UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number:
December 31, 1999 0-10211
Inter-Tel, Incorporated
Incorporated in the State of Arizona I.R.S. No. 86-0220994
120 North 44th Street, Suite 200
Phoenix, Arizona 85034-1826
(602) 302-8900
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(26,321,779 shares outstanding as of March 10, 2000)
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 period 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (S 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the last reported sales price of the Company's Common
Stock reported on the Nasdaq National Market System on March 10, 2000 was
approximately $923 million. Shares of Common Stock held by each executive
officer and director have been excluded in that such persons may be deemed to be
affiliates.
Sections from the following documents have been incorporated by reference into
this Report where indicated below: (1) the Registrant's Proxy Statement relating
to its 1999 Annual Meeting of Shareholders has been incorporated by reference
into Part III and Part IV of this report and (2) the Registrant's Registration
Statements on Form S-1 (Nos. 2-70437 and 33-70054), Form S-3 Registration
Statements (Nos. 33-58161, 33-61437, 333-01735, 333-12433 and 333-39221), Form
S-8 Registration Statements (Nos. 2-94805, 33-40353, 33-73620, 333-41197 and
333-67261), Annual Reports on Form 10-K for the years ended December 31, 1984,
1988 and 1994, and Reports on Form 8-K dated July 17, 1987, August 3, 1988 and
January 14, 2000 have been incorporated by reference into Part IV, Item 14.
INTER-TEL, INCORPORATED
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
Item 1 Business 3
Item 2 Properties 24
Item 3 Legal Proceedings 24
Item 4 Submission of Matters to a Vote of Security Holders 24
PART II
Item 5 Market for the Registrant's Common Stock
and Related Shareholder Matters 24
Item 6 Selected Financial Data 25
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 26
Item 7A Quantitative and Qualitative Disclosures About Market Risk 26
Item 8 Financial Statements and Supplementary Data 26
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 26
PART III
Item 10 Directors and Executive Officers of the Registrant 27
Item 11 Executive Compensation 27
Item 12 Security Ownership of Certain Beneficial Owners and Management 27
Item 13 Certain Relationships and Related Transactions 27
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 27
2
PART I
ITEM 1. BUSINESS
THE COMPANY
THIS ANNUAL REPORT TO SHAREHOLDERS ON FORM 10-K ("10-K") CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS
CONTAINED IN THIS 10-K THAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
INCLUDING WITHOUT LIMITATION STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS,
BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL FORWARD-LOOKING
STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE
COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY
SUCH FORWARD-LOOKING STATEMENTS. THE CAUTIONARY STATEMENTS MADE IN THIS 10-K
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS DOCUMENT. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "FACTORS THAT MAY
AFFECT RESULTS OF FUTURE OPERATIONS" BELOW AND ELSEWHERE IN THIS DOCUMENT. IN
EVALUATING THE COMPANY'S BUSINESS, SHAREHOLDERS AND PROSPECTIVE INVESTORS SHOULD
CONSIDER CAREFULLY THE FOLLOWING FACTORS IN ADDITION TO THE OTHER INFORMATION
SET FORTH IN THIS DOCUMENT.
Inter-Tel, incorporated in Arizona in 1969, is a single point of contact,
full service provider of digital business telephone systems, call processing
software, voice processing software, call accounting software, Internet Protocol
("IP") telephony software, computer telephone integration ("CTI") applications
and long distance calling services. Inter-Tel's products and services include
the AXXESS and Inter-Tel Axxent digital business communication software
platforms, the AXXESSORY TALK voice processing platform, the InterPrise routers,
ClearConnect Lite e-Commerce software, and Inter-Tel.net, an IP telephony packet
"switched" long distance service. The Company also acquired the Computer
Telephony business of eLot, formerly Executone Business Information Systems,
Inc. ("Executone"), including the IDS and INFOSTAR Computer Telephony product
lines. The Company also provides maintenance, leasing and support services for
its products. The Company's Common Stock is quoted on the Nasdaq National Market
System under the symbol INTL.
The Company has developed a distribution network of direct sales offices,
dealers and value added resellers (VARs) which sell the Company's products to
small-to-medium-size organizations and to divisions or departments of larger
organizations, including Fortune 500 companies, large service organizations and
governmental agencies. The Company has 46 direct sales offices in the United
States, one in the United Kingdom, one in Japan and a network of hundreds of
dealers and VARs around the world who purchase directly from the Company.
INDUSTRY BACKGROUND
In recent years, advances in telecommunications technologies have enabled
the development of increasingly sophisticated telephone systems and
applications. Users rely upon a variety of applications, including conference
calling, speaker phones, automated attendant, voice processing and unified
messaging (the integration of voice mail, facsimile and electronic mail), to
improve communications within their organizations and with customers and
vendors. Digital technology has facilitated the integration of computing and
telecommunications technologies, which has made possible a number of new
applications that further enhance productivity. Examples of these applications
include automatic call distribution (which provides for queuing and
prioritization of incoming calls), call accounting (which permits accounting for
telephone usage and toll calls), unified messaging, electronic data interchange
between customers and vendors and the use of automatic number identification
coupled with database look-up (where customer information is retrieved
automatically from a computerized database when the customer calls).
3
The emergence of high-performance computers and the growth of the Internet
and other digital IP networks have enabled real-time voice communications to be
transmitted on digital packet switched networks rather than over traditional
circuit switched telephone networks. This development of voice applications for
the Internet and other IP networks reflects a broader convergence of standard
voice communications and data networks. Because IP network telephony converts
all transmissions to the same type of packets, both voice and data can use the
same data circuits, thereby increasing efficiency and maximizing the use of
available bandwidth. The lowering of federal regulatory barriers to competition
across traditionally distinct sectors of the telecommunications industry has
opened new markets for and increased competitive pressures on telecommunications
companies. In response to these factors, telecommunications companies have begun
to establish a presence in Internet and other IP network voice communications
services.
Following the breakup of the Bell system in 1984, which removed
restrictions on the ability of the regional Bell operating companies ("RBOCs")
to purchase telecommunications equipment from independent suppliers and to
resell such equipment to end users, the market for telecommunications systems
and applications became increasingly fragmented. The number of independent
suppliers and distributors of telecommunications equipment initially increased,
but increased levels of competition subsequently led to consolidation among
suppliers and distributors. In addition, different telecommunications systems
and applications were often available from only one or a limited number of
suppliers, which required businesses seeking complete systems to work with a
number of different suppliers. A business seeking a telephone system, voice mail
and long distance services would most likely purchase the products and services
from three separate vendors. As business telecommunications requirements have
become more advanced, the integration of different systems has become
increasingly difficult.
PRODUCTS AND SERVICES
The Company offers a broad range of products and services designed to
support the needs of businesses and other organizations requiring voice and data
communications systems. The Company's principal products are digital telephone
systems which support networked installations up to 20,000 ports, IP telephony
products and services, CTI applications, unified messaging software and voice
processing software. The Company's principal system sales consist of systems
supporting 10 to 4,000 telephones with suggested retail prices of larger systems
in excess of $1,000,000 per system, depending on configuration. The Company also
offers long distance calling services, network design and implementation
services, maintenance, leasing and support services, and resells other
telecommunications products.
DIGITAL COMMUNICATION PLATFORMS
Inter-Tel offers an extensive line of digital communication systems,
including hardware platforms and C++ software applications. Because these
platforms are based upon open architecture and conform to established computer
and telephone industry standard programming interfaces and protocols (such as
TAPI, TSAPI and TCP/IP), customers can choose from a variety of either server
level or desktop applications.
AXXESS. The AXXESS platform, incorporates advanced technology for computer
and telephone integration. The AXXESS platform is designed to provide businesses
with the ability to customize applications to enhance their operations and
increase productivity. The current AXXESS system release supports up to 20,000
ports and includes such advanced capabilities as primary rate ISDN, integrated
call recording, voice prompts in different languages, transparent networking and
a Windows-based attendant's console. The AXXESS platform, allows, through fully
transparent digital networking, two or more systems to operate as one integrated
system, currently with capacity to 20,000 ports.
The AXXESS system incorporates fully-digital processing and transmission to
the desktop and open architecture interfaces, which allow the system to be
integrated with and controlled by attached computers such as PCs and
workstations. The system incorporates object-oriented C++ software
4
developed by the Company, which facilitates upgrades and the incorporation of
additional features and functionality.
AXXESS system telephones feature user-friendly, 6-by-16 character LCD
displays with menu keys that permit the user to select from multiple menu
choices or access additional menu screens. AXXESSORY TALK permits push-button
selection of voice processing commands to appear on the telephone's LCD display,
as well as voice-prompted selections through the telephone keypad. The AXXESS
system currently offers English, Japanese and Spanish voice prompts and LCD
displays and allows the user to switch from one language to another. The AXXESS
system can support the addition of other languages that the Company expects to
add in the future.
The AXXESS system's open architecture interface permits tight integration
with a PC or workstation system bus, using several industry-standard interfaces
to provide efficient access to voice processing and other applications on the PC
or workstation. Applications include database look-up (which utilizes Caller-ID
information to retrieve customer information automatically from a computerized
database), automated attendant, interactive voice response, automatic call
distribution (which queues and prioritizes incoming calls), and call accounting
(which permits the monitoring of telephone usage and toll cost). The AXXESS
system is managed through a Microsoft Windows-based graphical user interface on
a PC.
The AXXESS system utilizes advanced software to configure and utilize
real-time digital signal processor semiconductor components ("DSPs")
incorporated into the system hardware. The use of DSPs and related software
lowers system costs, permits higher functionality and increases system
flexibility. For example, DSPs can be configured by the system manager for
different combinations of speakerphones, conference capabilities and other
DSP-based facilities. The system's speakerphones incorporate full-duplex
technology, which permits speakerphones to transmit in both directions at the
same time without the need to override one speaker's voice to prevent feedback
interference.
Inter-Tel has evolved the AXXESS to a server-based communication system by
developing a Windows-NT server-based Central Processing Unit (CPU) for
Inter-Tel's AXXESS system. This CPU is designed to handle call processing with
greater speed and efficiency. By combining server-based technology and Inter-Tel
AXXESS technology, Inter-Tel leverages the benefits of a Win-Tel server and the
benefits of a PBX-like hot card insertion of telephony cards. Because this
server-based CPU integrates with the AXXESS system, current customers can
benefit from the new functionality, while retaining their current system
investment.
INTER-TEL AXXENT. Small businesses are demanding advanced telephony
applications formerly within reach of only large corporations. The Inter-Tel
Axxent is designed to bring many of the advanced features and functionality of
the AXXESS system to smaller installations on a cost-effective basis while
enabling users to migrate to an AXXESS system as their telecommunications needs
evolve. The Inter-Tel Axxent supports 24 lines and 12 trunks and provides
capabilities such as computer telephone integration, DSP technology, real-time
ACD reporting, and integrated voice processing. Housed in a compact, PC-type
mid-tower chassis, the Inter-Tel Axxent platform also offers the convenience of
a default database, allowing the system to be fully operational as soon as it is
plugged in. Basic database programming can also be performed through the digital
telephone terminals.
EXECUTONE IDS/ECLIPSE. The Executone IDS/Eclipse platform, incorporates
advanced technology for computer and telephone integration. The IDS/Eclipse
platform is designed to provide businesses with the ability to customize
applications to enhance their operations and increase productivity. The current
IDS/Eclipse system release supports up to 648 ports and includes such advanced
capabilities as primary rate ISDN, integrated automatic call distribution (ACD),
and an integrated operator's terminal.
The IDS/Eclipse system incorporates fully-digital processing and
transmission to the desktop and open architecture interfaces, which allow the
system to be integrated with and controlled by attached computers such as PCs
and workstations. The system incorporates object-oriented C software developed
by the Company, which facilitates upgrades and the incorporation of additional
features and functionality.
5
IP TELEPHONY PRODUCTS AND INTER-TEL.NET NETWORK
IP TELEPHONY VOICE AND DATA ROUTERS. Voice and data routers are transition
points between two different network types, such as between the public circuit
switched telephone network and a packet switched IP network such as the
Internet. IP Router products convert regular voice and facsimile transmissions
to or from the compressed data packets that travel over packetized networks. The
Company marketss a line of voice and data routers under the InterPrise brand.
INTER-TEL INTERPRISE PRODUCT LINE. This product line consists of the
InterPrise 400 (four analog PSTN access ports), the InterPrise 3200D (up to
thirty-two digital PSTN access ports), and the InterPrise 3200N (up to
thirty-two access ports using AXXESS networking protocol). These products
incorporate high speed embedded DSP technology and a proprietary Inter-Tel
operating system, and are used primarily by business customers over their
wide-area networks (WAN) and virtual private networks (VPN). The InterPrise
Voice and Data Routers enable phone-to-phone and PC-to-phone calling over IP
networks.
INTERPRISE 400. The InterPrise 400 is designed for corporate use over a
wide area network ("WAN"). The InterPrise 400 can be attached to an analog trunk
interface on the PBX, and the PBX's Automatic Route Selection or Least Cost
Routing features will be programmed to automatically route calls through that
trunk interface for other locations that also have InterPrise routers/gateways.
When phone users wish to place a call, they simply dial the desired telephone
number like any other call. The PBX will route the call to the InterPrise 400,
which converts it into the compressed or uncompressed, digitized data packets
used by the corporate WAN, and routes the call via the WAN to another InterPrise
gateway. The second gateway connects with the far-end PBX and dials either the
extension number of the desired party or accesses a trunk on the PBX and makes a
call into the switched network.
Because IP telephony converts all transmissions to the same type of
packets, both voice and data information can be transmitted using the same data
circuits, thereby increasing efficiency and maximizing the use of bandwidth.
Bandwidth utilization can be maximized to a point that some users may be able to
reduce the overall number of circuits needed.
INTERPRISE 3200D. The InterPrise 3200D is designed for corporate use over a
WAN or VPN.
CLEARCONNECT SOFTWARE TELEPHONE is a PC-client software that acts as a
single port IP telephony gateway and allows callers the ability to make
real-time, two-way voice communications over IP networks and realize potential
savings compared to standard long distance telephone service.
Callers connected to an IP network on their PC dial the destination phone
number from a familiar Windows graphical user interface ("GUI"). Using the PC's
microprocessor and multimedia capabilities, the PC-client software converts the
caller's voice into compressed, digitized data packets and routes the call via
the IP network to an Inter-Tel InterPrise voice and data router. The InterPrise
voice and data router connects with the traditional telephone network and dials
the final destination.
Possible applications for the ClearConnect Software phone are for potential
telecommunications savings for mobile employees and for use as on-ramps for long
distance minutes to Inter-Tel.net.
The Company believes that the opportunity to leverage the potential for
reduced cost phone calls is only one of the many opportunities for IP telephony.
For this reason, the Company continues to enhance its product line. The Company
is currently developing industry standard H.323 functionality, which allows the
Company's IP telephony gateways to integrate with non-Inter-Tel IP telephony
gateways.
CLEARCONNECT LITE. The Company has designed a light-weight version of the
ClearConnect technology that can be integrated with e-commerce web sites to
provide real-time, two-way voice conversations. A ClearConnect Lite button, when
pushed, would automatically connect e-commerce customers to call center agents
that can address their questions or provide sales assistance.
6
CIRILIUM JOINT VENTURE. In December 1999, Inter-Tel entered into an
agreement with Hypercom Corporation to jointly form Cirilium. Cirilium comprises
parts of Hypercom's data and Inter-Tel's packet telephony experience, products
and services, including Inter-Tel's Vocal'Net gateway products and technology.
Inter-Tel's investment in Cirilium included cash, selected assets, liabilities
and technology related to the Vocal'Net products. In addition, 20 employees from
Inter-Tel joined Cirilium to work in the entity's management, engineering, sales
and operations groups. Cirilium's products are used in the Inter-Tel.net
network. Inter-Tel has entered into service agreements with Cirilium to maintain
and support ongoing Inter-Tel.net network services.
INTER-TEL.NET. Inter-Tel.net is an IP long distance network that utilizes
the Inter-Tel IP telephony solutions and Cirilium gateways, Service Provider
Package and Centralized Accounting System. Inter-Tel.net's points of presence
("POP") include the San Francisco Bay Area, Washington D.C., Chicago, Reno, New
York, Phoenix, Atlanta, Houston, Dallas, Miami/Ft. Lauderdale and Los Angeles.
Utilizing Cirilium's gateway products and technology (formerly Vocal'Net),
Inter-Tel continues to develop and expand Inter-Tel.net, a private IP network
designed to carry long distance telephone traffic at rates typically lower than
traditional long distance providers. Through international alliances,
Inter-Tel.net is participating with businesses in Asia, Europe, Mexico and South
America to provide international IP telephony service. Through other third party
arrangements, the network is also expanding its domestic points of presence.
Commercial traffic is being sold to Inter-Tel's base customers in certain
markets, and pre-paid calling cards are being sold through Inter-Tel's branches,
certain agents and resellers. Where Inter-Tel.net or one of it's network
partners does not have a POP, Inter-Tel.net utilizes traditional Long Distance
Carriers to complete the call. See "Factors That May Affect Future Operating
Results."
COMPUTER-TELEPHONE INTEGRATION
Through CTI, the computer and the telephone are linked into one
environment. Inter-Tel's AXXESS and Executone digital communication systems and
software enable users to receive phone calls through their desktop PC. Using
Caller I.D., a caller's information can be retrieved from the company's database
even before the call is accepted. On an individual desktop or a company-wide
network basis, Inter-Tel offers a variety of products, such as AXXESSORY Call
Center and Executone Sentinal, that can manage automatic call distribution at
peak efficiency or route incoming telephone calls, based on various parameters,
to a specific person. It can also collect, analyze and report real-time call
processing information for staff forecasting and analysis.
Through the use of Novell's TSAPI and Microsoft's TAPI standard interfaces,
Inter-Tel's software applications integrate with other "off-the-shelf" Windows
applications such as personal information managers, call routing or call
management. Inter-Tel has formed relationships with a number of third party
software developers to integrate with their existing applications to create a
working environment for database, personal organizer, or terminal emulation
programs.
If these "off-the-shelf" applications do not adequately meet the needs of a
customer, the open design of Inter-Tel's software enables independent software
developers to write custom applications through Inter-Tel's Developer Program.
Alternatively, Inter-Tel's CTI Solutions Group can provide professional
consulting services or can develop individual customer applications, for either
desktop or local area network ("LAN")-based applications.
UNIFIED MESSAGING AND VOICE PROCESSING SOFTWARE
Inter-Tel's unified messaging software, AXXESSORY Talk Central, works in
conjunction with a variety of messaging platforms, including the Microsoft
Exchange messaging application, Lotus Notes, Lotus cc:Mail, Novell's GroupWise
and Internet mail applications such as Qualcomm's Eudora. AXXESSORY Talk Central
integrates all types of messages into a single-user interface on a PC, supports
both voice mail and facsimile mail and provides another means for improving
workplace productivity and retrieving messages from a PC connected to a modem.
7
Inter-Tel's AXXESSORY Talk, Axxent Talk, IVX500, and Executone INFOSTAR,
DVX, EVX, and VX2 are voice processing platforms that work with Inter-Tel's
AXXESS-brand and Executone-brand communication platforms. These voice processing
platforms provide advanced voice mail, auto attendant, recorded announcements,
and messaging notification features for businesses.
OTHER SERVICES AND PRODUCTS
NETWORKING TECHNOLOGIES INTEGRATION. To develop a solid foundation for
state-of-the-art data and telecommunications networking, customers require
strategic network expertise from their networking provider. Inter-Tel designs,
installs and supports the complete integration of a customer's complex data and
telecommunications network, from land-based LANs to geographically dispersed
WANs.
By forming relationships with major manufacturers of hardware and software
technologies, Inter-Tel provides the routers, ATM, LAN and WAN switches, file
servers, intelligent hubs and any other device required for the customer's
intranet or for usage of the Internet. Pre-sale design support, project
coordination for implementation, and installation support are offered on the
full line of Inter-Tel server-based telephony products, InterPrise products, and
services.
NETWORK AND LONG DISTANCE SERVICES. The Company, through its Inter-Tel
NetSolutions, Inc. subsidiary, resells a variety of long distance calling
services, including domestic and international calling services, 800 calling
services, dedicated services, voice and video conferencing, customized billing
and a variety of other telecommunication services. Inter-Tel NetSolutions also
provides long distance calling services that are a blend of IP Telephony long
distance and traditional circuit-switched long distance. The Company believes
that certain of its customers desire the convenience of acquiring long distance
calling services through the same vendor that the customer uses to purchase its
other telephony equipment and services. The Company currently resells long
distance services pursuant to contracts with major U.S. long distance carriers.
See "Factors That May Affect Future Operating Results."
Examples of the applications currently supported by Inter-Tel NetSolutions
include call centers using T-1 access for incoming toll-free traffic, sales
offices using NetSolutions' switched long distance and companies linking
multiple offices throughout the country on a frame relay network.
LEASING SERVICES. The Company offers its Totalease program through its
Inter-Tel Leasing, Inc. subsidiary. Totalease enables an end user to acquire a
full range of telephony systems, applications, maintenance and support services,
from affiliated vendors. The Totalease contract provides a total system
financing solution to the customer at a set monthly cost, with system expansion
available at predictable additional fees. The typical Totalease contract has a
term of 60 months, with the customer entitled to renew the contract at a
specified price for up to an additional 36 months.
Inter-Tel also offers a line of low-cost lease purchase financing. Lease
terms range from 24 to 84 months with $1.00, fixed and fair market value
purchase options. Inter-Tel can also customize financing packages to suit
customers with special financial needs. By offering this type of financing to
acquire Inter-Tel products and services, the customer is able to lease directly
from an affiliate of the manufacturer, thereby allowing Inter-Tel, or the
Inter-Tel dealer, to maintain a direct relationship with customers.
OTHER PRODUCTS. Inter-Tel also distributes other leading telecommunications
products from its Factored Products Division through its direct sales offices,
dealers and VARs. The Factored Products Division represents products that
Inter-Tel has endorsed as leading communications peripherals utilized in many
day-to-day functions. Businesses require telecommunications products to provide
increased productivity, ease of operations and reliability. Many of these
products interface with Inter-Tel telephone systems. Inter-Tel's product
selection consists of videoconferencing, battery backup, headsets, surge
protection, paging equipment, wireless communications and data multiplexers.
8
SALES AND DISTRIBUTION
The Company has developed a distribution network of direct sales offices,
dealers and VARs which market the Company's products to small to medium size
organizations and divisions or departments of larger organizations. In the
United States, the Company has 46 direct sales offices and a network of hundreds
of dealers who purchase systems directly from Inter-Tel. These resellers have
traditionally sold complex data solutions to customers, and the Company is
seeking to leverage its distribution network to capitalize on the merging of the
computer and telephony industries. The Company maintains a dealer support office
and direct sales office in the United Kingdom and have a network of dealers in
the United Kingdom and Europe. In addition, the Company maintains a direct sales
office in both Japan and Singapore.
The Company believes that its success depends in part upon the strength of
its distribution channels and its ability to maintain close access to its end
user customers. In recent periods, the Company has sought to improve its access
to end user customers by effecting strategic acquisitions of resellers of
telephony products and services in markets in which the Company has existing
direct sales offices and in other strategic markets. The Company has expanded
its direct sales office personnel from a total of 625 persons at December 31,
1995 to a total of 1,114 at December 31, 1999.
The Company's sales through its direct sales offices as a percentage of
total sales have decreased from 59.5% of net sales in 1995 to 56.6% of net sales
in 1999. Sales to distributors, dealers, and VARs have decreased from 31.7% of
net sales in 1995 to 28.0% of net sales in 1999. Sales through the Company's
long distance, IP and network services operations have increased from 5.0% of
net sales in 1995 to 12.4% of net sales in 1999.
Direct dealers and VARs typically enter into non-exclusive reseller
contracts for a term of one or more years. The Company generally provides
support and other services to the reseller pursuant to the terms of the
agreement. The agreements often include requirements that the reseller meet or
use its best efforts to meet minimum annual purchase quotas. The Company faces
intense competition from other telephone system and voice processing system
manufacturers for its dealers' attention, as most of the Company's dealers carry
products which compete with the Company's products. See "Factors That May Affect
Future Operating Results."
International sales, which include digital communications platforms and IP
telephony products, accounted for approximately 2.5%, of net sales in 1999
compared to 2.7% in 1998. In order to sell its products to customers in other
countries, the Company must comply with local telecommunications standards. The
Company's AXXESS system and IP telephony products can be readily altered through
software modifications, which the Company believes will facilitate compliance
with these local regulations. In addition, the AXXESS system has been designed
to support multi-lingual functionality, and currently supports English, Japanese
and Spanish. The Company is presently establishing AXXESS dealer networks in
Japan, other parts of Asia and Latin America and is working to expand its dealer
network in the United Kingdom and Europe. Starting in 2000, the Company will
also be distributing Executone Computer Telephony products in the United
Kingdom, Israel, Puerto Rico, and South America. International sales are subject
to a number of risks, including changes in foreign government regulations and
telecommunications standards, export license requirements, tariffs and taxes,
other trade barriers, difficulties in protecting intellectual property,
fluctuations in currency exchange rates, difficulty in collecting accounts
receivable, difficulty in staffing and managing foreign operations and political
and economic instability. Fluctuations in currency exchange rates could cause
the Company's 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.
9
CUSTOMER SERVICE AND SUPPORT
The Company believes that customer service and support are critical
components of customer satisfaction and the success of the Company's business.
The Company operates a technical support hotline to provide a range of telephone
support to its distributors, dealers and end user customers through a toll-free
number. The Company also provides on-site customer support and, through remote
diagnostic procedures, has the ability to detect and correct system problems
from its technical support facilities.
Information taken from customer service call records allows feedback into
Inter-Tel's Quality First continuous improvement process, thus providing
direction for product and service enhancements. Each direct sales office is
given a periodic service activity report summarizing the reasons that
technicians are asking for assistance and common issues that give rise to
technical inquiries. This allows them to analyze trends in their service
operations and provide better customer service.
RESEARCH AND DEVELOPMENT
The Company believes that its ability to enhance its current products,
develop and introduce new products on a timely basis, maintain technological
competitiveness and meet customer requirements are essential to the Company's
success. The Company's research and development efforts over the last several
years have been focused primarily on development of and enhancements to the
existing AXXESS and AXXESSORY TALK systems with additional applications,
capacity and features; development of a unified messaging software application,
and expanding the telecommunications networking package. Over the last several
years, the research and development efforts of the acquired TMSI organization
have focused on the development of the InterPrise IP product line, the
ClearConnect software phone, and the ClearConnect Lite e-commerce software. The
Company's current efforts are focused on the development and enhancement of IP
telephony products such as enhancements to the AXXESS and Executone digital
communication systems, enhancements to the AXXESSORY Talk Central unified
messaging platform, the IP Phone+ digital telephone, the InterPrise product
line, and enhancements to Inter-Tel's NT-CPU PBX. The software-based
architecture of the AXXESS and Executone systems facilitate maintenance and
support, upgrades, and incorporation of additional features and functionality.
The Company had a total of 136 personnel engaged in research and
development as of December 31, 1999. Research and development expenses were
$14,798,000; $11,373,000; and $7,998,000 for 1999, 1998, and 1997, respectively.
MANUFACTURING
The Company manufactures substantially all of its systems through third
party subcontractors located in the United States, the Philippines, the People's
Republic of China and Mexico. These subcontractors use both standard and
proprietary integrated circuits and other electronic devices and components to
produce telephone switches, telephones and printed circuit boards to the
Company's engineering specifications and designs. The suppliers also inspect and
test the equipment before delivering them to the Company, which in some cases
then performs systems integration, software loading, final testing and shipment.
Varian Associates, Inc. ("Varian"), a multinational electronic company,
currently manufacturers a significant portion of the Company's products,
including substantially all of the printed circuit boards used in the AXXESS,
Executone IDS and Inter-Tel Axxent systems, at the Varian Tempe, Arizona or
Poway, California facilities. The Company sold its manufacturing operation for
the Executone line of products to Varian on January 31, 2000. Varian will
manufacture the Executone line out of the Poway, California facility. The
Company maintains written agreements with its principal suppliers. The Company
provides a forecast schedule to its suppliers and revises the forecast on a
periodic basis. See "Factors That May Effect Future Operating Results."
10
QUALITY
The Company believes that the quality of its systems, customer service and
support, and other aspects of its organization are a critical element of meeting
the needs of its customers. Through its Quality First continuous improvement
process initiated in 1991, Inter-Tel implements quality processes throughout its
business operations. The Company has established formal procedures to ensure
responsiveness to customer requests, monitor response times and measure customer
satisfaction. The Company has also established means by which all end users,
including customers of the Company's resellers, can make product enhancement
requests directly to the Company. The Company supports its dealers and VARs
through an extensive training program at the Company's facility and at dealer
sites, a toll-free telephone number for sales and technical support, and the
provision of end user marketing materials. The Company typically provides a one
year warranty on its systems to end users. In manufacturing, the Company
continuously monitors the quality of the products produced on its behalf by the
Company's manufacturing subcontractors, and is extending the Company's Quality
First continuous improvement process to its suppliers.
COMPETITION
The market for the Company's products is highly competitive and in recent
periods has been characterized by pricing pressures and business consolidations.
The Company's PABX and key systems products competitors include Lucent
Technologies, Inc. ("Lucent") and Northern Telecom Limited ("NorTel"), as well
as Comdial Corporation ("Comdial"), Iwatsu America, Inc. ("Iwatsu"), Mitel
Corporation ("Mitel"), NEC Corporation ("NEC"), Nitsuko Corporation ("Nitsuko"),
Matsushita Electric Industrial Co., Ltd. ("Panasonic"), Siemens Rolm
Communications, Inc. ("Siemens"), Toshiba America, Inc. ("Toshiba") and others.
Many of these competitors have significantly greater financial, marketing and
technical resources than the Company. The Company also competes against the
RBOCs, which offer systems produced by one or more of the aforementioned
competitors and also offer Centrex systems in which automatic calling facilities
are provided through equipment located in the telephone company's central
office.
In the market for voice processing applications, including voice mail, the
Company competes against Applied Voice Technology, Inc. ("AVT"), Active Voice
Corporation ("Active Voice"), Centigram Communications Corporation
("Centigram"), Lucent and other competitors, certain of which have significantly
greater resources than the Company. In the market for long distance services,
the Company competes against AT&T, MCI WorldCom, Inc. ("MCI"), Sprint
Corporation, Qwest Communications Corporation ("Qwest") and other competitors,
many of which have significantly greater resources than the Company. The Company
also expects to compete with RBOCs, cable television companies, satellite and
other wireless broadband service providers and others for long distance business
as those companies gradually respond to the Telecommunications Act. Key
competitive factors in the sale of telephone systems and related applications
include price, performance, features, reliability, service and support, name
recognition and distribution capability. The Company believes that it competes
favorably in its markets with respect to the price, performance and features of
its systems, as well as the level of service and support that the Company
provides to its customers. Certain of the Company's competitors have
significantly greater name recognition and distribution capabilities than the
Company.
In the market for IP telephony products, the Company competes against
existing IP telephony gateway providers such as Clarent Lucent, NorTel, NetSpeak
Corporation, VocalTec Communications Ltd., Nokia IP Products (formerly Vienna
Systems Corporation), CISCO Systems, 3Com, Motorola, Cirilium and others. The
Company competes against existing IP long distance service providers such as
Net2Phone, deltathree.com, ITXC, AT&T and others. Several of these competitors
have been active in developing and marketing IP telephony products and have
established relationships with customers within their market. Should the market
for IP telephony products become fully developed or develop at a rapid rate,
large computer companies such as IBM Corporation ("IBM") and Microsoft
Corporation ("Microsoft"), or large telephone companies such as AT&T, MCI,
Sprint Corporation or Qwest, could choose to develop proprietary software
designed to facilitate voice communication over an IP network. In addition,
Inter-Tel's router IP solutions may also compete with Cirilium products.
11
As the Company competes for local telephone service, Long Distance Service
and IP network access, it faces additional competition from established foreign
and domestic Long Distance Carriers, RBOCs and other providers. Many have larger
marketing and sales organizations, significantly greater financial and technical
resources and a larger and more established customer base than the Company. In
addition, RBOCs and other providers have greater name recognition, more
established positions in the market and long standing relationships with
customers. Therefore, there can be no assurance that the Company will compete
successfully in these markets.
The Company expects that competition will continue to be intense in the
markets addressed by the Company, and there can be no assurance that the Company
will be able to continue to compete successfully.
INTELLECTUAL PROPERTY RIGHTS
The Company's future success will depend in part upon its proprietary
technology. The Company currently holds patents for eighteen telecommunications
and unified messaging products. The remaining life of these patents ranges from
5 to 18 years in duration. The Company has also applied to the U.S. Patent and
Trademark Office for seven additional patents. The Company also relies on
copyright and trade secret law and contractual provisions to protect its
intellectual property. See "Factors That May Effect Future Operating Results."
EMPLOYEES
As of December 31, 1999, the Company had a total of 1,652 employees, of
whom 1,392 were engaged in sales, marketing and customer support, 45 in quality,
manufacturing and related operations, 136 in research and development, and 79 in
finance and administration. The Company's future success will depend upon its
ability to attract, retain and motivate highly qualified employees, who are in
great demand. The Company believes that its employee relations are good.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
In addition, to the other information in this Form 10-K, the following are
important factors that should be considered in evaluating Inter-Tel and our
business.
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 persistent customer demand
for new products, applications and services. To compete successfully, we must
continually enhance our existing telecommunications products, related software
and customer services as well as 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 no not adapt our existing
products and services to customer demands or evolving industry standards, our
business could be significantly harmed. 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 could render our products
and services obsolete.
In addition, if the markets for IP network products or CTI applications
fail to develop as quickly as 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 INCREASING COMMERCIAL ACCEPTANCE OF OUR
INTERPRISE PRODUCTS, AXXESS PLATFORM, AND EXECUTONE COMPUTER TELEPHONY PRODUCTS.
12
During the past few years, we introduced unified messaging on our AXXESSORY
TALK platform, developed a number of enhancements to our existing AXXESS and
AXXESSORY Talk platforms and introduced the Inter-Tel Vocal'Net Gateway Server
and the Inter-Tel Vocal'Net Service Provider Package. In April 1999, we released
the InterPrise 400 voice and data router, the first of a family of voice and
data convergence products that will be released over the next year. Also, during
October 1999, we released AXXESS 5.1 and AXXESSORY TALK 5.1 software into
production. During the past 12 months, sales of our AXXESS digital
communications platforms and related software have comprised a substantial
portion of our net sales. We expect that our future success will continue to
depend, in large part, upon the increasing commercial acceptance of the
InterPrise products and the AXXESS platform, as well as future upgrades and
enhancements to these products and networking platforms. We cannot assure you
that these products or platforms will succeed in the future. Our future success
will also depend upon the market acceptance of our other new products and
enhancements, including the products that we purchased from Executone, pursuant
to our announcement on January 1, 2000.
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 are highly complex. Although our new
products and upgrades are examined prior to release, they can only be fully
tested when used by a large customer base. Consequently, our customers may
discover program errors or other defects after new products and upgrades have
been released. Some of these errors or "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
designed to minimize the number of errors or other 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:
* Costs associated with the remediation of any problems;
* Costs associated with design modifications;
* Loss of or delay in revenues;
* Loss of customers;
* Failure to achieve market acceptance or loss of market share;
* Increased service and warranty costs;
* Legal actions by our customers; and
* 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 AND OUR BUSINESS WOULD BE HARMED.
Due to the complexity of our products, we have in the past 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 on a regular and efficient basis, customer demand for our products
could decline and our business would be harmed.
THE EMERGING MARKET FOR INTERNET PROTOCOL 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 only recently
begun to develop, is rapidly evolving and is characterized by an increasing
number of market entrants who have introduced or developed products and services
for Internet or other IP network voice communications. As is typical in the case
of a new and rapidly evolving industry, the demand for and market acceptance of
recently introduced IP network products and services are highly uncertain. We
cannot assure you that voice communications over IP networks will become
widespread. Even if voice communications over IP networks do become
13
widespread in the future, we cannot assure you that our products, particularly
the Inter-Tel InterPrise product lines, will successfully compete against other
market players and attain broad market acceptance.
Additional uncertainties involving the development of IP network telephony
could harm our business. The adoption of voice communications over IP networks
generally requires the acceptance of a new way of exchanging information. In
particular, enterprises that have already invested substantial resources in
other means of communicating information may be reluctant or slow to adopt a new
approach to communications. Due to the lack of user control over network
infrastructure and individual system configuration, users of IP network voice
communications may experience delays in the transmission of speech, loss of
voice packets or inferior sound quality relative to standard telephony networks.
If these factors cause the market for IP network voice communications to fail to
develop or to develop more slowly than 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.
WE MAY BECOME SUBJECT TO GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES THAT
COULD HARM OUR BUSINESS.
The regulatory environment for IP network telephony is subject to
substantial uncertainty. In the United States, we believe that there are
currently few laws or regulations directly applicable to voice communications
over IP networks or to access to, or commerce on, IP networks generally. Future
changes in the regulatory environment, particularly in regulations relating to
the telecommunications industry, could significantly harm our business. The
increasing commercial acceptance of voice communications over IP networks, as
well as other factors, may result in the future application or adoption of a
number of laws and regulations relating to the conduct of our business as it
relates to telecommunications, such as:
* Fees or charges on users and providers of products and services;
* Pricing;
* Characteristics and quality of services;
* Taxes;
* Copyrights; and
* Additional regulations and obligations upon on-line service providers.
We cannot assure you that government regulation or government imposition of
fees, charges, taxes or regulation would not significantly harm the acceptance
and attractiveness of IP network voice communications. We also cannot predict
the likelihood that any future legislation or regulation will be enacted, nor
the financial impact, if any, of such resulting legislation or regulation. In
addition, we may develop and release other products with new telecommunications
capabilities or services which could be subject to existing federal government
regulations or which could trigger the enactment of additional domestic or
foreign government regulations.
WE FACE RISKS ASSOCIATED WITH THE INTER-TEL VOCAL'NET, INTER-TEL SERVICE
PROVIDER PACKAGE AND INTER-TEL INTERPRISE PRODUCTS.
Over the past 2 years, we have introduced the Inter-Tel Vocal'Net Server, the
Inter-Tel Service Provider Package, and Inter-Tel InterPrise products. We cannot
assure you that the functionality, scalability, and reliability of the Inter-Tel
Vocal'Net, Inter-Tel Service Provider Package and Inter-Tel InterPrise product
lines will achieve broad market acceptance. In addition, we cannot assure you
that these products will comply with industry standards or that emerging
industry standards will not render our IP telephony products obsolete. If these
products fail to achieve market acceptance, our business, financial condition
and operating results could be significantly harmed.
THE SUCCESS OF OUR JOINT VENTURE WITH HYPERCOM, AND THE MARKET ACCEPTANCE OF OUR
CIRILIUM VENTURE, AS WELL AS OUR OTHER IP NETWORK TELEPHONY PRODUCT AND SERVICE
OFFERINGS, IS UNCERTAIN AND IS SUBJECT TO RISKS THAT MAY PREVENT US FROM
ACHIEVING OUR OBJECTIVES.
14
In December 1999, Inter-Tel entered into an agreement with Hypercom
Corporation to jointly form Cirilium. Cirilium comprises parts of Hypercom's
data and Inter-Tel's packet telephony experience, products and services,
including Inter-Tel's Vocal'Net gateway products and technology. The market for
voice communications over IP networks, as well as the market for data telephony
products, services and applications in general, is intensely competitive.
Consequently, we cannot assure you that our expectations and objectives for the
Cirilium venture with Hypercom will be successfully attained.
The prospects for market acceptance of the Cirilium venture, and other IP
telephony products acquired through our June 1998 purchase of TMSI assets, must
be considered in light of the uncertainties to which companies and products in
rapidly evolving markets such as IP network telephony are particularly exposed.
These uncertainties include:
* The continued expansion of the Internet and Internet infrastructures;
* The development of complementary products necessary to make the
Internet a viable commercial network;
* The continued expansion of other IP networks and IP network
infrastructures;
* The preservation of current volume, distance and time-of-day pricing
structures by IP networks;
* The successful management of access costs, network capacity and voice
transmission quality relating to IP network products and services;
* The resolution of critical issues concerning commercial use of the
Internet, such as security, reliability, cost, ease of use, access and
quality of service; and
* The ability of the Internet to meet additional demand or its users'
changing requirements on a timely basis and at a commercially
reasonable cost.
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 eighteen telecommunication and unified messaging products and have
also applied to the U.S. Patent and Trademark Office for seven 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 you 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
could harm our business.
We also cannot assure you that third parties will not claim our current or
future products or services infringe upon their rights. Occasionally, we are
subject to proceedings alleging that we infringed upon third party intellectual
property rights, including patents, trademarks, copyrights, or other
intellectual property rights. We recently received a letter and viewed a
presentation from one of our primary competitors, Lucent, alleging that our
AXXESS digital communications platform utilizes inventions covered by certain of
such competitor's patents. We are continuing the process of investigating this
matter. When any such claims are asserted against us, 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, divert our management's attention and require us to
pay significant damages, develop non-infringing technology or acquire licenses
to the
15
technology which is the subject of the asserted infringement. Any of these
actions or outcomes could harm our business, financial condition and operating
results. 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.
The Inter-Tel InterPrise, ClearConnect, AXXESS NT-CPU, and AXXESSORY Talk
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 jeopardized the security of
confidential information, such as credit card or bank account information or the
content of conversations over the IP network. User concerns about privacy and
security may cause IP networks in general to grow more slowly, and impair market
acceptance of our IP network products in particular, until more comprehensive
security technologies are developed.
WE MAY EXPERIENCE DIFFICULTIES DEVELOPING, MAINTAINING AND IMPROVING THE QUALITY
OF OUR INTERNAL IP NETWORK, INTER-TEL.NET AND DEPEND ON THIRD-PARTY SUPPLIERS OF
TELECOMMUNICATIONS AND NETWORK TRANSMISSION SERVICES.
The Company is currently utilizing Cirilium's Inter-Tel Vocal'Net
technology and Inter-Tel InterPrise products to develop and expand our own IP
long-distance network, Inter-Tel.net, to carry voice traffic. The Inter-Tel.net
network is currently in the process of deployment and, accordingly, is subject
to risks and uncertainties. To date, the Inter-Tel.net network has established
points of presence in the San Francisco Bay Area, Washington, D.C., Chicago, New
York, Phoenix, Reno, Atlanta, Houston, Los Angeles, Dallas, and Miami/Ft.
Lauderdale. If the domestic or international market for IP network products
fails to develop or develops more slowly than we anticipate, or if we experience
difficulty in the integration of the TMSI technology, our Inter-Tel.net network
could become financially burdensome to maintain or obsolete, which could harm
our business, financial condition and operating results.
In addition, we are dependent on third-party or affiliate suppliers of
telecommunications and Internet network transmission services for implementation
of Inter-Tel.net and we currently do not have long-term contracts with these
suppliers. The successful expansion of Inter-Tel.net depends on our ability to
obtain services from these suppliers. Some of these suppliers are or may become
our competitors and have not agreed to restrict competition against us. If these
suppliers raise rates, change pricing structures, experience power or bandwidth
outages, or suffer delays in provision of local circuits, our operations and
business may be harmed. We cannot assure you that there will not be a
significant disruption of service provided by these suppliers, now or in the
future, that would harm our ability to provide undisrupted services to our
customers. We also cannot assure you that products developed by our suppliers
will not suffer from speed and scalability problems that could harm our
business.
Moreover, although we have devoted and intend to continue devoting
substantial resources to improving the quality of telephone conversations using
Cirilium's Inter-Tel Vocal'Net, Inter-Tel InterPrise products, and the
Inter-Tel.net network, we cannot assure you that we will be able to eliminate or
reduce the problems of voice communications over the Inter-Tel.net network, such
as delays in the speech transmission, loss of voice packets and poor sound
quality. If we fail to improve the sound quality and other limitations of voice
communications over the Inter-Tel.net network and to offer such improvements to
our customers on a cost-effective basis, the Inter-Tel.net network could fail to
achieve market acceptance and our business, financial condition and operating
results would suffer.
WE HAVE MANY COMPETITORS AND EXPECT NEW COMPETITORS TO ENTER OUR MARKET, WHICH
COULD PUT PRESSURES ON US.
16
The markets for our products and services are extremely competitive and we
expect competition to increase in the future. Our current and potential
competitors primarily include:
* PABX and core systems providers such as Lucent, Nortel, Comdial,
Iwatsu, Mitel, NEC, Nitsuko, Panasonic, Siemens and Toshiba;
* large data routing companies such as Cisco Systems and 3Com;
* voice processing applications providers such as AVT, Active Voice,
Centigram and Lucent;
* long distance services providers such as AT&T, MCI WorldCom, Sprint
and Qwest Communications;
* IP telephony product and service providers such as Clarent, Lucent,
NetSpeak, Nortel, VocalTec, Nokia, ITXC, deltathree.com, Net2Phone,
Cirilium and others;
* our current vendors, such as Cisco Systems, Nortel, 3Com, Motorola and
MICOM;
* large computer corporations such as Microsoft and IBM; and
* 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 arrangements 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 in the future. Our
competitors may be able to:
* develop and expand their product and service offerings more quickly;
* adapt to new or emerging technologies and changing customer needs
faster;
* take advantage of acquisitions and other opportunities more readily;
* negotiate more favorable licensing agreements with vendors;
* devote greater resources to the marketing and sale of their products;
and
* address customers' service-related issues better.
Some of our competitors may also be able to provide customers with
additional benefits at lower overall costs or to reduce their application
service charges 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 increased price competition and other forms of competition
that could cause our business to suffer.
ANY FUTURE BUSINESS ACQUISITIONS MAY DISRUPT OUR BUSINESS, DILUTE SHAREHOLDER
VALUE OR DISTRACT MANAGEMENT ATTENTION.
As part of our business strategy, we may 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, including:
* difficulty of assimilating the operations, products and personnel of
the acquired business;
* potential disruption of our ongoing business;
* unanticipated costs associated with the acquisition;
* inability of management to manage the financial and strategic position
of acquired or developed products, services and technologies;
* inability to maintain uniform standards, controls, policies and
procedures; and
* impairment of relationships with employees and customers which may
occur as a result of integration of the acquired business.
17
In particular, in January 2000, we acquired certain assets and liabilities
of Executone Information Systems. We may fail to address adequately the risks
described above relating to our Executone acquisition, and this failure could
harm our operating results. In addition, 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.
OUR RELIANCE ON A LIMITED NUMBER OF SUPPLIERS FOR KEY COMPONENTS AND OUR
INCREASING DEPENDENCE ON CONTRACT MANUFACTURERS COULD IMPAIR OUR ABILITY TO
MANUFACTURE AND DELIVER OUR PRODUCTS AND SERVICES IN A TIMELY 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 certain risks and uncertainties,
including the possibility of a shortage or delivery delay for certain key
components although we believe that alternate sources are available for most key
components. We currently manufacture our products through manufacturers located
in the United States, the Philippines, the People's Republic of China and
Mexico. Foreign manufacturing facilities are subject to changes in governmental
policies, imposition of tariffs and import restrictions and other factors beyond
our control. Varian currently manufactures a significant portion of our products
at Varian's Tempe, Arizona and Poway, California facilities, including
substantially all of the printed circuit boards used in the AXXESS and Inter-Tel
Axxent digital communication platforms as well as substantially all of the
Executone Computer Telephony products. Although we set manufacturing
specifications and conditions for our products, and all of our contract
manufacturers must meet our requirements for manufacturing process and quality
assurance before we enter into manufacturing agreements, we have occasionally
experienced delays in the supply of components and finished goods. We cannot
assure you that we will not experience similar delays in the future.
Our reliance on third party manufacturers 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 cannot efficiently develop alternative or additional sources if
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 and delivery terms in
the future.
WE RELY ON OUR DEALER NETWORK FOR A SUBSTANTIAL PORTION OF OUR NET SALES AND IF
THESE DEALERS DO NOT EFFECTIVELY PROMOTE AND SELL OUR PRODUCTS, OUR BUSINESS AND
OPERATING RESULTS COULD BE HARMED.
A substantial portion of our net sales is made through our network of
independent dealers. We face intense competition from other telephone system and
voice processing system manufacturers for these dealers' business, as most of
our dealers carry products which compete with our products. We cannot assure you
that any of our dealers will not promote the products of our competitors to our
detriment. The loss of any significant dealer or group of dealers, including
those who distribute the our recently acquired Executone products, or any event
or condition harming our dealer network, could harm our business, financial
condition and operating results.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL AS
NECESSARY, WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE GROWTH IN OUR BUSINESS OUR
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 had difficulty hiring employees in the timeframe that we
desire,
18
particularly skilled engineers. Our loss of any key personnel or our failure to
effectively recruit additional key personnel could make it difficult for us to
manage our business, make timely product introductions and meet other key
objectives and therefore harm our business. We cannot assure you that we will be
able to continue attracting and retaining the qualified personnel necessary for
the development of our business. Moreover, the growth in our business has
placed, and is expected to continue to place, a significant strain on our
personnel, management and other resources. Our ability to manage any future
growth effectively will require us to attract, train, motivate and manage new
employees successfully, to integrate new employees into our overall operations
and to continue to improve our operational, financial and management information
systems.
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
you 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 our prices minimum use requirements are
relatively fixed. The market for long distance services is experiencing, and is
expected to continue experiencing 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 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.
THE INTRODUCTION OF NEW PRODUCTS AND SERVICES HAS RESULTED IN CHANGES TO OUR
SALES CYCLES AND BACKLOG WHICH MAY CAUSE FLUCTUATIONS IN OUR QUARTERLY RESULTS.
In the past 24 months, we introduced AXXESS networking systems and software
which are typically sold to larger customers at a higher average selling price.
Our AXXESS networking products have a relatively high sales price per unit, and
often represent a significant and strategic decision by an enterprise regarding
our communications infrastructure. Accordingly, the purchase of our products
typically involves significant internal procedures associated with the
evaluation, testing, implementation and acceptance of new technologies. This
evaluation process frequently results in a lengthy sales process, typically
ranging from three months to more than nine months, and subjects the sales cycle
associated with the purchase of our products to a number of significant risks,
including budgetary constraints and internal acceptance reviews. The length of
our sales cycle also may vary substantially from customer to customer. While our
customers are evaluating our products and before placing an order with us, we
may incur substantial sales and marketing expenses and expend significant
management effort. Consequently, if sales forecasted from a specific customer
for a particular quarter are not realized in that quarter, our operating results
could be materially adversely affected.
Our quarterly operating results have historically depended on, and may
fluctuate in the future as a result of, many factors including:
* volume and timing of orders received during the quarter;
* the mix of products sold;
* 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, in particular
the Executone acquisition; and
19
* the availability and cost of products and components from our
suppliers.
In addition, we have historically operated with a relatively small backlog,
with sales and operating results in any quarter principally dependent on orders
booked and shipped in that quarter. This results primarily from our customers'
desire for immediate shipment and installation of platforms and software. 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 digital communication platforms and associated call
processing and voice processing software applications is largely dependent on
general economic conditions, and can vary significantly as a result of changing
conditions in the economy as a whole. We cannot assure you that historical
trends for small backlog 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, operating results could be harmed.
Because sales of digital communication platforms through our dealers produce
lower gross margins than sales through our direct sales organization, operating
results have varied, and will continue to vary based upon the mix of sales
through direct and indirect channels. Although to date we have been able to
resell the rental streams from leases under our Totalease program profitably and
on a substantially current basis, the timing and profitability of lease resales
from quarter to quarter could impact operating results, particularly in an
environment of fluctuating interest rates. Long distance sales, which have lower
gross margins than 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. In addition, we experience seasonal fluctuations in our operating
results, as net sales for the first and third quarters are frequently less than
those experienced in the fourth and second quarters, respectively. As a result
of these and other factors, we have historically experienced, and could continue
to experience in the future, fluctuations in sales and operating results on a
quarterly basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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. We cannot
assure you that you will be able to sell your shares at or above purchase price.
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:
* announcements of developments relating to our business;
* fluctuations in our operating results;
* shortfalls in revenue or earnings relative to securities analysts'
expectations;
* announcements of technological innovations or new products or
enhancements by us or our competitors;
* investors' reactions to acquisition announcements;
* general conditions in the telecommunications industry;
* the market for Internet-related products and services
* changes in the national or worldwide economy;
* changes in legislation or regulation affecting the telecommunications
industry;
* an outbreak of hostilities;
* developments relating to our and third party intellectual property
rights; and
* changes in our relationships with our customers and suppliers.
In addition, stock prices of technology companies in general, and for
Internet-based voice and data communications companies of technology stocks 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.
20
YEAR 2000 COMPLICATIONS MAY DISRUPT OUR OPERATIONS AND HARM OUR BUSINESS.
The date fields coded in many software products and computer systems need
to be able to distinguish 21st century dates from the 20th century dates,
including leap year calculations. the failure to be able to accurately
distinguish these dates is commonly known as the year 2000 problem. While we
have yet to experience any major year 2000 problems, the computer software
programs and operating systems used in our internal operations, including our
financial, product development, order management and manufacturing systems,
could experience errors or interruptions due to the year 2000 problem. In
addition, it is possible that our suppliers' and service providers' failure to
adequately address the year 2000 problem could have an adverse effect on their
operations, which, in turn, could have an adverse impact on us.
OUR CHAIRMAN OF THE BOARD OF DIRECTORS, CEO AND PRESIDENT WILL CONTROL 20.2% OF
OUR COMMON STOCK AND BE ABLE TO SIGNIFICANTLY INFLUENCE MATTERS REQUIRING
SHAREHOLDER APPROVAL
As of December 31, 1999, Steven G. Mihaylo, our Chairman of the Board of
Directors, Chief Executive Officer and President beneficially owned
approximately 20.2% of the outstanding shares of the Common Stock. As a result,
he has the ability to exercise significant influence over all matters requiring
shareholder approval. In addition, the concentration of ownership could have the
effect of delaying or preventing a change in control of us.
ANY OF THE FOREGOING COULD RESULT IN A MATERIAL ADVERSE EFFECT ON THE COMPANY'S
BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS.
21
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding Inter-Tel's
directors and executive officers as of March 1, 2000.
Name Age Position
- ---- --- --------
Steven G. Mihaylo 56 Chairman of the Board of Directors,
Chief Executive Officer and President
Norman Stout 42 Executive Vice President/Chief
Administrative Officer
Craig W. Rauchle 44 Executive Vice President
Jeffrey T. Ford 38 Senior Vice President/Chief Technology Officer
Kurt R. Kneip 37 Chief Financial Officer, Vice President
and Secretary
J. Robert Anderson 63 Director
Jerry W. Chapman 59 Director
Gary Edens 58 Director
Maurice H. Esperseth 74 Director
C. Roland Haden 59 Director
MR. MIHAYLO, the founder of the Company, has served as Chairman of the
Board of Directors of the Company since September 1983, as President since May
1998 and as Chief Executive Officer of the Company since its formation in July
1969. Mr. Mihaylo served as President of the Company from 1969 to 1983 and from
1984 to December 1994, and as Chairman of the Board of Directors from July 1969
to October 1982. Mr. Mihaylo is also a director of MicroAge, Inc. and Microtest,
Inc.
MR. STOUT was elected Executive Vice President and Chief Administrative
Officer and President of Inter-Tel Software and Services in June 1998. From
October 1994 to June 1998, he served as a director of the Company. Mr. Stout had
been President of Superlite Block, a manufacturer of concrete block, since
February 1993. Since 1996 Mr. Stout also had served as President of Oldcastle
Architectural West, the parent company of Superlite Block and ten other concrete
products plants. Prior thereto he was employed by Boorhem-Fields, Inc. of
Dallas, Texas, a manufacturer of crushed stone, as Chief Executive Officer from
1990 to 1993 and as Chief Financial Officer from 1986 to 1990. Previously, Mr.
Stout was a Certified Public Accountant with Coopers & Lybrand. Mr. Stout holds
an undergraduate degree in Accounting from Texas A&M and an MBA from the
University of Texas.
MR. RAUCHLE was elected Executive Vice President in December 1994. He had
been Senior Vice President of the Company and continues as President of
Inter-Tel Technologies, Inc., a wholly owned sales subsidiary of the Company. In
addition, he currently serves the Company and all subsidiaries in corporate
strategic planning and in mergers and acquisitions. Mr. Rauchle joined the
Company in 1979 as Branch General Manager of the Denver Direct Sales Office and
in 1983 was appointed the Central Region Vice President and subsequently the
Western Regional Vice President. From 1990 to 1992, Mr. Rauchle served as
President of Inter-Tel Communications, Inc. Mr. Rauchle holds a Bachelor of Arts
degree in Communications from the University of Denver.
MR. FORD was elected Senior Vice President in May 1998 and has served as
the Company's Chief Technology Officer since 1997. He was elected President of
Inter-Tel Integrated Systems, Inc. ("IIS") in
22
May 1998, after serving as Senior Vice President of IIS for one year and Vice
President of Software Engineering from 1993 to 1997. He joined Inter-Tel in 1983
as a software design engineer. Mr. Ford holds a bachelor of science degree in
computer systems engineering from Arizona State University.
MR. KNEIP has served as Vice President and Chief Financial Officer of the
Company since September 1993. He was elected Secretary and Treasurer in October
1994. In May 1996 he was elected Assistant Treasurer, as John Abbott was elected
Treasurer. He joined the Company in May 1992 as Director of Corporate Tax, after
seven years with the accounting firm of Ernst & Young. Mr. Kneip is a Certified
Public Accountant, and holds an undergraduate degree in Commercial Economics
from South Dakota State University and a Masters Degree in Professional
Accountancy from the University of South Dakota.
MR. ANDERSON has been a director of the Company since February 1997. Mr.
Anderson held various positions at Ford Motor Company from 1963 to 1983, serving
from 1978 to 1983 as President of the Ford Motor Land Development Corporation.
He served as Senior Vice President, Chief Financial Officer and a member of the
Board of Directors of The Firestone Tire and Rubber Company from 1983 to 1989,
and as Vice Chairman of Bridgestone/Firestone, Inc. from 1989 through 1991. He
most recently served as Vice Chairman, Chief Financial Officer and a member of
the Board of Directors of the Grumman Corporation from 1991 to 1994. Mr.
Anderson is currently semi-retired, and he is an active leader in various
business, civic and philanthropic organizations.
MR. CHAPMAN was elected as a director in December 1999 and previously
served as a director in the late 1980's and early 1990's. He is a Certified
Public Accountant and recently retired as a partner with Arthur Andersen LLP
after over 37 years in public accounting and consulting. During the first half
of his career, Mr. Chapman focused his energies in the Audit and Assurance area
of practice. In 1980, he moved into the Business and Strategic Consulting areas
of practice as well as managing major practice areas for his firms. Mr. Chapman
has now opened a consulting practice focusing on providing strategic and market
driven services for his clients.
MR. EDENS has been a director of the Company since October 1994. He was a
broadcasting media executive from 1970 to 1994, serving as Chairman and Chief
Executive Officer of Edens Broadcasting, Inc. from 1984 to 1994, when that
corporation's nine radio stations were sold. He is currently President of The
Hanover Companies, Inc., an investment firm. He is an active leader in various
business, civic and philanthropic organizations.
MR. ESPERSETH has been a director of the Company since October 1986. Mr.
Esperseth joined the Company in January 1983 as Senior Vice President-Research
and Development, after a 32-year career with GTE, and served as Executive Vice
President of Inter-Tel from 1986 to 1988. Mr. Esperseth retired as an officer of
the Company on December 31, 1989. Mr. Esperseth is not standing for reelection
in April 2000.
DR. HADEN has been a director of the Company since 1983. Dr. Haden has been
Vice Chancellor and Dean of Engineering of Texas A&M University since 1993.
Previously, he served as Vice Chancellor of Louisiana State University from 1991
to 1993, Dean of the College of Engineering and Applied Sciences at Arizona
State University from 1989 to 1991, Vice President for Academic Affairs at
Arizona State University from 1987 to 1988, and Dean of the College of
Engineering and Applied Sciences from 1978 to 1987. Dr. Haden holds a doctoral
degree in Electrical Engineering from the University of Texas and has also
served on the faculty of the University of Oklahoma.
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee, consisted of Directors Chapman, Anderson and Haden as of
December 31, 1999, is charged with reviewing the Company's annual audit and
meets with the Company's independent auditors to review the Company's internal
controls and financial management practices. The Audit Committee met two times
during the last fiscal year. The Compensation Committee, consisted of Directors
Anderson, Esperseth and Edens as of December 31, 1999, recommends to the Board
of Directors compensation for the Company's key employees and administers the
Company's stock option plans. The Compensation Committee met two times during
the last fiscal year.
23
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in 23,000 square feet of a
building located in Phoenix, Arizona pursuant to a lease that expires in 2000,
and its principal development and distribution operations in a 96,000 square
foot building located in Chandler, Arizona pursuant to a lease that expires in
2008. The Company also owns a 70,000 square foot facility located in Reno,
Nevada that houses the Inter-Tel.net network operations center, credit and lease
finance facilities, business development center and sales office. The Company
also leases sales and support offices in a total of 47 locations in the United
States, including approximately 147,000 square feet of office space in Milford,
Connecticut pursuant to the Executone acquisition, and two locations overseas.
The Company's aggregate monthly payments under these leases were approximately
$345,000 at December 31, 1999. The Company believes that its facilities will be
adequate to meet its current needs and that additional or alternative space will
be available as necessary in the future on commercially reasonable terms. See
"Factors That May Effect Future Operating Results."
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation incidental to its
business. The Company believes that the outcome of current litigation will not
have a material adverse effect upon its business, financial condition or results
of operations and will not disrupt the normal operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Inter-Tel Common Stock is traded over-the-counter (symbol INTL) and since
February 1983 has been included in the Nasdaq National Market System. As of
March 10, 2000 there were of record approximately 1,711 shareholders of the
Company's Common Stock. The Company believes there are approximately 11,750
additional beneficial holders of the Company's Common Stock. The following table
sets forth high and low closing prices reported by Nasdaq.
Until 1997, Inter-Tel had never paid a cash dividend on its Common Stock.
During 1998, the Board of Directors declared a quarterly cash dividend of $.01
per share of Common Stock. A dividend has been paid to shareholders of record
for each quarter since December 31, 1997. The continuation of this dividend
policy will depend on Company earnings, capital requirements for growth,
financial conditions and other factors.
1999 HIGH LOW 1998 HIGH LOW
---- ---- --- ---- ---- ---
First Quarter 28 1/8 13 3/8 First Quarter 28 1/2 17
Second Quarter 19 11 1/2 Second Quarter 27 1/2 14 7/8
Third Quarter 25 1/2 15 1/8 Third Quarter 18 3/4 12 7/8
Fourth Quarter 26 3/8 14 Fourth Quarter 25 1/4 9 1/2
24
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL SUMMARY
- ---------------------------------------------------------------------------------------------------
(In thousands, except
per share amounts and ratios) For the years ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net sales $314,221 $274,504 $223,569 $185,884 $150,533
Cost of sales 159,463 140,946 122,363 104,966 87,696
Research and development 14,798 11,373 7,998 6,581 5,764
Selling, general and administrative 98,430 86,554 69,942 56,386 43,578
Write-off of in-process research and
development and related costs -- 22,755(1) -- -- --
Special charge -- -- -- 4,542(2) 1,315(3)
-------- -------- -------- -------- --------
Operating income 41,530 12,876(1) 23,266 13,409(2) 12,180(3)
-------- -------- -------- -------- --------
Interest and other income 2,345 3,018 1,383 1,974 1,674
Interest expense (110) (60) (47) (77) (106)
-------- -------- -------- -------- --------
Income before income taxes 43,765 15,834(1) 24,602 15,306(2) 13,748(3)
Income taxes 16,619 6,790 9,920 6,264 5,249
-------- -------- -------- -------- --------
Net income $ 27,146 $9,044(1) $14,682 $9,042(2) $8,499(3)
-------- -------- -------- -------- --------
Net income per share
Basic $1.05 $0.34(1) $ 0.59 $ 0.35(2) $ 0.37(3)
Diluted $1.01 $0.32(1) $ 0.57 $ 0.34(2) $ 0.36(3)
Average shares outstanding
Common shares outstanding 25,949 26,602 24,836 25,780 23,056
Common shares outstanding
assuming dilution 27,004 27,846 25,983 26,572 23,766
-------- -------- -------- -------- --------
BALANCE SHEET DATA
Total assets $240,249 $197,030 $194,988 $132,611 $118,767
Working capital 60,925 96,317 123,814 79,709 75,623
Long-term debt 1,231 -- -- -- --
Shareholders' equity 168,121 142,686 145,505 94,934 85,117
-------- -------- -------- -------- --------
KEY RATIOS
Current ratio 2.05 3.17 4.69 4.09 4.36
Term debt/equity .01 -- -- -- --
Return on equity-continuing operations 19.0% 6.2% 15.5% 10.6% 18.8%
Return on equity-excluding charges 19.0% 15.6%(1) 15.5% 13.8%(2) 20.6%(3)
-------- -------- -------- -------- --------
- ----------
(1) 1998 operating income includes a special charge of $22.8 million, which
reduced net income by $13.7 million or $.49 per diluted share after tax.
This charge reflects the write-off of in-process research and development
in connection with the purchase of certain assets and liabilities of
Telecom Multimedia Systems, Inc. ("TMSI"). Without this write-off, the
Company would have reported net income of $22.7 million ($.82 per diluted
share) for the year ended December 31, 1998.
(2) 1996 operating income includes a special charge of $4.5 million, which
reduced net income by $2.7 million or $.10 per diluted share after tax.
This special charge reflects the decision by the Company to replace its MIS
system software. Without this special charge, the Company would have
reported net income of $11.8 million ($.44 per diluted share) for the year
ended December 31, 1996.
(3) 1995 operating income includes a special charge of $1.3 million, which
reduced net income by $815,000, or $.03 per diluted share after tax. This
special charge reflects the costs associated with integrating the
operations of entities acquired in May 1995. Without this special charge,
the Company would have reported operating income of approximately $13.5
million and net income of approximately $9.3 million ($.39 per diluted
share) for the year ended December 31, 1995.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated by reference to
Exhibit 13.0.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments.
INVESTMENT PORTFOLIO. The Company does not use derivative financial
instruments in its 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 the
Company's investment policy guidelines. Given the short-term nature of these
investments, and that the Company has no borrowings outstanding other than
short-term letters of credit, the Company is not subject to significant interest
rate risk.
LEASE PORTFOLIO. The Company offers to its customers lease financing and
other services, including its Totalease program, through its Inter-Tel Leasing
subsidiary. The Company funds these programs in part through the sale to
financial institutions of rental income streams under the leases. Although the
Company to date has been able to resell the rental streams from leases under its
lease programs profitably and on a substantially current basis, the timing and
profitability of lease resales could impact the Company's business and operating
results, particularly in an environment of fluctuating interest rates and
economic uncertainty. If the Company were required to repurchase rental streams
and realize losses thereon in amounts exceeding its reserves, its operating
results could be materially adversely affected. See "Liquidity and Capital
Resources" in Management's Discussion and Analysis for more information
regarding the Company's lease portfolio and financing.
IMPACT OF FOREIGN CURRENCY RATE CHANGES. Inter-Tel invoices the customers
of its international subsidiaries primarily in the local currencies of its
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to
Exhibit 13.0.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
26
PART III
Certain information required by Part III is omitted from this report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and the information included therein is
incorporated herein by reference to the extent stated below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors and executive officers is included at
the end of Part I, Item 1 of this report under the caption "Directors and
Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. FINANCIAL STATEMENTS
The following consolidated financial statements of Inter-Tel, Incorporated,
and subsidiaries, are incorporated by reference to Exhibit 13.0.
Report of Ernst & Young LLP, Independent Auditors
Consolidated balance sheets--December 31, 1999 and 1998
Consolidated statements of income--years ended December 31, 1999, 1998 and
1997
Consolidated statements of shareholders' equity--years ended December 31,
1999, 1998 and 1997
Consolidated statements of cash flows--years ended December 31, 1999, 1998
and 1997
Notes to consolidated financial statements
27
2. FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of Inter-Tel,
Incorporated, and subsidiaries is filed as part of this Report and should be
read in conjunction with the Consolidated Financial Statements of Inter-Tel,
Incorporated and subsidiaries, and the notes thereto.
Schedule for the three years ended December 31, 1999:
Page No.
--------
Schedule II--Valuation and Qualifying Accounts 31
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or notes thereto.
3. EXHIBITS
3.1(10) Articles of Incorporation, as amended.
3.2(16) By-Laws, as amended.
10.15(1) Registrant's form of standard Distributor Agreement.
10.16(1) Registrant's form of standard Service Agreement.
10.34(2)* 1984 Incentive Stock Option Plan and forms of Stock Option
Agreement.
10.35(3) Agreement between Registrant and Samsung Semiconductor and
Telecommunications Company, Ltd. dated October 17, 1984.
10.37(3)* Tax Deferred Savings Plan.
10.51(11)* 1990 Directors' Stock Option Plan and form of Stock Option
Agreement.
10.52(15)* Inter-Tel, Incorporated Long-Term Incentive Plan and forms of
Stock Option Agreements.
10.53(12) Agreement between Registrant and Maxon Systems, Inc. dated
February 27, 1990.
10.54(12) Agreement between Registrant and Varian Tempe Electronics Center
dated February 26, 1991.
10.55(12) Agreement between Registrant and Jetcrown Industrial Ltd. dated
February 18, 1993.
10.56(13)* Employee Stock Ownership Plan.
10.57(14) Loan and Security Agreement dated March 4, 1997 between Bank
One, Arizona, N.A. and Registrant and Modification Agreement
dated July 25, 1997.
10.58(16) Development, Supply and License Agreement between Registrant and
QUALCOMM dated January 17, 1996.
10.59(17)* Inter-Tel, Incorporated 1997 Long-Term Incentive Plan.
10.60(17)* Inter-Tel, Incorporated 1997 Employee Stock Purchase Plan.
13.0(18) Excerpts from Annual Report to Security Holders.
- ----------
(1) Previously filed with Registrant's Registration Statement on Form S-1 (File
No. 2-70437).
28
(2) Previously filed with Registrant's Registration Statement on Form S-8 (File
No. 2-94805).
(3) Previously filed with Registrant's Annual Report on Form 10-K for the year
ended November 30, 1984 (File No. 0-10211).
(10) Previously filed with Registrant's Annual Report on Form 10-K for the year
ended December 31, 1988 (File No. 0-10211).
(11) Previously filed with Registrant's Registration Statement on Form S-8 (File
No. 33-40353).
(12) Previously filed with Registrant's Registration Statement on Form S-1 (File
No. 33-70054).
(13) Previously filed with Registrant's Registration Statement on Form S-8 (File
No. 33-73620).
(14) Previously filed with Registrant's Annual Report on Form 10-K for the year
ended December 31, 1988 (File No. 0-10211).
(15) Previously filed with Registrant's Proxy Statement dated March 23, 1994.
(16) Previously filed with Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 0-10211).
(17) Previously filed with Registrant's Registration Statement on Form S-8 (File
No. 333-41197).
(18) Filed herewith, except as noted.
* Management contracts or compensatory plan or arrangement required to be
filed as an exhibit to this report on Form 10-K.
(b) Reports on Form 8-K.
None. The Company filed Form 8-K (File No. 333-67261) on January 14, 2000
in connection with the acquisition of selected assets and liabilities of the
computer telephone division of Executone Business Information Systems, Inc.
(c) Exhibits.
13.0 Excerpts from Annual Report to Security Holders. (financial statements
and management's discussion and analysis are filed herewith; a copy of the
excerpts of the Company's Annual Report to Security Holders will be available
upon request by writing to Shareholder Relations, Inter-Tel, Incorporated, 120
N. 44th Street, Suite 200, Phoenix, Arizona 85034)
23.0 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney.
See Item 14(a) (3) also.
(d) Financial Statement Schedules. The response to this portion of Item 14
is submitted as a separate section of this report. See Item 8.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Inter-Tel, Incorporated, has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTER-TEL, INCORPORATED
BY: /s/ Steven G. Mihaylo
------------------------------------
Steven G. Mihaylo
Chairman and Chief Executive Officer
Dated: March 15, 2000
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
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COL. A COL. B COL. C COL. D COL. E
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ADDITIONS
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Charged Charged to
Balance at to Other Charged to Balance
Beginning Costs & Accounts Deductions at End of
DESCRIPTION of Period Expenses Describe Describe Period
----------- --------- -------- -------- -------- ------
YEAR ENDED DECEMBER 31, 1999
Deducted from asset accounts:
Allowance for doubtful
accounts $4,604 $4,623 $2,628(3) $3,041(1) $8,814
Allowance for lease
accounts $5,716 $3,773 $ -- $2,755(1) $6,734
Inventory allowance $5,453 $1,508 $ 83(3) $1,195(2) $5,849
YEAR ENDED DECEMBER 31, 1998
Deducted from asset accounts:
Allowance for doubtful
accounts $3,722 $2,963 $ 137(4) $2,218(1) $4,604
Allowance for lease
accounts $3,969 $2,688 $ -- $ 941(1) $5,716
Inventory allowance $5,740 $1,828 $ -- $2,115(2) $5,453
YEAR ENDED DECEMBER 31, 1997
Deducted from asset accounts:
Allowance for doubtful
accounts $3,096 $2,194 $ 17 $1,585(1) $3,722
Allowance for lease
accounts $2,706 $1,910 $ -- $ 647(1) $3,969
Inventory allowance $2,979 $4,021 $ -- $1,260(2) $5,740
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(1) Uncollectible accounts written off, net of recoveries.
(2) Inventory written off.
(3) Acquired in purchase of Tri-Com, Matrix and Network Services Agency.
(4) Acquired in purchase of TMSI and Integrated Telecom Services Corporation.
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