increases were
through direct channels, as compared to sales through the dealer channel. In
addition, the Company experienced increased sales of its higher margin products
such as its AXXESS digital communication platforms, call processing software and
voice processing software as a percentage of net sales.
Research and development expenses for the second quarter of 1999 increased
to $3.7 million, or 4.8% of net sales, compared to $2.8 million, or 4.2% of net
sales, for the second quarter of 1998. Research and development expenses
increased to $7.0 million, or 4.9% of net sales, in the first six months of 1999
compared to $5.3 million, or 4.0% of net sales, in the first six months of 1998.
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 (which are branded as the Company's
Vocal'Net, InterPrise and Inter-Tel.net products). The Company expects that
research and 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 in the future, however, as a
percentage of net sales.
8
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Selling, general and administrative expenses for the second quarter of 1999
increased in absolute dollars to $24.6 million compared to $22.0 million for the
second quarter of 1998. Selling, general and administrative expenses increased
to $45.2 million in the first six months of 1999 compared to $42.5 million in
the first six months of 1998. The increases in absolute dollars for the quarter
and six months ended June 30, 1999, were attributable in part to 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; increased write-offs of accounts receivable as a percentage of sales; and
providing additional marketing resources for new IP product introductions and
network and long distance services. Selling, general and administrative expenses
decreased as a percentage of net sales for the quarter to 31.6% from 32.3% for
the second quarter of 1998, and also decreased as a percentage of net sales to
31.5% from 32.3% for the six months ended June 30, 1999. These decreases were
largely attributable to increased net sales and cost-cutting measures. The
Company expects that selling, general and administrative expenses will continue
to increase in absolute dollars, but may vary in the future 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 million plus
related acquisition costs. The aggregate purchase price was allocated to the
fair value of the assets and liabilities acquired, of which $22.8 million, or
$13.7 million after taxes, was written-off as purchased in-process research and
development.
Other income in both periods consisted primarily of interest income and
foreign exchange rate gains and losses. Income from interest decreased in both
comparable periods of 1999 based on a lower level of invested funds, principally
relating to the repurchase of shares of the Company's common stock during the
second half of 1998 and in the second quarter of 1999. Other changes in other
income primarily reflected differences in net foreign exchange rate gains and
losses.
Net income for the second quarter was $7.2 million ($0.27 per diluted
share), compared to a net loss of $8.6 million ($0.32 per diluted share) for the
second quarter of 1998, reflecting the write-off of those in-process research
and development costs noted above. Net income for the six months ended June 30,
1999 was $12.3 million, or $0.46 per diluted share, compared to a net loss of
$3.3 million, or $0.12 per diluted share, in the first six months of 1998,
reflecting the write-off of such in-process research and development costs.
Without such write-off, net income for the quarter ended June 30, 1999 would
have increased 44.1% compared to 1998. Moreover, without such write-off, net
income for the six months ended June 30, 1999 would have increased 18.7%
compared to 1998.
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
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, 1999, the Company had $60.3 million in cash and equivalents,
which represents a decrease of approximately $2.8 million from December 31,
1998. 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 this 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
9
<PAGE>
expand Inter-Tel.net and for potential acquisitions, strategic alliances,
working capital and general corporate purposes.
Net cash provided by operating activities totaled $11.1 for the six months
ended June 30, 1999, compared to net cash provided by operating activities of
$11.9 million for the same period in 1998. The operating cash flow in the first
six months of 1999 was primarily the result of profitable operations including
non-cash depreciation and amortization charges. During the first six months of
1999, accounts receivable increased approximately $7.2 million ($2.7 million of
which was attributable to an acquisition), while inventories decreased
approximately $1.7 million. During the first six months of 1999, increases in
accounts receivable and prepaid expenses and other assets were offset in part by
reductions in inventories and investment in sales-leases. 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, less
proceeds from the disposal of some operating leases, totaled $8.1 million in the
six months ended June 30, 1999, compared to $33.4 million for the same period of
1998. The net cash used 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 $25.3 million
in the first six months of 1998. Capital expenditures totaled approximately $9.4
million in 1999 and $8.1 million for 1998. The Company anticipates additional
capital expenditures during 1999, principally relating to potential acquisition
expenditures and other expenditures for equipment 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 used in financing activities totaled $5.8 million in the six
months ended June 30, 1999 compared to cash provided by financing activities
totaling $919,000 for the same period in 1998. Cash used in 1999 was related
primarily to payments for the repurchase of the Company's common stock of $6.7
million, offset by proceeds from the exercise of stock options and stock issued
under the Company's Employee Stock Purchase Plan ("ESPP"), less cash dividends
paid. During the second quarter of 1999, the Company initiated a stock
repurchase program under which the Board of Directors authorized the repurchase
of up to 2,500,000 shares of the Company's common stock. The Company stock
repurchases in the second quarter of 1999 were funded primarily by existing cash
balances. The Company reissued treasury shares with a cost basis of
approximately $4.9 million in connection with stock option and ESPP 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 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 $150.1 million and $131.3 remained unbilled at June 30, 1999 and
December 31, 1998, respectively. The Company is obligated to repurchase such
income streams in the event of defaults by lease customers, and accordingly,
maintains reserves based on loss experience and past due accounts. Although the
Company to date has been able to resell the rental streams from leases under the
Totalease program profitably and on a substantially current basis, the timing
and profitability of lease resales could impact the Company's business and
operating results, particularly in an environment of fluctuating interest rates
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 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
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<PAGE>
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
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 April 1999, the
Company released the InterPrise 400 voice and data router, the first of a family
of voice and data convergence products that will be released over the next year.
Also, during the second quarter of 1999, the Company introduced AXXESS and
AXXESSORY TALK 5.1 software into controlled product introduction. During the
past 12 months, sales of the Company's AXXESS digital communications platforms
and related software have comprised a substantial portion of the Company's net
sales. The Company expects that its future success will continue to depend, in
large part, upon the increasing commercial acceptance of the InterPrise products
and the AXXESS platform, as well as future upgrades and enhancements to these
products and networking platforms. There can be no assurance that any of these
introduced products and enhancements will be successful. Due to the complexity
of the Company's products, the Company has in the past and expects in the future
to experience delays in the development and release of new products or product
enhancements. 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 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
11
<PAGE>
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 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
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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.
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,
Los Angeles, Dallas, Ft. Lauderdale and Miami. 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.
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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 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
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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 Clarent, Lucent, NetSpeak
Corporation, VocalTec Communications Ltd., Nokia IP Products 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 faces significant competition from vendors such as Cisco
Systems, Inc., Nortel, 3Com Corporation, Motorola, Inc. and MICOM Communications
Corp., as these established data vendors have entered 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 Net2Phone, 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 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.
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, 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
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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. In this
regard, the Company recently received a letter from one of its primary
competitors alleging that the Company's AXXESS digital communications platform
utilizes inventions covered by certain of such competitor's patents. The Company
is currently in the process of investigating this matter. When any such claims
are asserted against the Company, the Company may seek to purchase a license
under the third party's intellectual property rights. Purchasing such licenses
can be expensive, and there can be no assurance that a license will be available
on prices or other 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.
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.
The Company has substantially implemented various components of the new MIS
software beginning in 1998 and completed the deployment of this software in June
1999. Full implementation of this system software and the transition from the
old 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. Acquisitions require a significant amount of
the Company's management attention and financial and operational resources, all
of which are limited. The integration of any acquired assets or entities, or
prospective acquisition candidates 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 acquired assets or 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
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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.
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. The Company relies principally
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
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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; 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 15 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 placing 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
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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."
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 has substantially updated its information
systems with systems that are designed to be Year 2000 ready. The Company has
upgraded its long distance billing system, which is warranted by the
manufacturer to be Year 2000 ready. In addition, the Company has reviewed and
tested its lease billing and collections system, which is Year 2000 ready. The
Company has contracted outside vendors to perform detailed reviews of the
readiness of other information systems devices in use in the Company's business.
This assessment has been completed. 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 either completed
before year-end or deemed unnecessary to the continuing operation of the
business. The total cost of each system is being or will be capitalized and
depreciated in the normal course of business. The Company's critical information
systems are believed to be substantially Year 2000 ready and secondary systems
and devices deemed necessary for the operation of the business will be completed
by the end of the fourth 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
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with our test procedures. Costs to develop and update the Company's products for
Year 2000 readiness have been part of the Company's ongoing research and
development efforts. Any disruption in manufacturing services provided by the
Company as a result of Year 2000 noncompliance could 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. The
Plan includes organizing a team of employees dedicated to the specific problems
of the Year 2000 change including monitoring key internal systems to insure
continuation of operations, and ongoing customer service in the beginning of the
new year.
CONCENTRATION OF OWNERSHIP
As of June 30, 1999, Steven G. Mihaylo, the Company's Chairman of the Board of
Directors, Chief Executive Officer and President beneficially owned
approximately 21.1% 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 1. LEGAL PROCEEDINGS--NOT APPLICABLE
ITEM 2. CHANGES IN SECURITIES--NOT APPLICABLE
20
<PAGE>
ITEM 3. DEFAULTS ON SENIOR SECURITIES--NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
1. On April 26, 1999, 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 21,352,160 156,725
J. Robert Anderson 21,351,477 157,408
Gary D. Edens 31,352,007 156,878
Maurice H. Esperseth 21,352,007 156,878
C. Roland Haden 21,352,007 156,878
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 by February 6, 2000,
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
Exhibit 27.1 - Financial Data Schedule for June 30, 1999
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 8-13-99 /s/ Steven G. Mihaylo
----------------------------------------
Steven G. Mihaylo,
Chairman of the Board,
Chief Executive Officer and President
Date 8-13-99 /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 JUNE 30, 1999 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
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 60,313
<SECURITIES> 0
<RECEIVABLES> 53,688
<ALLOWANCES> 5,350
<INVENTORY> 17,980
<CURRENT-ASSETS> 144,040
<PP&E> 59,583
<DEPRECIATION> 27,047
<TOTAL-ASSETS> 206,848
<CURRENT-LIABILITIES> 46,625
<BONDS> 0
0
0
<COMMON> 104,539
<OTHER-SE> 44,691
<TOTAL-LIABILITY-AND-EQUITY> 206,848
<SALES> 143,313
<TOTAL-REVENUES> 143,313
<CGS> 72,122
<TOTAL-COSTS> 72,122
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,551
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 19,855
<INCOME-TAX> 7,542
<INCOME-CONTINUING> 12,313
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,313
<EPS-BASIC> 0.47
<EPS-DILUTED> 0.46
</TABLE>
