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, 2003 0-10211
INTER-TEL, INCORPORATED
Incorporated in the State of Arizona I.R.S. No. 86-0220994
1615 S. 52nd Street
Tempe, Arizona 85281
(480) 449-8900
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Title of Class Outstanding as of June 30, 2003
-------------- -------------------------------
Common Stock, no par value 24,993,836
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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No[_]
INDEX
INTER-TEL, INCORPORATED AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets--June 30, 2003 and December 31, 2002
3
Condensed consolidated statements of income--three and six months ended June 30,
2003 and June 30, 2002 4
Condensed consolidated statements of cash flows--six months ended June 30, 2003
and June 30, 2002 5
Notes to condensed consolidated financial Statements--June 30, 2003
6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Changes in Securities and Use of Proceeds 33
Item 3. Defaults on Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURES 34
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(in thousands, except share amounts) 2003 2002
(Unaudited) (Note A)
ASSETS
CURRENT ASSETS
Cash and equivalents $ 86,583 $ 84,923
Short-term investments 50,444 40,916
- ----------------------------------------------------------------------------------------------------------------
Total cash and short-term investments 137,027 125,839
Accounts receivable, net of allowances of $11,376 in 2003 and
$12,159 in 2002 42,509 42,566
Inventories, net of allowances of $7,470 in 2003 and
$10,558 in 2002 12,769 11,329
Net investment in sales-leases, net of allowances of $739 in
2003 and $516 in 2002 16,444 13,344
Income taxes receivable 1,543 2,604
Deferred income taxes 3,744 2,377
Prepaid expenses and other assets 7,090 6,705
- -----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 221,126 204,764
PROPERTY, PLANT & EQUIPMENT 23,218 24,795
GOODWILL 17,646 17,646
PURCHASED INTANGIBLE ASSETS 6,890 7,416
NET INVESTMENT IN SALES-LEASES, net of allowances of
$1,696 in 2003 and $1,411 in 2002 27,613 24,692
OTHER ASSETS 165 2,749
- -----------------------------------------------------------------------------------------------------------------
$ 296,658 $ 282,062
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 27,990 $ 23,089
Other current liabilities 45,763 50,051
- -----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 73,753 73,140
DEFERRED TAX LIABILITY 17,991 16,320
LEASE RECOURSE LIABILITY 11,977 11,125
RESTRUCTURING RESERVE 549 1,049
OTHER LIABILITIES 6,870 6,525
SHAREHOLDERS' EQUITY
Common stock, no par value-authorized 100,000,000 shares;
issued-27,161,823 shares; outstanding-24,993,836 at June 30, 2003
and 24,908,983 shares at December 31, 2002 111,779 111,639
Less: Shareholder loans (312) (338)
Retained earnings 100,096 89,643
Accumulated other comprehensive income 170 195
- -----------------------------------------------------------------------------------------------------------------
211,733 201,139
Less: Treasury stock at cost - 2,167,987 shares in 2003 and 2,252,840
shares in 2002. (26,215) (27,236)
- -----------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 185,518 173,903
- -----------------------------------------------------------------------------------------------------------------
$ 296,658 $ 282,062
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes.
3
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except Three Months Six Months
per share amounts) Ended June 30, Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
NET SALES $ 95,102 $ 95,948 $ 179,271 $ 186,017
Cost of sales 44,852 47,473 84,947 92,489
- --------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 50,250 48,475 94,324 93,528
Research & development 5,426 4,538 10,660 8,855
Selling, general and administrative 33,001 32,866 64,247 63,523
Amortization of purchased intangible assets 486 269 914 526
- --------------------------------------------------------------------------------------------------------------------
38,913 37,673 75,821 72,904
- --------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 11,337 10,802 18,503 20,624
Litigation settlement (net of costs except for taxes) -- 214 -- 15,516
Write-down of investment in Inter-Tel.NET/Vianet -- (600) -- (1,200)
Interest and other income 432 513 875 953
Foreign currency transaction gains (losses) 26 284 (14) 200
Interest expense (71) (46) (103) (80)
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 11,724 11,167 19,261 36,013
Income tax provision 4,455 4,132 7,320 13,583
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 7,269 $ 7,035 $ 11,941 $ 22,430
- --------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE
- --------------------------------------------------------------------------------------------------------------------
Basic $ 0.29 $ 0.29 $ 0.48 $ 0.93
Diluted $ 0.28 $ 0.28 $ 0.46 $ 0.88
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE $ 0.03 $ 0.02 $ 0.06 $ 0.04
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Weighted average basic common shares 24,947 24,269 24,934 24,224
- --------------------------------------------------------------------------------------------------------------------
Weighted average diluted common shares 25,970 25,563 26,004 25,556
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes.
4
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands) Six Months
Ended June 30,
2003 2002
---- ----
OPERATING ACTIVITIES
Net income $ 11,941 $ 22,430
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation of fixed assets 3,533 3,712
Amortization of patents included in R&D expenses 111 111
Amortization of goodwill and purchased intangible assets 914 526
Provision for losses on receivables 1,595 1,954
Provision for losses on leases 2,606 3,230
Provision for inventory valuation 335 295
Decrease in other liabilities (1,466) (1,395)
Loss (gain) on sale of property and equipment 56 (25)
Deferred income taxes 304 258
Effect of exchange rate changes (26) 36
Changes in operating assets and liabilities (7,655) 11,454
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,248 42,586
INVESTING ACTIVITIES
Purchases of short-term investments (68,400) (18,100)
Maturities and sales of short-term investments 58,872 2,000
Additions to property, plant and equipment (2,082) (2,773)
Proceeds from disposal of property, plant and equipment 70 287
Proceeds from investment in Inter-Tel.NET/Vianet 1,450 --
Cash used in acquisitions -- (7,925)
- ----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (10,090) (26,511)
FINANCING ACTIVITIES
Cash dividends paid (1,495) (932)
Treasury stock purchases (12) (5)
Payments on term debt (75) (337)
Proceeds from exercise of stock options, including shareholder loan
repayments 616 1,338
Proceeds from stock issued under the ESPP 468 475
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (498) 539
- ----------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND EQUIVALENTS 1,660 16,614
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 84,923 58,795
- ----------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 86,583 $ 75,409
- --------------------------------------------------------------------------- --------------- --------------
See accompanying notes.
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2003
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States 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 ending June 30, 2003
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2003. The balance sheet at December 31, 2002 has been derived
from the audited financial statements at that date, but does not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. 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, 2002.
Certain prior year amounts have been reclassified to conform with the current
period presentation.
Stock-Based Compensation
In 2002, the Financial Accounting Standards Board ("FASB") issued
Statement No. 148 "Accounting for Stock-Based Compensation--Transition and
Disclosure, an amendment of FASB Statement No. 123" ("SFAS No. 148"), which
provides alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of SFAS No. 123 to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this statement amends APB Opinion No. 28, "Interim
Financial Reporting," to require disclosure about those effects in interim
financial information. We adopted SFAS No. 148 in the fourth quarter of 2002.
Since we have not changed to a fair value method of stock-based compensation,
the applicable portion of this statement only affects our disclosures.
We do not recognize compensation expense relating to employee stock
options because we only grant options with an exercise price equal to the fair
value of the stock on the effective date of grant. At June 30, 2003, the Company
has four stock-based employee and director incentive plans and an employee stock
purchase plan. The Company accounts for these plans under the recognition and
measurement principles of APB No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Stock-based employee compensation costs
are not reflected in net income, as all options granted under the plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. If we had elected to recognize compensation expense using a fair
value approach, and therefore determined the compensation based on the value as
determined by the modified Black-Scholes option pricing model, the pro forma net
income and earnings per share would have been as follows:
Six Months Ended June 30,
(in thousands, except per share data) 2003 2002
Net income, as reported $ 11,941 $ 22,430
Deduct: total stock-based compensation expense determined under fair
value based method for all awards, net of tax (1,473) (1,230)
------------------- ------------------
Pro forma net income $ 10,468 $ 21,200
=================== ==================
Earnings per share of common stock
Basic - as reported $ 0.48 $ 0.93
Basic - pro forma $ 0.42 $ 0.88
Diluted - as reported $ 0.46 $ 0.88
Diluted - pro forma $ 0.40 $ 0.83
6
The fair value for these options was estimated at the date of grant using
a Black-Scholes option pricing model using the low end of reasonable assumptions
for input variables rather than attempting to identify a best-point estimate.
The option pricing model utilized the following weighted average assumptions for
2003 and 2002: risk free interest rates of 2.81% for 2003 and 2.73% for 2002;
dividend yields of 1.2% for 2003 and 0.75% for 2002; volatility factors of the
expected market price of our stock averaged .587 for 2003 and .576 for 2002.
Employee stock options vest over four to five year periods and director options
vest at the end of six months from the grant date.
New Accounting Standards and Pronouncements
Costs Associated with Exit or Disposal Activities: In 2002, the FASB
issued Statement of Financial Accounting Standards No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). This
standard requires companies to recognize costs associated with exit or disposal
activities when they are incurred, rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, plant closing, or other exit or disposal activity. We adopted
SFAS No. 146 effective January 1, 2003, to be applied prospectively to exit or
disposal activities initiated after December 31, 2002, and its adoption did not
have any effect on our financial position or results of operations.
Asset Retirement Obligations: In 2001, the FASB issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and associated asset retirement costs. We adopted SFAS No. 143 on January
1, 2003 and its adoption did not have any effect on our financial position or
results of operations.
Variable Interest Entities: In January 2003, the FASB issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
interpretation of ARB 51" ("FIN 46"). The primary objectives of FIN 46 are to
provide guidance on the identification of entities for which control is achieved
through means other than through voting rights ("VIEs") and how to determine
when and which business enterprise should consolidate the VIE. This new model
for consolidation applies to an entity which either (1) the equity investors (if
any) do not have a controlling financial interest or (2) the equity investment
at risk is insufficient to finance that entity's activities without receiving
additional subordinated financial support from other parties. We do not expect
the adoption of this standard to have any impact on our results of operations,
financial position or liquidity.
Guarantees: In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation
expands the disclosure requirements of guarantee obligations and requires the
guarantor to recognize a liability for the fair value of the obligation assumed
under a guarantee. In general, FIN 45 applies to contracts or indemnification
agreements that contingently require the guarantor to make payments to the
guaranteed party based on changes in an underlying instrument that is related to
an asset, liability, or equity security of the guaranteed party. Other
guarantees are subject to the disclosure requirements of FIN 45 but not to the
recognition provisions and include, among others, a guarantee accounted for as a
derivative instrument under SFAS No. 133, "Accounting for Derivatives and
Hedging" ("SFAS No. 133"), a parent's guarantee of debt owed to a third party by
its subsidiary or vice versa, and a guarantee which is based on performance. The
disclosure requirements of FIN 45 were effective as of December 31, 2002. The
recognition requirements of FIN 45 are to be applied prospectively to guarantees
issued or modified after December 31, 2002. Adoption of FIN 45 to has not had
any impact on our results of operations, financial position or liquidity.
Contingencies. We are a party to various claims and litigation in the
normal course of business. Management's current estimated range of liability
related to various claims and pending litigation is based on claims for which
our management can estimate the amount and range of loss. Because of the
7
uncertainties related to both the amount and range of loss on the remaining
pending claims and litigation, management is unable to make a reasonable
estimate of the liability that could result from an unfavorable outcome. As
additional information becomes available, we will assess the potential liability
related to our pending litigation and revise our estimates. Such revisions in
our estimates of the potential liability could materially impact our results of
operations and financial position.
Divisions of the United States Department of Justice are investigating
other companies' and Inter-Tel's participation in a federally funded "E-Rate
program" to connect schools and libraries to the Internet. The Justice
Department has not provided Inter-Tel with a description of the evidence on
which the investigations are based. Inter-Tel is presently unable to predict or
determine the final outcome of, or to estimate the potential range of loss with
respect to, the investigations. Based upon the information known at this time,
we do not expect the investigations to result in a material adverse impact upon
the Company's business or financial condition. If Inter-Tel is convicted of any
crime or subjected to sanctions, or debarred from certain government contracts
or if penalties, damages or other monetary remedies are assessed against
Inter-Tel in connection with or related to these and other investigations, our
business and operating results could be materially and adversely affected. The
existence and disclosure of the investigations may have already caused
competitive harm to Inter-Tel, and any unfavorable resolution to these matters
may further harm Inter-Tel's business. Nevertheless, the early nature of the
investigations makes it difficult to determine whether the likelihood of a
material adverse outcome is likely.
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 for which
the 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, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Numerator: Net income $ 7,269 $ 7,035 $ 11,941 $ 22,430
======= ======= ======== ========
Denominator:
Denominator for basic earnings per
share - weighted average shares 24,947 24,269 24,934 24,224
Effect of dilutive securities:
Employee and director stock options 1,023 1,294 1,070 1,332
------- ------- -------- --------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 25,970 25,563 26,004 25,556
======= ======= ======== ========
Basic earnings per share $ 0.29 $ 0.29 $ 0.48 $ 0.93
======= ======= ======== ========
Diluted earnings per share $ 0.28 $ 0.28 $ 0.46 $ 0.88
======= ======= ======== ========
At June 30, 2003 and 2002, options to purchase 1,165,200 and 1,104,800 shares,
respectively, of Inter-Tel stock were excluded from the calculation of diluted
net earnings per share for the periods presented because the exercise price of
these options was greater than the average market price of the common shares for
the respective fiscal years, and therefore the effect would have been
antidilutive.
NOTE C - ACQUISITIONS, DISPOSITIONS AND RESTRUCTURING CHARGES
McLeod. On January 24, 2002, we acquired certain assets of McLeodUSA Integrated
Business Systems, Inc. ("McLeod") for cash plus the assumption of various
specific liabilities and related acquisition costs. Inter-Tel acquired McLeod's
voice customer base in Minnesota, Iowa and Colorado and DataNet operations in
South Dakota, which also included the related accounts receivable, inventory and
fixed assets
8
along with assumption of scheduled specific liabilities for warranty and
maintenance obligations. The aggregate purchase price of $7.9 million was
allocated to the fair value of the assets and liabilities acquired.
In connection with the McLeod acquisition, we recorded goodwill of approximately
$4.0 million and other purchased intangible assets of $0.5 million, for a total
of $4.5 million. The goodwill balance is being accounted for in accordance with
SFAS 141 and 142. The balances included in other purchased intangible assets
will be amortized over periods ranging from two to five years from the date of
the acquisition. During the quarters ended June 30, 2003 and 2002, the
amortization of purchased intangible assets from McLeod was $38,000 and $25,000,
respectively.
Swan. On December 3, 2002, Inter-Tel Integrated Systems, Inc., our wholly-owned
subsidiary, acquired 100% of the capital stock of Swan Solutions Limited
("Swan") in England and Wales, for $4.0 million in cash. Of this amount, $3.0
million was paid at closing, $250,000 is payable in six months from the closing
date and $250,000 is payable one year from closing date. The remaining $500,000
is subject to the achievement of five performance milestones triggering the
payment of $100,000 each. As of June 30, 2003, the first two of the milestones
were achieved and $200,000 in the aggregate was paid to the Swan shareholders.
Achievement of performance milestones is considered a part of the purchase price
and accordingly, for purposes of determining the total purchase price, $500,000
was deemed to be achieved and added to the purchase price and capitalized as
purchased intangibles. These technology assets are being amortized over a life
of 5 years. The remaining three milestones must be achieved by June 30, 2004.
Accordingly, the purchase price may be reduced if any portion of the remaining
milestones is not achieved. Through June 30, 2003, we recorded amortizable
intangible technology assets of $3.9 million in connection with this
acquisition. During the first six months of 2003 the amortization of these
technology assets from Swan was $402,000.
Inter-Tel.NET/Comm-Services/Vianet. On July 24, 2001, Inter-Tel sold 83% of the
stock of Inter-Tel.NET, Inc. to Comm-Services Corporation for a note of $4.95
million, collateralized by Comm-Services stock, other marketable securities of
the shareholders of Comm-Services and 100% of the net assets of Inter-Tel.NET.
In connection with the sale of 83% of Inter-Tel.NET, we assessed the fair value
of the remaining 17% investment in Inter-Tel.NET. Pursuant to SFAS 121, we
recorded a charge as of the close of the second quarter of 2001 of $5.4 million
($3.4 million after tax) associated with the impairment of our investment in
Inter-Tel.NET. After the impairment charge, the carrying value of our investment
(the note receivable from Comm-Services plus the 17% ownership interest in
Comm-Services) totaled $3.7 million as of December 31, 2001. The charge was
primarily non-cash.
Inter-Tel's management has not participated in the management of Inter-Tel.NET
since the sale in July 2001. As a result, since July 24, 2001, we have accounted
for the remaining Inter-Tel.NET/Comm-Services investment using the cost method
of accounting. On December 30, 2001, Comm-Services entered into a merger
agreement with Vianet. Inter-Tel's 17% investment in Comm-Services was converted
to approximately 10% of Vianet stock and as a result, Vianet assumed the loan
for the purchase and Inter-Tel continued to hold collateral from the former
shareholders of Comm-Services until March 2003. During the first six months of
2002, the net investment in the notes receivable and 10% interest in Vianet
(formerly Comm-Services) was written down by $1.2 million ($600,000 each in the
first and second quarters) and was recorded in other assets at a carrying value
of approximately $2.5 million as of December 31, 2002, which approximated
management's estimate of the related collateral value at that time.
During 1999, 2000 and 2001, Inter-Tel.NET entered into operating lease
agreements totaling approximately $6.5 million from an equipment vendor for
network equipment and software. The lease agreements required Inter-Tel.NET to
purchase vendor maintenance on their products. Inter-Tel originally guaranteed
the indebtedness. In February 2003, we executed an agreement with Vianet and
this vendor releasing Inter-Tel from its guarantee of all of these obligations,
and Inter-Tel and Vianet released the vendor from claims arising from the
failure of the network equipment and software previously leased. As part of this
agreement, Inter-Tel also received payment from the Vianet shareholders of $1.45
million, in exchange for the release of the remaining collateral and as payment
of the loan. The value received in this transaction was equivalent to our
remaining investment value, less accruals for potential obligations to the
vendor discussed above.
9
Inter-Tel retains its ownership interest in Vianet and will account for the
remaining investment interest of approximately 10% in Vianet using the cost
method of accounting.
Executone Restructuring Charge. During the second quarter of 2000, we recognized
a restructuring charge related to acquired Executone operations. We accounted
for the restructuring of the Executone operations, including severance and
related costs, the shut down and consolidation of the Milford facility and the
impairment of assets associated with the restructuring as identified in the
table below. Accrued costs associated with this plan were estimates, although
the original estimates made for the second quarter of 2000 for reserve balances
have not changed significantly through June 30, 2003.
Exit costs associated with the closure of the Milford facility also included
liabilities for building, furniture and equipment lease, and other contractual
obligations. We are liable for the lease on the Milford buildings through
January 2005. Various furniture leases ran concurrently through March 2002.
Other capital leases for computer and other equipment terminated on varying
dates through September 2002. To date, we have entered into sublease agreements
with third parties to sublease portions of the facility and equipment. The
reserve for lease and other contractual obligations is identified in the table
below.
The following table summarizes details of the restructuring charge taken in the
second quarter of 2000 in connection with the Executone acquisition, including
the description of the type and amount of liabilities assumed, and activity in
the reserve balances from the date of the charge through June 30, 2003.
Activity Reserve
Cash/ Restructuring Through 2003 Balance
Description Non-Cash Charge 2002 Activity At 6/30/03
- ---------------------------------------------------------------------------------------------------------------
Personnel Costs:
Severance and termination costs Cash $ (1,583) $ 1,580 $ 3 $ --
Other Plant closure costs Cash (230) 230 -- --
Lease termination and other contractual
obligations (net of anticipated
recovery):
Building and equipment leases Cash (7,444) 5,431 477 (1,536)
Other contractual obligations Cash (1,700) 1,700 -- --
Impairment of Assets:
Inventories Non-Cash (3,454) 3,454 -- --
Prepaid inventory and other expenses Non-Cash (2,485) 2,485 -- --
Accounts receivable Non-Cash (1,685) 854 390 (441)
Fixed assets Non-Cash (3,151) 2,995 -- (156)
Net intangible assets Non-Cash (29,184) 29,184 -- --
- -------------------------------------- ------------ -------------- ----------- ---------- ------------------
Total $ (50,916) $ 47,913 $ 870 $ (2,133)
- -------------------------------------- ------------ -------------- ----------- ---------- ------------------
NOTE D - SEGMENT INFORMATION
Inter-Tel follows Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 established 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 established 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
10
making decisions as to how to allocate resources and assess performance. The
Company's chief decision maker, as defined under SFAS 131, is the Chief
Executive Officer.
We view our operations as primarily composed of two segments: (1) telephone
systems, telecommunications software and hardware, and (2) local and long
distance calling services. These services are provided through the Company's
direct sales offices and dealer network to business customers throughout the
United States, Europe, Asia, Mexico and Canada. As a result, financial
information disclosed represents substantially all of the financial information
related to the Company's two principal operating segments. Results of operations
for the local and long distance calling services segment, if the operations were
not included as part of the consolidated group, could differ materially, as the
operations are integral to the total telephony solution offered by us to our
customers.
In addition to the two primary segments discussed above, the Inter-Tel.NET
operations/investment, Inter-Tel's former IP long distance subsidiary, is
separately disclosed as a business segment through June of 2002. On July 24,
2001, Inter-Tel agreed to sell 83% of Inter-Tel.NET to Comm-Services
Corporation. As a result, since July 24, 2001, we have accounted for the
remaining 17% Inter-Tel.NET/Comm-Services investment using the cost method of
accounting. On December 30, 2001, Comm-Services entered into a merger agreement
with Vianet. Inter-Tel's 17% investment in Inter-Tel.NET/Comm-Services was
converted to approximately 10% of Vianet stock. Inter-Tel assessed the value of
this investment at March 31, 2002 and wrote-down this investment by $600,000.
Inter-Tel assessed the value of this investment again at June 30, 2002 and
wrote-down this investment by another $600,000. In February 2003, we executed an
agreement with Vianet (See Note C) and the vendor releasing Inter-Tel from its
guarantee of any and all of these obligations, and Inter-Tel and Vianet released
the vendor from claims arising from the failure of the network equipment and
software previously leased. As part of this agreement, Inter-Tel also received
payment from the Vianet shareholders of $1.45 million, in exchange for the
release of the remaining collateral and as payment of the loan. Inter-Tel will
account for the remaining 10% investment in Vianet (formerly Comm-Services)
using the cost method of accounting.
For the quarters and six months ended June 30, 2003 and 2002, we generated
income from business segments, including income from a litigation settlement and
losses from our investment in Inter-Tel.NET/Vianet for 2002, as follows:
Three Months Ended June 30, 2003
Resale of
Local and
(In thousands, except per share Subtotal Long
amounts) Principal Litigation Principal Inter-Tel.NET Distance
Segment Settlement Segment /Vianet Services Total
- ------------------------------------------------------------------------------------------------------------------------
Net sales $ 85,621 $ -- $ 85,621 $ -- $ 9,481 $ 95,102
Gross profit 47,272 -- 47,272 -- 2,978 50,250
Operating income 9,953 -- 9,953 -- 1,384 11,337
Interest and other income 396 -- 396 -- 36 432
Foreign currency transaction gains 26 -- 26 -- -- 26
Interest expense (71) -- (71) -- -- (71)
Net income $ 6,389 $ -- $ 6,389 $ -- 880 $ 7,269
Net income per diluted share (1) $ 0.25 $ -- $ 0.25 $ -- $ 0.03 $ 0.28
Weighted average diluted shares (1) 25,970 25,970 25,970 -- 25,970 25,970
Total assets $277,135 $ -- $277,135 $ -- $19,523 $296,658
Depreciation and amortization 2,265 -- 2,265 -- 11 2,276
11
Three Months Ended June 30, 2002
Resale of
Local and
(In thousands, except per share Subtotal Long
amounts) Principal Litigation Principal Inter-Tel.NET Distance
Segment Settlement Segment /Vianet Services Total
- ------------------------------------------------------------------------------------------------------------------------
Net sales $ 88,815 $ -- $ 88,815 $ -- $ 7,133 $ 95,948
Gross profit 45,905 -- 45,905 -- 2,570 48,475
Operating income 9,392 -- 9,392 -- 1,410 10,802
Interest and other income 474 214 688 (600) 39 127
Foreign currency transaction gains 284 -- 284 -- -- 284
Interest expense (46) -- (46) -- -- (46)
Net income $ 6,365 $ 135 $ 6,500 $ (378) $ 913 $ 7,035
Net income per diluted share (1) $ 0.25 $ 0.01 $ 0.26 $ (0.02) $ 0.04 $ 0.28
Weighted average diluted shares (1) 25,563 25,563 25,563 24,269 25,563 25,563
Total assets $245,195 $ -- $245,195 $ -- $13,216 $258,411
Depreciation and amortization 2,137 -- 2,137 -- 20 2,157
Six Months Ended June 30, 2003
Resale of
Local and
(In thousands, except per share Subtotal Long
amounts) Principal Litigation Principal Inter-Tel.NET Distance
Segment Settlement Segment /Vianet Services Total
- ------------------------------------------------------------------------------------------------------------------------
Net sales $161,296 $ -- $ 161,296 $ -- $ 17,975 $ 179,271
Gross profit 88,832 -- 88,832 -- 5,492 94,324
Operating income 15,932 -- 15,932 -- 2,571 18,503
Interest and other income 806 -- 806 -- 69 875
Foreign currency transaction losses (14) -- (14) -- (14)
Interest expense (103) -- (103) -- (103)
Net income $ 10,305 $ -- $ 10,305 $ -- $ 1,636 $ 11,941
Net income per diluted share (1) $ 0.40 $ -- $ 0.40 $ -- $ 0.06 $ 0.46
Weighted average diluted shares (1) 26,004 26,004 26,004 -- 26,004 26,004
Total assets $277,135 $ -- $ 277,135 $ -- $ 19,523 $ 296,658
Depreciation and amortization 4,535 -- 4,535 -- 23 4,558
Six Months Ended June 30, 2002
Resale of
Local and
(In thousands, except per share Subtotal Long
amounts) Principal Litigation Principal Inter-Tel.NET Distance
Segment Settlement Segment /Vianet Services Total
- ------------------------------------------------------------------------------------------------------------------------
Net sales $172,094 $ -- $172,094 $ -- $ 13,923 $ 186,017
Gross profit 89,501 -- 89,501 -- 4,027 93,528
Operating income 18,773 -- 18,773 -- 1,851 20,624
Interest and other income 885 15,516 16,401 (1,200) 68 15,269
Foreign currency transaction gains 200 -- 200 -- -- 200
Interest expense (80) -- (80) -- -- (80)
Net income $ 12,480 $ 9,496 $ 21,976 $ (757) $ 1,211 $ 22,430
Net income per diluted share (1) $ 0.49 $ 0.37 $ 0.86 $ (0.03) $ 0.05 $ 0.88
Weighted average diluted shares (1) 25,556 25,556 25,556 24,224 25,556 25,556
Total assets $245,195 $ -- $245,195 $ -- $ 13,216 $ 258,411
Depreciation and amortization 4,299 -- 4,299 -- 50 4,349
1) Options that are antidilutive because the exercise price was greater than the
average market price of the common shares are not included in the computation of
diluted earnings per share when a net loss is recorded.
Our revenues are generated predominantly in the United States. Total revenues
generated from U.S. customers totaled $173.8 million or 97.0% of total revenues,
and $181.1 million or 97.3% of total revenues for the six months ended June 30,
2003 and 2002, respectively. The Company's revenues from international sources
were primarily generated from customers located in the United Kingdom, Europe
and Asia. In the first six months of 2003 and 2002, revenues from customers
located internationally accounted for 3.0% and 2.7% of total revenues,
respectively.
12
NOTE E - NET INVESTMENT IN SALES-LEASES
Net investment in sales-leases represents the value of sales-leases presently
held under our Total Solution program. We currently sell the rental payments due
to us from some of the sales-leases. We maintain reserves against our estimate
of potential recourse for the balance of sales-leases and for the balance of
sold rental payments remaining unbilled. The following table provides detail on
the total net balances in sales-leases (in thousands):
June 30, December 31,
2003 2002
- ---------------------------------------------------------------------------------------------------------------
Lease balances included in consolidated accounts receivable, net of $ 7,357 $ 6,470
allowances of $2,068 in 2003 and $2,562 in 2002
Net investment in Sales-Leases:
Current portion, net of allowances of $739 in 2003 and $516 in 2002
16,444 13,344
Long-term portion, includes residual amounts of $486 in 2003 and $518 in
2002, net of allowances of $1,696 in 2003 and $1,411 in 2002 27,613 24,692
- ---------------------------------------------------------------------------------------------------------------
Total investment in Sales-Leases, net of allowances of $4,502 in 2003 and
$4,489 in 2002 51,414 44,506
Soldrental payments remaining unbilled (subject to limited recourse
provisions), net of allowances of $11,977 in 2003 and $11,125 in 2002 195,574 194,684
- ---------------------------------------------------------------------------------------------------------------
Total balance of sales-leases and sold rental payments remaining unbilled,
net of allowances $ 246,988 $ 239,190
- ---------------------------------------------------------------------------------------------------------------
Total allowances for entire lease portfolio (including limited recourse
liabilities) $ 16,479 $ 15,614
- ---------------------------------------------------------------------------------------------------------------
Reserve levels are established based on portfolio size, loss experience, levels
of past due accounts and periodic, detailed reviews of the portfolio. Recourse
on the sold rental payments is contractually limited to a percentage of the net
credit losses in a given annual period as compared to the beginning portfolio
balance for a specific portfolio of sold leases. While our recourse is limited,
we maintain reserves at a level that we believe is sufficient to cover all
anticipated credit losses. The aggregate reserve for uncollectible lease
payments and recourse liability represents the reserve for the entire lease
portfolio. These reserves are either netted from consolidated accounts
receivable, netted against current or long-term "investment in sales-leases" or
included in long-term liabilities for sold rental payments remaining unbilled.
Sales of rental payments per period:
Six Months Ended Year Ended
(In thousands) June 30, 2003 December 31, 2002
- ----------------------------------------------------------------------------------------------------------
Sales of rental payments $ 41,187 $ 83,141
Sold payments remaining unbilled at end of period $ 207,551 $ 205,809
Sales of rental payments represents the gross selling price or total present
value of the payment stream on the sale of the rental payments to third parties.
Sold payments remaining unbilled at the end of the period represents the total
balance of leases that are not included in our balance sheet. We do not expect
to incur any significant losses in excess of reserves from the recourse
provisions related to the sale of rental payments.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF 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 our expectations, beliefs,
intentions or strategies for the future. All forward-looking statements included
in this document are based on information available to us on the date hereof,
and we assume 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.
Our 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 Future Operating Results" below and
elsewhere in this document.
Overview
Inter-Tel, incorporated in 1969, is a single point of contact, full service
provider of converged voice and data business communications systems, voice mail
systems and networking applications. We market and sell voice processing and
unified messaging software, call accounting software, Internet Protocol ("IP")
telephony software, computer-telephone integration ("CTI") applications, local
and long distance calling services through NetSolutions (our wholly-owned
subsidiary), and other communications services. Our products and services
include the Axxess by Inter-Tel, Eclipse(2) by Inter-Tel and Encore by Inter-Tel
business communication systems, with integrated voice processing and unified
messaging systems, IP telephony voice and data routers, and e-commerce software.
We also provide maintenance, leasing and support services for our products. Our
customers include business enterprises, government agencies and non-profit
organizations. Our common stock is quoted on the Nasdaq National Market System
under the symbol "INTL."
We have developed a distribution network of direct sales offices, dealers and
value added resellers (VARs), which sell our products to organizations
throughout the United States and internationally, including to divisions of
Fortune 500 companies, large service organizations and governmental agencies. As
of June 30, 2003, we had 51 direct sales offices in the United States and one in
Japan, and a network of hundreds of dealers and VARs around the world that
purchase directly from us. We also maintain a wholesale distribution office in
the United Kingdom that supplies Inter-Tel's dealers and distributors throughout
the United Kingdom and parts of Europe. In December 2002, we also acquired Swan
Solutions Limited, a research and development and software sales office in the
United Kingdom.
Sales of systems through our dealers and VARs typically generate lower gross
margins than sales through our direct sales organization, although direct sales
typically require higher levels of selling, general and administrative expenses.
In addition, our long distance services and Datanet products typically generate
lower gross margins than sales of software and system products. Accordingly, our
margins may vary from period to period depending upon distribution channel and
product mix. In the event that sales through dealers or sales of long distance
services increase as a percentage of net sales, our overall gross margin could
decline.
Our operating results depend upon a variety of factors, including the volume and
timing of orders received during a period, the mix of products sold and the mix
of distribution channels, general economic conditions, patterns of capital
spending by customers, the timing of new product announcements and releases by
us and our competitors, pricing pressures, the cost and effect of acquisitions
and the availability and cost of products and components from our suppliers.
Historically, a substantial portion of our net sales in a given quarter has been
recorded in the third month of the quarter, with a concentration of such net
sales in the last two weeks of the quarter. In addition, we are subject to
seasonal variations in our operating results, as net sales for the first and
third quarters are frequently less than those experienced during the fourth and
second quarters, respectively.
The markets we serve have been characterized by rapid technological changes and
increasing customer requirements. We have sought to address these changes and
requirements through the development of software enhancements and improvements
to existing systems and the introduction of new systems, products, and
applications. Inter-Tel's research and development efforts over the last several
years have been focused primarily on the development of, and enhancements to,
our Axxess and Eclipse(2) systems,
14
including adding new applications, incorporating IP convergence applications and
IP telephones into our product lines, developing Unified Messaging Software
applications, developing speech recognition and text-to-speech applications,
developing and enhancing call center applications, developing Unified
Communications Software applications, and expanding the telecommunications
networking package to include networking over IP and frame relay networks.
Inter-Tel's current efforts are focused on developing and enhancing the
convergence applications for our Axxess system, enhancing our server-PBX
offering, enhancing our unified communications applications, developing new IP
endpoint technology, and enhancing our call center applications.
We offer to our customers a package of lease financing and other services under
the name Total Solution (formerly, Totalease). Total Solution provides our
customers lease financing, maintenance and support services, fixed price
upgrades and other benefits. We finance this program through the periodic resale
of lease rental streams to financial institutions. Refer to Note E of Notes to
Consolidated Financial Statements for additional information regarding our
program.
Results of Operations
The following table sets forth certain statement of operations data expressed as
a percentage of net sales for the periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
NET SALES 100.0% 100.0% 100.0% 100.0%
Cost of sales 47.2 49.5 47.4 49.7
- ------------------------------------------------------------------------------------------------------
GROSS PROFIT 52.8 50.5 52.6 50.3
Research and development 5.7 4.7 5.9 4.8
Selling, general and administrative 34.7 34.2 35.8 34.1
Amortization 0.5 0.3 0.5 0.3
- ------------------------------------------------------------------------------------------------------
OPERATING INCOME 11.9 11.3 10.3 11.1
Litigation settlement (net of costs except
for taxes) -- 0.2 -- 8.3
Interest and other income 0.5 0.5 0.5 0.5
Write-down of investment in
Inter-Tel.NET/Vianet -- (0.6) -- (0.6)
Foreign currency transaction gains (losses)
0.0 0.3 (0.0) 0.1
Interest expense (0.1) (0.0) (0.1) (0.0)
- ------------------------------------------------------------------------------------------------------
Income before income taxes 12.3 11.6 10.7 19.4
Income taxes 4.7 4.3 4.1 7.3
- ------------------------------------------------------------------------------------------------------
Net income 7.6% 7.3% 6.7% 12.1%
- ------------------------------------------------------------------------------------------------------
Net Sales. Net sales decreased 0.9% to $95.1 million in the second quarter
of 2003 from $95.9 million in the second quarter of 2002, representing a
decrease of $846,000. Sales from our direct sales offices decreased $2.3 million
in the second quarter of 2003 compared to the second quarter of 2002. Sales from
our government and national accounts decreased $0.4 million over the same
periods. Sales from our DataNet division decreased $2.0 million in the second
quarter of 2003 compared to the second quarter of 2002. These decreases were
offset in part by increases of $2.3 million in sales from our long distance
resale and network services division and $0.4 million in sales to our dealer
network in the second quarter of 2003 compared to the second quarter of 2002.
The decrease in net sales for the second quarter of 2003 compared to the
second quarter of 2002 from our direct sales offices, government and national
accounts division and Datanet division, offset in part by a slight increases in
dealer network sales and international operations, were primarily a result of
lower volumes of systems sold as a result of weak economic conditions, increased
competitive pressures and delayed buying decisions by customers. In some
instances, prices of various telecommunications systems decreased, and discounts
or other competitive promotions that were offered to customers to generate
15
sales resulted in lower revenues from both our direct and indirect sales
channels. Sales of communications systems were impacted by delayed buying
decisions, in particular in our direct sales offices resulting from weak
economic conditions affecting our industry. Sales to new customers declined
during the second quarter of 2003, as recurring revenues to existing customers
increased as a percentage of total sales.
Sales from our long distance resale and network services division
represented our largest percentage sales increases in the second quarter of 2003
as compared to the second quarter of 2002. Sales increased in NetSolutions, our
long distance division, by 32.9%, despite downward pricing pressure and
significant competition. Increased sales volume has allowed NetSolutions to
offer more competitive pricing, which improved sales to our existing customer
base. Network services revenues decreased 46.9% in the second quarter of 2003
compared to the second quarter of 2002, on lower sales volume and commissions on
local and network services such as T-1 access, frame relay and other voice and
data circuit services, due in part to changes to agency terms and contract
provisions with a regional bell operating company. See Note D of Notes to
Condensed Consolidated Financial Statements for additional segment reporting
information.
Gross Profit. Gross profit for the second quarter of 2003 increased 3.7%
to $50.3 million, or 52.8% of net sales, from $48.5 million, or 50.5% of net
sales, in the second quarter of 2002. Gross profit increased 0.9% to $94.3
million, or 52.6% of net sales, in the first six months of 2003 compared to
$93.5 million, or 50.3% of net sales, in the first six months of 2002. The
increases in gross profit dollars and as a percentage of net sales (or gross
margin), resulted from several different factors, including a higher proportion
of recurring revenues from existing customers (including increased maintenance
and services revenues as a percentage of total sales), higher software content
in our products, cost containment efforts, product design improvements,
component price declines, and efficiencies achieved with our manufacturing
vendors, as well as efficiencies achieved from a higher percentage of orders
placed using the Internet. These increases were offset in part by greater
competitive pricing pressures and by pricing discounts or special promotions on
telephone system and software sales and related equipment.
During the second quarter of 2003, recurring revenues from existing
customers in our direct sales and national and government accounts channels
increased as a percentage of total sales from these same channels relative to
the second quarter of 2002. Existing customers accounted for a significant
portion of our net sales from maintenance and other services, software additions
and/or upgrades, support, training and hardware products such as video
conferencing, headsets (wired and wireless), networking products and
speakerphones during the second quarter of 2003. Our business communications
platforms allow for system migration without the complete change-out of
hardware, which enables us to offer enhancements and new solutions through
software-only upgrades to our existing customers. Our gross margins are
generally higher with recurring revenues because we incur less materials costs
relative to new installations. Accordingly, our gross margins improved in the
second quarter of 2003 as a result of the increased proportion of recurring
revenues.
Sales from NetSolutions, our long distance resale subsidiary, increased by
32.9%, or $2.3 million, in the second quarter of 2003 as compared to the second
quarter of 2002. Gross margins are generally lower in this division than our
consolidated margins. However, NetSolutions margins improved in the second
quarter of 2003 relative to the second quarter of 2002, based in part on our
ability to negotiate more favorable pricing with vendors on higher resale
volumes. Sales from our network services division decreased 46.9% in the second
quarter of 2003 compared to the second quarter of 2002. This division generally
receives commissions on network services we sell as an agent for regional bell
operating companies. Sales from this division carry little to no equipment costs
and generated margins of over 90% during the second quarter of 2003; therefore,
the decrease in sales from this division partially offset the overall
improvement of our consolidated gross margins. We cannot accurately predict
future gross margins based on a number of factors, including, among other
factors, competitive pricing pressures, sales of systems, software and services
through different distribution channels, and the mix of systems, software and
services we sell, as well as macroeconomic conditions.
Research and Development. Research and development expenses for the second
quarter of 2003 increased 19.6% to $5.4 million, or 5.7% of net sales, from $4.5
million, or 4.7% of net sales, for the second quarter of 2002. Research and
development expenses increased 20.4% to $10.7 million, or 5.9%
16
of net sales, in the first six months of 2003 compared to $8.9 million, or 4.8%
of net sales, in the first six months of 2002. Included in research and
development expenses in both the second quarter of 2003 and the second quarter
of 2002 was amortization of patents totaling $55,000 in each period. The
increase in research and development expenses was primarily attributable to the
increase in engineers hired in connection with our acquisition of Swan in
December 2002 and our development of new product end-points. To a lesser extent,
the increase is also attributable to increased research and development spending
related to our development of convergence applications and new IP endpoint
technology. In the second quarter of 2003, research and development expenses
were directed principally toward the continued development of the AXXESS
software and systems (including version 8.0), unified messaging and voice
processing software, speech recognition and text-to-speech applications, call
center applications, unified communications applications, IP endpoint
development, and certain CTI and IVR applications. We expect that research and
development expenses will increase in absolute dollars as we continue 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. In the second quarter of 2003,
selling, general and administrative expenses, excluding amortization, increased
0.4% to $33.0 million, or 34.7% of net sales, from $32.9 million, or 34.3% of
net sales, in the second quarter of 2002. The slight increase in absolute
dollars and as a percentage of net sales was due in part to higher costs
associated with increases in depreciation expenses associated with the
implementation of an information systems upgrade, insurance costs and higher
professional fees, partially offset by lower expenses attributable to bad debts.
In addition, higher relative sales through SWAN, acquired in December 2002 and
sales in our long distance division led to increased selling expenses and
commission costs in the first six months of 2003 relative to total sales in the
first six months of 2002. We expect that for the foreseeable future selling,
general and administrative expenses may vary in absolute dollars and as a
percentage of net sales.
Amortization of goodwill and purchased intangible assets. We adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142") effective in the beginning of fiscal 2002. In
accordance with SFAS 142, we ceased amortizing goodwill. We are required to
perform goodwill impairment tests on an annual basis and between annual tests in
certain circumstances. As of June 30, 2003, no impairment of goodwill has been
recognized. We face the risk that future goodwill impairment tests may result in
charges to earnings.
Amortization of purchased intangible assets included in operating expenses
was $486,000 in the second quarter of 2003, compared to $269,000 in the second
quarter of 2002. In addition, $55,000 of amortization was included in research
and development expenses for the second quarter of 2003 and the second quarter
of 2002. Amortization of purchased intangible assets included in operating
expenses was $914,000 for the six months ended June 30, 2003, compared to
$526,000 for the six months ended June 30, 2002. An additional $111,000 of
amortization was included in research and development expenses for the six
months ended June 30, 2003 and June 30, 2002. The increase in the amortization
of purchased intangible assets for the second quarter and six months ended June
30, 2003, compared to the same periods in 2002 were primarily related to the
additional amortization from recent acquisitions. For additional information
regarding purchased intangible assets, see Note C "Acquisitions, Dispositions
and Restructuring Charges " to the Condensed Consolidated Financial Statements.
Litigation Settlement, Net of Costs Except Taxes. In May 2001, Inter-Tel
entered into an agreement to submit to binding arbitration a lawsuit we filed in
1996. The arbitration was completed in January 2002 and, as a result of the
arbitration, Inter-Tel received a one-time gross cash award of $20 million in
February 2002. Direct costs for attorney's fees, expert witness costs,
arbitration costs and estimated additional payments and expenses, totaled
approximately $4.5 million in the first six months of 2002, excluding income
taxes, for a net award of approximately $15.5 million. The estimated net
proceeds from this arbitration settlement were approximately $9.5 million after
taxes, or $0.37 per diluted share for six months ended June 30, 2002.
Interest and Other Income. Interest and other income in 2003 and 2002
consisted primarily of interest income and foreign currency transaction gains or
losses, with the exception of an expense of $1.2 million related to the
write-down of Inter-Tel's investment in Inter-Tel.NET/Vianet in the first six
months of 2002. Income from interest and short-term investments in 2003 was
relatively flat compared to 2002
17
despite higher level of invested funds, due to lower yields on investments.
Other changes in other income primarily reflected slightly lower net foreign
currency transaction gains and losses of approximately $214,000 in the first six
months of 2003 compared to the first six months of 2002. Interest expense in the
first six months of 2003 increased $23,000 compared to the first six months of
2002.
Income Taxes. Inter-Tel's income tax rate for the second quarter of 2003
was 38% compared to 37% for the second quarter of 2002. Inter-Tel expects the
full-year 2003 tax rate to be comparable to the tax rate effective for the
second quarter of 2003.
Net Income. Net income for the second quarter of 2003 was $7.3 million
($0.28 per diluted share), compared to net income of $7.0 million ($.28 per
diluted share) in the second quarter of 2002, including the litigation
settlement adjustment in 2002. Net income for the six months ended June 30, 2003
was $11.9 million, compared to net income of $22.4 million ($0.88 per diluted
share) for the six months ended June 30, 2002, including the 2002 litigation
settlement. Excluding the 2002 litigation settlement adjustment, we reported net
income of $6.9 million, or $0.27 per diluted share in the second quarter of
2002. Excluding the 2002 litigation settlement, we reported net income of $12.9
million, or $0.51 per diluted share in the first six months of 2002.
Net income increased slightly for the quarter ended June 30, 2003 compared
to same period in 2002, primarily attributable to higher gross profit and
increased operating efficiencies and other items described in further detail
above. The decrease in net income for the six months was primarily attributable
to the litigation settlement award received in 2002.
18
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. The potential expansion of
international operations in the United Kingdom and Europe and increased sales,
if any, in Japan and other parts of Asia could result in higher international
sales as a percentage of total revenues; however, international revenues do not
currently represent a significant portion of our total revenues.
Liquidity and Capital Resources
At June 30, 2003, cash and short-term investments totaled $137.0 million,
an increase of approximately $11.2 million from December 31, 2002. We maintain a
$10 million unsecured, revolving line of credit with Bank One, NA that is
available through June 1, 2004. Under the credit facility, we have the option to
borrow at a prime rate or adjusted LIBOR interest rate. Historically, we have
used the credit facility primarily to support international letters of credit to
suppliers. The remaining cash balances may be used for acquisitions, strategic
alliances, working capital, dividends and general corporate purposes.
Net cash provided by operating activities totaled $12.2 million for the
six months ended June 30, 2003, compared to $42.6 million for the same period in
2002. Cash provided by operating activities in the first six months of 2003 was
primarily the result of cash generated from profitable operations, including
non-cash depreciation, provisions for losses and amortization charges. Cash
provided by operating activities in the first six months of 2002 was primarily
the result of cash generated from operations, as well as the receipt of a gross
cash award of $20 million (net award of $15.5 million before income taxes) in
settlement of a dispute submitted to binding arbitration. Cash used in the
change in operating assets and liabilities in the first six months of 2003 was
$7.7 million, compared to cash provided by operating assets and liabilities of
$11.5 million for the same period in 2002. The cash used in the change in
operating assets and liabilities was primarily due to the increased level of net
investment in sales-leases. The increase in net inventory in the first six
months of 2003 was partially offset by a slight decrease in accounts receivable,
while the increase in accounts payable was substantially offset by decreases in
other accrued expenses, primarily reflecting payments on accrued commissions,
bonuses, 401(k) matching contributions and profit sharing in the first six
months of 2003. If we are able to expand sales through our direct sales offices,
dealer network and government and national accounts divisions, this would likely
require the expenditure of working capital for increased accounts receivable and
inventories.
Net cash used in investing activities totaled $10.1 million for the six
months ended June 30, 2003 compared to $26.5 million for the six months ended
June 30, 2002. Net cash used in the purchase of investments during the six
months ended June 30, 2003 and June 30, 2002 were $68.4 million and $18.1
million, respectively, offset in part during each period by maturities and sales
of short-term investments of $58.9 million and $2.0 million, respectively.
During the first six months of 2003, we expended no cash for acquisitions
compared to the first six months of 2002, when net cash used in acquisitions
totaled approximately $7.9 million. In the first quarter of 2003, Inter-Tel also
received payment from the Vianet shareholders of $1.45 million, as payment of a
loan in connection with the sale of 83% of our interest in Inter-Tel.NET, and in
exchange for the full release of our guarantee of vendor obligations.
Approximately $2.1 million was used to acquire additional property and equipment
during the first six months of 2003 compared to $2.8 million for the same period
in 2002. We anticipate incurring additional capital expenditures during the
second half of 2003, principally relating to expenditures for equipment and
management information systems used in our operations.
Net cash used in financing activities totaled approximately $0.5 million
in the six months ended June 30, 2003, compared to cash provided by financing
activities of $0.5 million for the same period in 2002. Net cash used for
dividends totaled approximately $1.5 million and $0.9 million, respectively,
during the first six months of 2003 and 2002, which was offset in each period by
cash provided by the exercise of stock options and from stock issued under the
company's employee stock purchase plan totaling $1.1 million and $1.8 million.
During the first six months of 2003 and 2002, we reissued treasury shares
through stock option exercises and issuances. In the six month periods ending
June 30, 2003 and 2002, the proceeds received from these reissued treasury
shares were approximately the same as the cost basis of the treasury stock
reissued, resulting in a minimal impact on retained earnings.
19
We offer to our customers lease financing and other services, including
our Total Solution (formerly Totalease) program, through our Inter-Tel Leasing,
Inc. subsidiary. We fund our Total Solution program in part through the sale to
financial institutions of rental payment streams under the leases. Sold lease
rentals totaling $207.6 million and $205.8 million remained unbilled at June 30,
2003 and December 31, 2002, respectively. We are obligated to repurchase such
income streams in the event of defaults by lease customers and, accordingly,
maintain reserves based on loss experience and past due accounts. Although, to
date, we have been able to resell the rental streams from leases under the Total
Solution program profitably and on a substantially current basis, the timing and
profitability of lease resales could impact our business and operating results,
particularly in an environment of fluctuating interest rates and economic
uncertainty. If we are required to repurchase rental streams and realize losses
thereon in amounts exceeding our reserves, our operating results will be
adversely affected.
We believe that our working capital and credit facilities, together with
cash generated from operations, will be sufficient to develop and expand our
business operations, 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 eighteen 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 additional acquisitions, we will seek additional
financing. There can be no assurance that additional financing will be available
when required or on acceptable terms.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The methods, estimates and judgments we use in applying our most critical
accounting policies have a significant impact on the results we report in our
consolidated financial statements. We evaluate our estimates and judgments on an
on-going basis. We base our estimates on historical experience and on
assumptions that we believe to be reasonable under the circumstances. Our
experience and assumptions form the basis for our judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may vary from what we anticipate and different
assumptions or estimates about the future could change our reported results. We
believe the following accounting policies are the most critical to us, in that
they are important to the portrayal of our financial statements and they require
our most difficult, subjective or complex judgments in the preparation of our
consolidated financial statements:
Revenue Recognition. We recognize revenue pursuant to Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements." Accordingly,
revenue is recognized when all four of the following criteria are met: (i)
persuasive evidence that an arrangement exists; (ii) delivery of the products
and/or services has occurred; (iii) the selling price is both fixed and
determinable and; (iv) collectibility is reasonably probable. Revenue derived
from sales of systems and services to end-user customers is recognized upon
installation of the systems and performance of the services, respectively,
allowing for use by our customers of these systems. Pre-payments for
communications services are deferred and recognized as revenue as the
communications services are provided.
For shipments to dealers and other distributors, our revenues are recorded
as products are shipped and services are rendered, because the sales process is
complete. These shipments are primarily to third-party dealers and distributors,
and title passes when goods are shipped (free-on-board shipping point). Long
distance services revenues are recognized as service is provided.
Sales-Leases. For our sales-type lease accounting, we follow the guidance
provided by FASB Statement No. 13, Accounting for Leases and FASB Statement No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - A Replacement of FASB Statement No. 125. We
record the discounted present values of minimum rental payments under sales-type
leases as sales, net of provisions for continuing administration and other
expenses over the lease period. We record the lease sales at the time of system
sale and installation pursuant to Staff Accounting Bulletin No. 101, as
discussed above for sales to end user customers, and upon receipt of the
executed lease documents. The costs of systems installed under these
sales-leases, net of residual values at the end of the lease periods, are
recorded as costs of sales. The net rental streams are sold to funding sources
on a regular basis with the income streams discounted by prevailing like-term
rates at the time of sale. Gains or losses resulting
20
from the sale of net rental payments from such leases are recorded as net sales.
We establish and maintain reserves against potential recourse following the
resales based upon historical loss experience, past due accounts and specific
account analysis. The allowance for uncollectible minimum lease payments and
recourse liability at the end of the year represent reserves against the entire
lease portfolio. Management reviews the adequacy of the allowance on a regular
basis and adjusts the allowance as required. These reserves are either netted in
the accounts receivable, current and long-term components of "Net investments in
Sales-Leases" on the balance sheet, or included in long-term liabilities on our
balance sheet for off-balance sheet leases.
Goodwill and Other Intangible Assets. We assess the impairment of goodwill
and other identifiable intangibles whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Some factors we
consider important which could trigger an impairment review include the
following:
o Significant under-performance relative to historical, expected or
projected future operating results;
o Significant changes in the manner of our use of the acquired assets
or the strategy for our overall business;
o Our market capitalization relative to net book value, and
o Significant negative industry or economic trends.
When we determine that the carrying value of goodwill and other identified
intangibles may not be recoverable, we measure any impairment based on a
projected discounted cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our current business
model. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
on January 1, 2002, we ceased amortizing goodwill. Inter-Tel has tested goodwill
for impairment using the two-step process prescribed in SFAS 142. The first step
is a screen for potential impairment, while the second step measures the amount
of the impairment, if any. Inter-Tel has performed the first of the required
impairment tests for goodwill as of October 1, 2002 and has determined that the
carrying amount of goodwill is not impaired.
Allowance for Doubtful Accounts. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. Additional reserves or allowances for doubtful accounts
are recorded for our sales-type leases, discussed above in "Sales-Leases." We
establish and maintain reserves against estimated losses based upon historical
loss experience, past due accounts and specific account analysis. Management
reviews the level of the allowances for doubtful accounts on a regular basis and
adjusts the level of the allowances as needed. At June 30, 2003, our allowance
for doubtful accounts for accounts receivable were $11.4 million of our $53.9
million in gross accounts receivable. If the financial condition of our
customers or channel partners were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Inventories. We value our inventories at lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method, including material, labor
and factory overhead. Significant management judgment is required to determine
the reserve for obsolete or excess inventory. Inventory on hand may exceed
future demand either because the product is outdated or obsolete, or because the
amount on hand is more than can be used to meet estimated future needs. We
consider criteria such as customer demand, product life-cycles, changing
technologies, slow moving inventory and market conditions. We write down our
excess and obsolete inventory equal to the difference between the cost of
inventory and the estimated market value. At June 30, 2003, our inventory
reserves were $7.5 million of our $20.2 million gross inventories. If actual
customer demand, product life-cycles, changing technologies and market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
Contingencies. We are a party to various claims and litigation in the
normal course of business. Management's current estimated range of liability
related to various claims and pending litigation is based on claims for which
our management can estimate the amount and range of loss. Because of the
uncertainties related to both the amount and range of loss on the remaining
pending claims and litigation, management is unable to make a reasonable
estimate of the liability that could result from an unfavorable outcome. As
additional information becomes available, we will assess the potential liability
related to our
21
pending litigation and revise our estimates. Such revisions in our estimates of
the potential liability could materially impact our results of operations and
financial position.
Divisions of the United States Department of Justice are investigating
other companies' and Inter-Tel's participation in a federally funded "E-Rate
program" to connect schools and libraries to the Internet. The Justice
Department has not provided Inter-Tel with a description of the evidence on
which the investigations are based. Inter-Tel is presently unable to predict or
determine the final outcome of, or to estimate the potential range of loss with
respect to, the investigations. Based upon the information known at this time,
we do not expect the investigations to result in a material adverse impact upon
the Company's business or financial condition. If Inter-Tel is convicted of any
crime or subjected to sanctions, or debarred from certain government contracts
or if penalties, damages or other monetary remedies are assessed against
Inter-Tel in connection with or related to these and other investigations, our
business and operating results could be materially and adversely affected. The
existence and disclosure of the investigations may have already caused
competitive harm to Inter-Tel, and any unfavorable resolution to these matters
may further harm Inter-Tel's business. Nevertheless, the early nature of the
investigations makes it difficult to determine whether the likelihood of a
material adverse outcome is likely.
Factors That May Affect Future Operating Results
This Report on Form 10-Q contains 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. 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. In evaluating Inter-Tel's
business, shareholders and prospective investors should consider carefully the
following factors in addition to the other information set forth in this
document.
Risks Related to Our Business
Our operating results have historically depended on a number of factors, and
these factors may cause our operating results to fluctuate in the future.
Our quarterly operating results have historically depended on, and may
fluctuate in the future as a result of, many factors including:
o volume and timing of orders received during the quarter;
o gross margin fluctuations associated with the mix of products sold;
o the mix of distribution channels;
o general economic conditions and the condition of the markets our
business addresses;
o patterns of capital spending by customers;
o the timing of new product announcements and releases by us and our
competitors;
o pricing pressures, the cost and effect of acquisitions;
o the availability and cost of products and components from our
suppliers; and
o national and regional weather patterns.
In addition, we have historically operated with a relatively small
backlog, with sales and operating results in any quarter depending principally
on orders booked and shipped in that quarter. In the past, we have recorded a
substantial portion of our net sales for a given quarter in the third month of
that 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 business
communications systems and associated call processing and voice processing
software applications depends largely on general economic conditions, and can
vary significantly as a result of changing conditions in the economy as a whole.
We cannot assure you that we can continue to be successful operating with a
small backlog or whether historical backlog trends will continue in the future.
Our expense levels are based in part on expectations of future sales and,
if sales levels do not meet expectations, our operating results could be harmed.
In addition, because sales of business communications systems through our
dealers typically produce lower gross margins than sales through our
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direct sales organization, operating results have varied, and will continue to
vary based upon the mix of sales through direct and indirect channels. In
addition, in the past we have derived a significant part of our revenue from
recurring revenue streams, which typically produce higher gross margins. If we
do not maintain recurring revenue streams at current or historic levels, our
operating results will suffer if we do not significantly increase sales to new
customers. For example, in the most recent quarter ended, sales through our
direct sales offices and government and national accounts divisions to new
customers declined as a percentage of total sales, resulting in decreased net
sales compared to the comparable quarter in 2002. Moreover, 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 typically have lower gross margins than our core business,
have grown in recent periods at a faster rate than our overall net sales. As a
result, gross margins could be harmed if long distance calling services continue
to increase as a percentage of net sales. We also experience seasonal
fluctuations in our operating results, as net sales for the first quarter is
frequently less than the fourth quarter and the third quarter is frequently less
than the second quarter. As a result of these and other factors, we have
historically experienced, and could continue to experience in the future,
fluctuations in sales and operating results on a quarterly basis.
Our market is subject to rapid technological change and to compete successfully,
we must continually introduce new and enhanced products and services that
achieve broad market acceptance.
The market for our products and services is characterized by rapid
technological change, evolving industry standards and vigorous customer demand
for new products, applications and services. To compete successfully, we must
continually enhance our existing telecommunications products, related software
and customer services, and develop new technologies and applications in a timely
and cost-effective manner. If we fail to introduce new products and services
that achieve broad market acceptance, or if we do not adapt our existing
products and services to customer demands or evolving industry standards, our
business could be significantly harmed. We believe that problems and delays
associated with new product development have in the past contributed to lost
sales. In addition, current competitors or new market entrants may offer
products, applications or services that are better adapted to changing
technology or customer demands and that could render our products and services
unmarketable or obsolete.
In addition, if the markets for computer-telephony applications, Internet
Protocol network products, or related products fail to develop or continue to
develop more slowly than we anticipate, or if we are unable for any reason to
capitalize on any of these emerging market opportunities, our business,
financial condition and operating results could be significantly harmed.
Our future success largely depends on increased commercial acceptance of our
Axxess system, Encore product, speech recognition and Interactive Voice Response
products, and related computer-telephony products.
In 2002, we introduced Unified Communicator, a web-based,
speech-recognition and Wireless Application Protocol (WAP) software application
for controlling and managing your calls, contacts and presence status; Inter-Tel
Application Platform, a highly flexible speech-recognition, text-to-speech and
CTI application generation platform; enhanced convergence features on the Axxess
system, including support of standard Session Initiation Protocol (SIP)
endpoints and trunk gateways; and several other telephony-related products.
During the past 12 months, sales of our Axxess business communications systems
and related software have comprised a substantial portion of our net sales. Our
future success depends, in large part, upon increased commercial acceptance and
adoption of the Application Platform, the Unified Communicator and related
computer-telephony products, the Axxess system, Encore products, Media Gateway
Control Protocol (MGCP) and SIP standards-based applications and devices, new
speech recognition and Interactive Voice Response products, as well as future
upgrades and enhancements to these products and networking platforms. We cannot
assure you that these products or platforms will achieve commercial acceptance
in the future.
Our products are complex and may contain errors or defects that are detected
only after their release, which may cause us to incur significant unexpected
expenses and lost sales.
Our telecommunications products and software are highly complex. Although
our new products and upgrades are examined and tested prior to release, they can
only be fully tested when used by a large customer base. Consequently, our
customers may discover program errors, or "bugs," or other defects
23
after new products and upgrades have been released. Some of these bugs may
result from defects contained in component parts or software from our suppliers
or other third parties that are intended to be compatible with our products and
over which we have little or no control. Although we have test procedures and
quality control standards in place designed to minimize the number of errors and
defects in our products, we cannot assure you that our new products and upgrades
will be free of bugs when released. If we are unable to quickly or successfully
correct bugs identified after release, we could experience the following, any of
which would harm our business:
o costs associated with the remediation of any problems;
o costs associated with design modifications;
o loss of or delay in revenues;
o loss of customers;
o failure to achieve market acceptance or loss of market share;
o increased service and warranty costs;
o liabilities to our customers; and
o increased insurance costs.
The complexity of our products could cause delays in the development and release
of new products and services. As a result, customer demand for our products
could decline, which could harm our business.
Due to the complexity of our products and software, we have in the past
experienced and expect in the future to experience delays in the development and
release of new products or product enhancements. If we fail to introduce new
software, products or services in a timely manner, or fail to release upgrades
to our existing systems or products and software on a regular and timely basis,
customer demand for our products and software could decline, which would harm
our business.
Business acquisitions, dispositions or joint ventures entail numerous risks and
may disrupt our business, dilute shareholder value or distract management
attention.
As part of our business strategy, we consider acquisitions of, or
significant investments in, businesses that offer products, services and
technologies complementary to ours. Such acquisitions could materially adversely
affect our operating results and/or the price of our common stock. Acquisitions
also entail numerous risks, some of which we have experienced and may continue
to experience, including:
o unanticipated costs and liabilities;
o difficulty of assimilating the operations, products and personnel of
the acquired business;
o difficulties in managing the financial and strategic position of
acquired or developed products, services and technologies;
o difficulties in maintaining customer relationships;
o difficulties in servicing and maintaining acquired products, in
particular where a substantial portion of the target's sales were
derived from our competitor's products and services;
o difficulty of assimilating the vendors and independent contractors
of the acquired business;
o the diversion of management's attention from the core business;
o inability to maintain uniform standards, controls, policies and
procedures; and
o impairment of relationships with acquired employees and customers
occurring as a result of integration of the acquired business.
In particular, in recent years our operating results were materially
adversely affected by several of the factors described above, including
substantial acquisition-related charges, operating losses or impairment losses
from the Executone acquisition, Cirilium Corporation joint venture and
Inter-Tel.NET operations. Refer to Management's Discussion and Analysis and
notes to the consolidated financial statements for additional information
regarding these transactions.
We completed four acquisitions during 2001 and 2002. During 2001, we
acquired certain assets and assumed certain liabilities of Convergent
Communication Services, Inc. ("Convergent") and Mastermind Technologies, Inc.
("Mastermind"). During 2002, we acquired certain assets and assumed certain
liabilities of McLeodUSA Integrated Business Systems, Inc. ("McLeod") and we
acquired 100% of the stock of Swan
24
Solutions Limited ("Swan") in the United Kingdom. These acquisitions are subject
to risks and uncertainties including those indicated above.
Finally, to the extent that shares of our stock or the rights to purchase
stock are issued in connection with any future acquisitions, dilution to our
existing shareholders will result and our earnings per share may suffer. Any
future acquisitions may not generate additional revenue or provide any benefit
to our business, and we may not achieve a satisfactory return on our investment
in any acquired businesses.
We may not be able to adequately protect our proprietary technology and may be
infringing upon third-party intellectual property rights.
Our success depends upon our proprietary technology. We currently hold
patents for twenty (20) telecommunication and unified messaging products and
have also applied to the U.S. Patent and Trademark Office for eleven (11)
additional patents. We also rely on copyright and trade secret law and
contractual provisions to protect our intellectual property. Despite these
precautions, third parties could copy or otherwise obtain and use our technology
without authorization, or develop similar technology independently.
We cannot assure you that any patent, trademark or copyright that we own
or have applied to own, will not be invalidated, circumvented or challenged by a
third party. Effective protection of intellectual property rights may be
unavailable or limited in foreign countries. We cannot assure that the
protection of our proprietary rights will be adequate or that competitors will
not independently develop similar technology, duplicate our services or design
around any patents or other intellectual property rights we hold. Litigation may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Litigation could be costly, absorb significant management time and
harm our business.
We are also subject to third party claims that our current or future
products or services infringe upon the rights of others. For example, we are
subject to proceedings alleging that certain of our key products infringe upon
third party intellectual property rights, including patents, trademarks,
copyrights or other intellectual property rights. We have viewed presentations
from Avaya, one of our primary competitors, alleging that our Axxess business
communications system utilizes inventions covered by certain of their patents.
We are continuing the process of investigating this matter and we have made
claims against Avaya for infringement of our patents. While we do not believe
these matters, collectively, would have a material adverse impact on our
financial position and future results of operations, the ultimate outcomes by
their nature are uncertain.
When any such claims are asserted against us, among other means to resolve
the dispute, we may seek to license the third party's intellectual property
rights. Purchasing such licenses can be expensive, and we cannot assure you that
a license will be available on prices or other terms acceptable to us, if at
all. Alternatively, we could resort to litigation to challenge such a claim.
Litigation could require us to expend significant sums of cash and divert our
management's attention. In the event that a court renders an enforceable
decision with respect to our intellectual property, we may be required to pay
significant damages, develop non-infringing technology or acquire licenses to
the technology subject to the alleged infringement. Any of these actions or
outcomes could harm our business. If we are unable or choose not to license
technology, or decide not to challenge a third party's rights, we could
encounter substantial and costly delays in product introductions. These delays
could result from efforts to design around asserted third party rights or our
discovery that the development, manufacture or sale of products requiring these
licenses could be foreclosed.
Our IP network products may be vulnerable to viruses, other system failure risks
and security concerns, which may result in lost customers or slow commercial
acceptance of our IP network products.
Inter-Tel's IP telephony and network products may 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 that could harm our operations and revenues. In addition, we may lose
customers if inappropriate use of the Internet or other IP networks by third
parties jeopardize the security of confidential information, such as credit card
or bank account information or the content of conversations over the IP network.
In addition, user concerns about privacy and security may cause IP networks in
25
general to grow more slowly, and impair market acceptance of our IP network
products in particular, until more comprehensive security technologies are
developed.
We have many competitors and expect new competitors to enter our market, which
could increase price competition and spending on research and development and
which may impair our ability to compete successfully.
The markets for our products and services are extremely competitive and we
expect competition to increase in the future. Our current and potential
competitors in our primary business segments include:
o PABX and converged systems providers such as Avaya, Cisco Systems,
Comdial, 3Com, Iwatsu, Mitel, NEC, NextiraOne, Nortel, Panasonic,
Shoreline, Siemens, Toshiba, Vertical Networks and Vodavi;
o large data routing and convergence companies such as 3Com and Cisco
Systems;
o voice processing applications providers such as ADC,
InterVoice-Brite, Active Voice (a subsidiary of NEC America), Avaya,
and Captaris (formerly AVT);
o long distance services providers such as AT&T, MCI, Qwest and
Sprint;
o large computer and software corporations such as IBM, HP, Intel and
Microsoft; and
o regional Bell operating companies, or RBOCs, cable television
companies and satellite and other wireless broadband service
providers.
These and other companies may form strategic relationships with each other
to compete with us. These relationships may take the form of strategic
investments, joint-marketing agreements, licenses or other contractual
arrangements, which could increase our competitors' ability to address customer
needs with their product and service offerings.
Many of our competitors and potential competitors have substantially
greater financial, customer support, technical and marketing resources, larger
customer bases, longer operating histories, greater name recognition and more
established relationships in the industry than we do. We cannot be sure that we
will have the resources or expertise to compete successfully. Compared to us,
our competitors may be able to:
o develop and expand their product and service offerings more quickly;
o offer greater price discounts or make substantial product
promotions;
o adapt to new or emerging technologies and changing customer needs
faster;
o take advantage of acquisitions and other opportunities more readily;
o negotiate more favorable licensing agreements with vendors;
o devote greater resources to the marketing and sale of their
products; and
o address customers' service-related issues more adequately.
Some of our competitors may also be able to provide customers with
additional benefits at lower overall costs or to reduce their gross margins
aggressively in an effort to increase market share. We cannot be sure that we
will be able to match cost reductions by our competitors. In addition, we
believe that there is likely to be consolidation in our markets, which could
lead to having even larger and more formidable competition and other forms of
competition that could cause our business to suffer.
Our reliance on a limited number of suppliers for key components and our
dependence on contract manufacturers could impair our ability to manufacture and
deliver our products and services in a timely and cost-effective manner.
We currently obtain certain key components for our digital communication
platforms, including certain microprocessors, integrated circuits, power
supplies, voice processing interface cards and IP telephony cards, from a
limited number of suppliers and manufacturers. Our reliance on these limited
suppliers and contract manufacturers involves risks and uncertainties, including
the possibility of a shortage or delivery delay for some key components. We
currently manufacture our products through third-party subcontractors located in
the United States, the People's Republic of China, the United Kingdom and
Mexico. Foreign manufacturing facilities are subject to changes in governmental
policies, imposition of tariffs and import restrictions and other factors beyond
our control. Varian, Inc. currently manufactures a significant portion of our
products at Varian's Tempe, Arizona facility, including substantially all of the
printed circuit boards used in the Axxess and Eclipse2 systems. We have
experienced occasional delays in
26
the supply of components and finished goods that have harmed our business. If
inventory levels are not adequately maintained and managed we are at risk of not
having the appropriate inventory quantities on hand to meet sales demand. We
cannot assure that we will not experience similar delays in the future.
Our reliance on third party manufacturers and OEM partners involves a
number of additional risks, including reduced control over delivery schedules,
quality assurance and costs. Our business may be harmed by any delay in delivery
or any shortage of supply of components or finished goods from a supplier. Our
business may also be harmed if we are unable to develop alternative or
additional supply sources as necessary. To date, we have been able to obtain
supplies of components and products in a timely manner even though we do not
have long-term supply contracts with any of our contract manufacturers. However,
we cannot assure you that we will be able to continue to obtain components or
finished goods in sufficient quantities or quality or on favorable pricing or
delivery terms in the future.
We derive a substantial portion of our net sales from our dealer network and if
these dealers do not effectively promote and sell our products, our business and
operating results could be harmed.
We derive a substantial portion of our net sales through our network of
independent dealers. We face intense competition from other telephone, voice
processing, and voice and data router system manufacturers for these dealers'
business, as most of our dealers carry other products that compete with our
products. Our dealers may choose to promote the products of our competitors to
our detriment. We have developed programs and expended capital to incentivize
our dealers to promote our products, and we cannot assure you that these
techniques will be successful. The loss of any significant dealer or group of
dealers, or any event or condition harming our dealer network, could harm our
business, financial condition and operating results.
Managing our international sales efforts may expose us to additional business
risks, which may result in reduced sales or profitability in our international
markets.
We are in the process of attempting to maintain and expand our
international dealer network both in the countries in which we already have a
presence and in new countries and regions. International sales are subject to a
number of risks, including changes in foreign government regulations and
telecommunication standards, export license requirements, tariffs and taxes,
other trade barriers, difficulties in protecting our intellectual property,
fluctuations in currency exchange rates, difficulty in collecting receivables,
difficulty in staffing and managing foreign operations, and political and
economic instability. In particular, the terrorist acts of September 11, 2001,
the war in Iraq and continued turmoil in the Middle East and North Korea, have
created an uncertain international economic environment and we cannot predict
the impact of these acts, any future terrorist acts or any related military
action on our efforts to expand our international sales. Fluctuations in
currency exchange rates could cause our products to become relatively more
expensive to customers in a particular country, leading to a reduction in sales
or profitability in that country. In addition, the costs associated with
developing international sales may not be offset by increased sales in the short
term, or at all. Any of these risks could cause our products to become
relatively more expensive to customers in a particular country, leading to
reduced sales or profitability in that country. In addition, the costs
associated with developing an international dealer network may not be offset by
increased sales in the short term, if at all.
If we lose key personnel or are unable to hire additional qualified personnel as
necessary, we may not be able to achieve our objectives.
We depend on the continued service of, and our ability to attract and
retain, qualified technical, marketing, sales and managerial personnel, many of
whom would be difficult to replace. Competition for qualified personnel is
intense, and we have historically had difficulty hiring employees in the
timeframe that we desire, particularly skilled engineers. The loss of any of our
key personnel or our failure to effectively recruit additional key personnel
could make it difficult for us to manage our business, complete timely product
introductions or meet other critical business objectives. For example, our
inability to retain key executives of Executone following our Executone
acquisition impaired our ability to benefit from the Executone business and to
grow revenues from the Executone assets. Moreover, our operating results could
be impaired if we lose a substantial number of key employees from recent
acquisitions, including personnel from McLeod, Swan, Mastermind and Convergent.
We cannot assure you that we will be able to continue to attract and retain the
qualified personnel necessary for the development of our business.
27
We may be unable to achieve or manage our growth effectively, which may harm our
business.
The ability to operate our business in an evolving market requires an
effective planning and management process. Our efforts to achieve growth in our
business has placed, and is expected to continue to place, a significant strain
on our personnel, management systems, infrastructure and other resources. In
addition, our ability to manage any potential future growth effectively will
require us to successfully attract, train, motivate and manage new employees, to
integrate new employees into our overall operations and to continue to improve
our operational, financial and management controls and procedures. Furthermore,
we expect that we will be required to manage an increasing number of
relationships with suppliers, manufacturers, customers and other third parties.
If we are unable to implement adequate controls or integrate new employees into
our business in an efficient and timely manner, our operations could be
adversely affected and our growth could be impaired which could harm our
business.
The introduction of new products and services has lengthened our sales cycles,
which may result in significant sales and marketing expenses.
In the past few years, we introduced the Axxess ATM business
communications system and our versions 7.0 and 8.0 IP networking software, which
are typically sold to larger customers at a higher average selling price and
often represent a significant communications infrastructure capital expenditure
by the prospective enterprise customer. Accordingly, the purchase of our
products typically involves numerous internal approvals relating to the
evaluation, testing, implementation and acceptance of new technologies. This
evaluation process frequently results in a lengthy sales process, which can
range from a few months to more than 12 months, thereby subjecting our sales
cycle to a number of significant uncertainties concerning 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, our operating results could be materially adversely
affected.
We rely heavily upon third-party packaged software systems to manage and run our
business processes and to produce our financial statements. From time to time we
upgrade these systems to ensure continuation of support and to expand the
functionality of the systems to meet our business needs. The risks associated
with the upgrade process include disruption of our business processes, which
could harm our business.
We currently run third-party applications for data processing in our
distribution center operations, shipping, materials movement, customer service,
invoicing, financial record keeping and reporting, and other operations and
administration. The nature of the software industry is to upgrade software
systems to make architectural changes, increase functionality and address
software bugs. Over time, older versions of the software become less supported
by our vendors for financial and other reasons and eventually become obsolete.
Oracle, the primary supplier of our third-party applications, provides notice of
the dates that Oracle will de-support the software and companies are expected to
either make plans to upgrade to newer versions or operate without Oracle
support. While Oracle and other third-party vendors may provide advanced notice
of product upgrade schedules and take other steps to make the upgrade process as
straight-forward as possible, we are subject to risks associated with the
process. Our software systems could become unstable following an upgrade process
and impact our ability to process data properly in these systems, including
timely and accurate shipment of products, invoicing our customers properly and
the production of accurate and timely financial statements. We also cannot
assure you that these software upgrades or enhancements will operate as intended
or be free from bugs. We upgraded our Oracle applications during the fourth
quarter of 2002 and expect to affect similar software upgrades in the future. If
we are unable to successfully integrate the new software into our information
systems, our operations, customer service and financial reporting could be
adversely affected and could harm our business.
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Our stock price has been and may continue to be volatile, impairing your ability
to sell your shares at or above purchase price.
The market price for our common stock has been highly volatile. The
volatility of our stock could be subject to continued wide fluctuations in
response to many risk factors listed in this section, and others beyond our
control, including:
o announcements of developments relating to our business;
o fluctuations in our operating results;
o shortfalls in revenue or earnings relative to securities analysts'
expectations;
o announcements of technological innovations or new products or
enhancements by us or our competitors;
o announcements of acquisitions or planned acquisitions of other
companies or businesses;
o investors' reactions to acquisition announcements or our forecasts
of future results;
o general conditions in the telecommunications industry;
o the market for Internet-related products and services;
o changes in the national or worldwide economy;
o changes in legislation or regulation affecting the
telecommunications industry;
o threats of or outbreaks of war, hostilities or terrorist acts;
o developments relating to our intellectual property rights and the
intellectual property rights or third parties;
o changes in our relationships with our customers and suppliers; and
o national and regional weather patterns.
In addition, stock prices of technology companies in general, and for
voice and data communications companies in particular, have experienced extreme
price fluctuations in recent years which have often been unrelated to the
operating performance of affected companies. We cannot assure you that the
market price of our common stock will not experience significant fluctuations in
the future, including fluctuations that are unrelated to our performance.
We are currently the target of government investigations and in the future we
may be subject to litigation, which if they result in any convictions, sanctions
or penalties against us, could harm our business.
Divisions of the United States Department of Justice are investigating
other companies' and Inter-Tel's participation in a federally funded "E-Rate
program" to connect schools and libraries to the Internet. The Justice
Department has not provided Inter-Tel with a description of the evidence on
which the investigations are based.
Inter-Tel is presently unable to predict or determine the final outcome
of, or to estimate the potential range of loss with respect to, the
investigations. If Inter-Tel is convicted of any crime or subjected to
sanctions, or debarred from certain government contracts or if penalties,
damages or other monetary remedies are assessed against Inter-Tel in connection
with these and other investigations, our business and operating results could be
materially and adversely affected. The existence and disclosure of the
investigations may have already caused competitive harm to Inter-Tel, and any
unfavorable resolution to these matters may further harm Inter-Tel's business.
Inter-Tel is also subject to litigation in the ordinary course of
business. We cannot assure you that any adverse outcome in connection with such
litigation would not impair our business or financial condition.
Our Chairman of the Board of Directors, CEO and President controls 21.4% of our
Common Stock and is able to significantly influence matters requiring
shareholder approval.
As of June 30, 2003, Steven G. Mihaylo, Inter-Tel's Chairman of the Board
of Directors, Chief Executive Officer and President, beneficially owned
approximately 21.4% of the existing 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
Inter-Tel.
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Risks Related to Our Industry
Reductions in spending on enterprise communications equipment may materially and
adversely affect our business.
The overall economic slowdown has had and continues to have a harmful
effect on the market for enterprise communications equipment. Our customers have
reduced significantly their capital spending on communications equipment in an
effort to reduce their own costs and bolster their revenues. The market for
enterprise communications equipment may only grow at a modest rate or possibly
not grow at all, and our financial performance has been and may continue to be
materially and adversely affected by the reductions in spending on enterprise
communications equipment.
The emerging market for IP network telephony is subject to market risks and
uncertainties that could cause significant delays and expenses.
The market for IP network voice communications products has begun to
develop only recently, is evolving rapidly 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 of a new
and rapidly evolving industry, the demand for and market acceptance of, recently
introduced IP network products and services are highly uncertain. We cannot
assure you that IP voice networks will become widespread. Even if IP voice
networks become more widespread in the future, we cannot assure that our
products, including the IP telephony features of the Axxess systems our IP
endpoints and IP applications will successfully compete against other market
players and attain broad market acceptance.
Moreover, the adoption of IP voice networks and importance of development
of products using industry standards such as MGCP and SIP, generally require 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.
If the market for IP network voice communications fails to develop or develops
more slowly than we anticipate, our IP network telephony products could fail to
achieve market acceptance, which in turn could significantly harm our business,
financial condition and operating results. This growth may be inhibited by a
number of factors, such as quality of infrastructure; security concerns;
equipment, software or other technology failures; regulatory encroachments;
inconsistent quality of service; poor voice quality over IP networks as compared
to circuit-switched networks; and lack of availability of cost-effective,
high-speed network capacity. Moreover, as IP-based data communications and
telephony usage grow, the infrastructure used to support these IP networks,
whether public or private, may not be able to support the demands placed on them
and their performance or reliability may decline. The technology that allows
voice and facsimile communications over the Internet and other data networks,
and the delivery of other value-added services, is still in the early stages of
development.
Government regulation of third party long distance and network service entities
on which we rely may harm our business.
Our supply of telecommunications services and information depends on
several long distance carriers, RBOCs, local exchange carriers, or LECs, and
competitive local exchange carriers, or CLECs. We rely on these carriers to
provide network services to our customers and to provide us with billing
information. Long distance services are subject to extensive and uncertain
governmental regulation on both the federal and state level. We cannot assure
that the increase in regulations will not harm our business. Our current
contracts for the resale of services through long distance carriers include
multi-year periods during which we have minimum use requirements and/or costs.
The market for long distance services is experiencing, and is expected to
continue to experience significant price competition, and this may cause a
decrease in end-user rates. We cannot assure you that we will meet minimum use
commitments, that we will be able to negotiate lower rates with carriers if
end-user rates decrease or that we will be able to extend our contracts with
carriers at favorable prices. If we are unable to secure reliable long distance
and network services from certain long distance carriers, RBOCs, LECs and CLECs,
or if these entities are unwilling or unable to provide telecommunications
services and billing information to us on favorable terms, our ability to expand
our own long distance and network services will be harmed. Carriers that provide
telecommunications services to us may also experience financial difficulties, up
to and including bankruptcies, which could harm our ability to offer
telecommunications services.
30
Consolidation within the telecommunications industry could increase competition
and reduce our customer base.
There has been a trend in the telecommunications industry towards
consolidation and we expect this trend to continue as the industry evolves. As a
result of this consolidation trend, new stronger companies may emerge that have
improved financial resources, enhanced research and development capabilities and
a larger and more diverse customer base. The changes within the
telecommunications industry may adversely affect our business, operating results
and financial condition.
Terrorist activities and resulting military and other actions could harm our
business.
Terrorist attacks in New York and Washington, D.C. in September of 2001
disrupted commerce throughout the world. The continued threat of terrorism, the
conflict in Iraq and the potential for additional military action and heightened
security measures in response to these threats may continue to cause significant
disruption to commerce throughout the world. To the extent that disruptions
result in a general decrease in corporate spending on information technology or
advertising, our business and results of operations could be harmed. We are
unable to predict whether the conflict in Iraq and its aftermath, the threat of
terrorism or the responses thereto will result in any long-term commercial
disruptions or if such activities or responses will have a long-term adverse
effect on our business, results of operations or financial condition.
Additionally, if any future terrorist attacks were to affect the operation of
the Internet or key data centers, our business could be harmed. These and other
developments arising out of the potential attacks may make the occurrence of one
or more of the factors discussed herein more likely to occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates and foreign currency exchange rates. We do
not use derivative financial instruments.
INVESTMENT PORTFOLIO. We do not use derivative financial instruments in our
non-trading investment portfolio. Inter-Tel maintains a portfolio of highly
liquid cash equivalents typically maturing in three months or less as of the
date of purchase. Inter-Tel places its investments in instruments that meet high
credit quality standards, as specified in our investment policy guidelines.
The Company also maintains short-term investments, which are all
classified as available for sale, and have been recorded at fair value, which
approximates cost. Short-term investments include certificates of deposit,
auction rate certificates, auction rate preferred securities, municipal
preferred securities and mutual funds. The auction rate securities are
adjustable-rate securities with dividend rates that are reset periodically by
bidders through periodic "Dutch auctions" generally conducted every 7 to 49 days
by a trust company or broker/dealer on behalf of the issuer. The Company
believes these securities are highly liquid investments through the related
auctions; however, the collateralizing securities have stated terms of up to
thirty (30) years. These instruments are rated A or higher by Standard & Poor's
Ratings Group, or equivalent. The Company's short-term investments are intended
to establish a high-quality portfolio that preserves principal, meets liquidity
needs, avoids inappropriate concentrations and delivers an appropriate yield in
relationship to the Company's investment guidelines and market conditions. Given
the short-term nature of these investments, and that we have no borrowings
outstanding other than short-term letters of credit, we are not subject to
significant interest rate risk.
LEASE PORTFOLIO. We offer to our customers lease financing and other services,
including our Total Solutions program, through our Inter-Tel Leasing subsidiary.
We fund these programs in part through the sale to financial institutions of
rental payment streams under the leases. Upon the sale of the rental payment
streams, we continue to service the leases and maintain limited recourse on the
leases. We maintain reserves for loan losses on all leases based on historical
loss experience, past due accounts and specific account analysis. Although to
date we have been able to resell the rental streams from leases under our lease
programs profitably and on a substantially current basis, the timing and
profitability of lease resales could impact our business and operating results,
particularly in an environment of fluctuating
31
interest rates and economic uncertainty. If we were required to repurchase
rental streams and realize losses thereon in amounts exceeding our reserves, our
operating results could be materially adversely affected. See "Liquidity and
Capital Resources" and "Critical Accounting Policies and Estimates" in
Management's Discussion and Analysis for more information regarding our lease
portfolio and financing.
IMPACT OF FOREIGN CURRENCY RATE CHANGES. We invoice the customers of our
international subsidiaries primarily in the local currencies of our subsidiaries
for product and service revenues. Inter-Tel is exposed to foreign exchange rate
fluctuations as the financial results of foreign subsidiaries are translated
into U.S. dollars in consolidation. The impact of foreign currency rate changes
have historically been insignificant.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Our management
evaluated, with the participation of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act
of 1934, as amended) as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures were effective to ensure that material information we are required to
disclose in reports that we file or submit under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and forms.
Changes in internal controls over financial reporting. There were no
changes in our internal controls over financial reporting that occurred during
the period covered by this Quarterly Report on Form 10-Q that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
32
INTER-TEL, INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved from time to time in litigation incidental to our business. We
believe that the outcome of current litigation will not have a material adverse
effect upon our business, financial condition or results of operations and will
not disrupt our normal operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS--Not Applicable
ITEM 3. DEFAULTS ON SENIOR SECURITIES--Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The voting results of our Annual Meeting Of Shareholders dated April 21, 2003
were reported in the Company's Form 10-Q filed May 12, 2003.
ITEM 5. OTHER INFORMATION
Pursuant to Rule 14a-4(c)(1) under the Securities Exchange Act of 1934, as
amended, in connection with the Company's annual meeting of shareholders, if a
shareholder 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
shareholders, without any discussion of the matter in the proxy statement. Since
the Company mailed its proxy statement for the 2003 annual meeting of
shareholders on March 21, 2003, the deadline for receipt of any such shareholder
proposal for the 2004 annual meeting of shareholders is February 5, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
Exhibits:
Exhibit 31.1: Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2: Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1: Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Exhibit 32.2: Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Reports on Form 8-K:
On April 7, 2003, we filed a Current Report on Form 8-K under Item
7 (Financial Statements and Exhibits) and furnished disclosure
under Item 9 (Regulation FD Disclosure) to report our Press
release dated April 7, 2003 announcing anticipated net sales and
earnings per share results for, and anticipated cash and
short-term investment levels as of, the fiscal quarter ended March
31, 2003.
On April 21, 2003, we filed a Current Report on Form 8-K under
Item 7 (Financial Statements and Exhibits) and furnished
disclosure under Item 9 (Regulation FD Disclosure) to report our
Press release dated April 21, 2003 announcing GAAP and non-GAAP
results
33
for the fiscal quarter ended March 31, 2003, and comparing such
results with the results for the quarter ended March 31, 2002.
On July 21, 2003, we filed a Current Report on Form 8-K under Item
7 (Financial Statements and Exhibits) and furnished disclosure
under Item 9 (Regulation FD Disclosure) to report our Press
release dated July 21, 2003 announcing GAAP and non-GAAP results
for the fiscal quarter ended June 30, 2003, and comparing such
results with the results for the quarter ended June 30, 2002.
- --------------------------------------------------------------------------------
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
August 14, 2003 /s/ Steven G. Mihaylo
- --------------- ------------------------------------
Steven G. Mihaylo
Chairman of the Board, Chief Executive
Officer and President
August 14, 2003 /s/ Kurt R. Kneip
- --------------- --------------------------------------
Kurt R. Kneip
Vice President and
Chief Financial Officer
34