UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File Number:
March 31, 2000 0-10211
INTER-TEL, INCORPORATED
Incorporated in the State of Arizona I.R.S. No. 86-0220994
120 NORTH 44TH STREET, SUITE 200
PHOENIX, ARIZONA 85034-1822
(602) 302-8900
--------------
Common Stock
(26,333,137 shares outstanding as of March 31, 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 periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
INDEX
INTER-TEL, INCORPORATED AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited, except
December 31, 1999 balance sheet)
Condensed consolidated balance sheets--March 31, 3
2000 and December 31, 1999
Condensed consolidated statements of income--three 4
months ended March 31, 2000 and March 31, 1999
Condensed consolidated statements of cash flows 5
--three months ended March 31, 2000 and
March 31, 1999
Notes to condensed consolidated financial 6
statements--March 31, 2000
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II. OTHER INFORMATION 21
SIGNATURES 22
2
PART I. FINANCIAL INFORMATION
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands) March 31, December 31,
2000 1999
--------- ---------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and equivalents $ 20,768 $ 19,226
Accounts receivable -- net 63,262 49,583
Inventories 28,700 18,816
Net investment in sales-leases 15,479 14,466
Restricted cash for acquisition -- 12,097
Prepaid expenses and other assets 16,510 4,926
--------- ---------
TOTAL CURRENT ASSETS 144,719 119,114
PROPERTY, PLANT & EQUIPMENT 34,029 28,706
EQUIPMENT HELD UNDER LEASE, NET 4,762 5,310
GOODWILL 46,894 16,452
OTHER ASSETS 32,065 70,667
--------- ---------
$ 262,469 $ 240,249
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 36,246 $ 20,540
Other current liabilities 39,663 37,649
--------- ---------
TOTAL CURRENT LIABILITIES 75,909 58,189
DEFERRED TAXES 7,927 6,278
OTHER LIABILITIES 10,502 7,661
SHAREHOLDERS' EQUITY
Common stock, no par value - authorized
100,000,000 shares, issued and outstanding
- 26,135,640 in 1999 107,280 106,853
Less: Shareholder loans (1,046) (1,116)
Retained earnings 72,977 75,835
Accumulated other comprehensive income (83) 177
--------- ---------
179,128 181,749
Less: Treasury stock at cost (10,997) (13,628)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 168,131 168,121
$ 262,469 $ 240,249
========= =========
See accompanying notes.
3
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
(In thousands, except ---------------------
per share amounts) March 31, March 31,
2000 1999
-------- --------
NET SALES $ 96,363 $ 65,525
Cost of sales 54,823 33,853
-------- --------
GROSS PROFIT 41,540 31,672
Research & development 5,668 3,307
Selling, general, and administrative 30,911 20,579
In-process research and development 5,433 --
-------- --------
42,012 23,886
OPERATING INCOME (LOSS) (472) 7,786
Equity Share of Cirilium Corp.'s net losses (1,699) --
Interest and other income 277 434
Interest expense (75) (12)
-------- --------
INCOME (LOSS) BEFORE TAXES (1,969) 8,208
Income tax provision (benefit) (748) 3,116
-------- --------
NET INCOME (LOSS) $ (1,221) $ 5,092
======== ========
NET INCOME (LOSS) PER SHARE
Basic $ (0.05) $ 0.20
======== ========
Diluted $ (0.05) $ 0.19
======== ========
Average number of common shares
Outstanding - Basic 26,249 26,096
======== ========
Average number of common shares
Outstanding - Diluted 26,249 27,277
======== ========
See accompanying notes.
4
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
--------------------
(In thousands) March 31, March 31,
2000 1999
-------- --------
OPERATING ACTIVITIES
Net income (loss) (1,221) $ 5,092
Adjustments to reflect operating activities:
Depreciation and amortization 3,194 2,123
Purchased in-process research and development 5,433 --
Changes in operating assets and liabilities (14,350) (6,807)
Other 5,755 3,233
-------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (1,189) 3,641
INVESTING ACTIVITIES
Additions to property and equipment (2,963) (2,069)
Additions to operating leases (41) (2,876)
Proceeds from disposal of property and equipment 7 --
Proceeds from disposition of business segment 6,602 --
Cash used in acquisitions (1,647) (220)
-------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 1,958 (5,165)
FINANCING ACTIVITIES
Cash dividends paid (262) (260)
Payments on long-term debt (222) --
Proceeds from exercise of stock options 1,257 853
-------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 773 593
INCREASE (DECREASE) IN CASH
AND EQUIVALENTS 1,542 (931)
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD 19,226 63,124
-------- --------
CASH AND EQUIVALENTS AT
END OF PERIOD $ 20,768 $ 62,193
======== ========
See accompanying notes.
5
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2000
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the results for the interim periods presented have been included. Operating
results for the three months ending March 31, 2000 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2000. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1999.
For the first quarter ended March 31, 2000, the Company owned more than 20% but
less than 50% of Cirilium Corporation ("Cirilium"). Therefore, the Company
recorded the activity of Cirilium using the equity method of accounting.
NOTE B--EARNINGS PER SHARE
Diluted earnings per share assume that outstanding common shares were increased
by shares issuable upon the exercise of all outstanding stock options to which
market price exceeds exercise price less shares which could have been purchased
with related proceeds, if the effect would not be antidilutive.
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
-----------------------
(In thousands, except March 31, March 31,
per share amounts) 2000 1999
-------- --------
Numerator:
Net Income $ (1,221) $ 5,092
======== ========
Denominator:
Denominator for basic earnings per
share - weighted average shares 26,249 26,096
Effect of dilutive securities:
Employee and director stock options -- 1,181
-------- --------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 26,249 27,277
-------- --------
Basic earnings per share $ (0.05) $ 0.20
======== ========
Diluted earnings per share $ (0.05) $ 0.19
======== ========
In the first quarter of 2000, the effect of diluted securities would have had an
antidilutive impact on earnings per share. Accordingly, employee and director
stock options were not included in the diluted earnings per share. If the
Company had reported positive earnings during the quarter, the denominator for
calculating dilutive earnings per share would have increased by 1,228 to 27,477.
6
NOTE C - ACQUISITIONS AND DISPOSITIONS
On January 1, 2000 Inter-Tel purchased certain computer telephony assets and
assumed certain liabilities of Executone Information Systems, Inc. ("Executone")
for $44.3 million in cash plus related acquisition costs, subject to purchase
price adjustments as of the closing date. Executone is based in Milford, CT, and
also has offices located in Poway, California and Oakton, Virginia. Executone
specializes in database design and systems integration for small- to medium-size
businesses that utilize advanced telecommunications products and services. The
aggregate purchase price was allocated to the fair value of the assets and
liabilities acquired, of which $5.4 million ($3.4 million after taxes) was
written-off as purchased in-process research and development since there was no
alternative use. The Executone transaction was accounted for using the purchase
method of accounting. During the first quarter, the Executone division
recognized losses of approximately $2.5 million ($1.5 million after taxes, or
$.06 per diluted share) excluding the charge for in-process research and
development.
In connection with the Executone acquisition, the Company sold a portion of the
assets and liabilities to Varian Associates, Inc. ("Varian") of Tempe, Arizona.
The Company sold approximately $6.6 million of inventory and fixed assets at net
book value, thereby generating no gain or loss on the transaction.
Inter-Tel also acquired Intercomm Americas, Inc. ("ICA") during the first
quarter of 2000 for $580,000 plus 750,000 shares of stock in Inter-Tel's
wholly-owned subsidiary, Inter-Tel.net. Such stock may be converted by the
seller into Inter-Tel, Incorporated common stock on June 30, 2001, June 30, 2002
or June 30, 2003 if Inter-Tel.net has not completed an initial public offering
of Inter-Tel.net's stock by any of those dates. If Inter-Tel.net does not
complete an initial public offering by August 31, 2003, the Company has the
right to convert the seller's Inter-Tel.net stock to Inter-Tel shares pursuant
to the same conversion ratio. The conversion ratio is dependent on the fair
market value of the Company's common stock at the date of conversion, if
applicable. ICA is an IP telephony-based long distance carrier that originates
and terminates IP telephony-based long distance traffic from and to Mexico and
has an IP network throughout Mexico. The ICA transaction was accounted for using
the purchase method of accounting. The operations related to ICA were not
significant to the Company's consolidated operations.
NOTE D - PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE
During the first quarter of 2000, Inter-Tel completed the acquisition of
Executone (see NOTE C above). The aggregate purchase price of the Executone
acquisition was allocated to the fair value of the assets and liabilities
acquired, of which $5.4 million ($3.4 million after taxes), or $0.13 per diluted
share, was written-off as purchased in-process research and development.
Including this charge, the Company incurred net losses of $1.2 million ($0.05
per diluted share) for the first quarter ended March 31, 2000.
NOTE E - SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in the fiscal year ended December 31, 1998. SFAS 131 establishes standards
for reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions
how to allocate resources and assess performance. The Company's chief decision
maker, as defined under SFAS 131, is the Chief Executive Officer.
Prior to this quarter, the Company had viewed its operations as principally one
segment; telephone systems, telecommunications software and hardware, and
related long distance calling services. These services are provided through the
Company's direct sales offices and dealer network to business customers
throughout the United States, Europe, Asia and South America. As a result,
financial information disclosed previously materially represented all of the
financial information related to the Company's principal operating segment.
Although the operations of Executone are identified separately below, the
Executone operations are similar and comparable to the principal segment.
Accordingly, future disclosures may reflect the Executone operations combined
with the principal segment.
7
In the first quarter of 2000, the Company generated income from business
segments as follows:
(in thousands, except per share Principal
amounts) Segment Executone Cirilium Inter-tel.net Total
-------- -------- -------- -------- --------
NET SALES $ 79,121 $ 14,800 $ 2,442 $ 96,363
OPERATING INCOME (LOSS) 9,483 (7,825) -- (2,130) (472)
Equity Share of Cirilium Corp.'s net losses -- -- (1,699) -- (1,699)
Interest and other income 337 (60) -- 277
Interest expense (34) (41) -- (75)
NET INCOME (LOSS) 6,067 (4,914) (1,053) (1,321) (1,221)
NET INCOME (LOSS) PER SHARE--DILUTED $ 0.23 $ (0.19) $ (0.04) $ (0.05) $ (0.05)
Average number of common
shares outstanding -- Diluted 26,249 26,249 26,249 26,249 26,249
In December 1999, Inter-Tel entered into an agreement with Hypercom
Corporation to jointly form Cirilium Corporation ("Cirilium"). Cirilium
comprises parts of Hypercom's data and Inter-Tel's packet telephony products and
services, including Inter-Tel's Vocal'Net gateway products and technology.
The Company's revenues are generated predominantly in the United States.
Total revenues generated from U.S. customers totaled $93.8 million and $64.1
million of total revenues for the quarters ended March 31, 2000 and 1999,
respectively. The Company's revenues from international sources were primarily
generated from customers located in the United Kingdom, Europe, Asia and South
America. In the first quarters of 2000 and 1999, revenues from customers located
internationally accounted for 2.6% and 2.2% of total revenues, respectively.
PART I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS QUARTERLY REPORT TO SHAREHOLDERS ON FORM 10-Q ("10-Q") CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS
CONTAINED IN THIS 10-Q THAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
INCLUDING WITHOUT LIMITATION STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS,
BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL FORWARD-LOOKING
STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE
COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY
SUCH FORWARD-LOOKING STATEMENTS. THE CAUTIONARY STATEMENTS MADE IN THIS 10-Q
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS DOCUMENT. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "FACTORS THAT MAY
AFFECT RESULTS OF FUTURE OPERATIONS" BELOW AND ELSEWHERE IN THIS DOCUMENT.
8
OVERVIEW
Inter-Tel is a leading provider of business key telephone systems, voice
processing systems and related software applications for the 40+ station key
telephone system market in the United Sates. Inter-Tel is also a leading
provider of IP telephony voice and data convergence products. Inter-Tel's
products include the AXXESS business telephone system, AXXESSORY TALK voice mail
system, Executone computer telephony products, and the InterPrise voice and data
routers. Inter-Tel also operates Inter-Tel.net, an IP telephony-based long
distance network. 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.
RESULTS OF OPERATIONS
Net sales increased 47.1% to $96.4 million in the first quarter of 2000
from $65.5 million in the first quarter of 1999. For the quarter ended March 31,
2000, sales from the Company's direct sales offices and from wholesale
distribution increased approximately $12.2 million compared to the first quarter
of 1999. Sales from the Company's network services group increased $3.3 million
over the same periods. The remaining increases were attributable to acquisitions
during the quarter and increases from other operations. Please refer to Note E
for additional segment reporting information.
The following table sets forth selected statements of income data as a
percentage of net sales:
Three months
Ended March 31,
----------------
2000 1999
----- -----
Net sales 100.0% 100.0%
Cost of sales 56.9 51.7
----- -----
Gross Profit 43.1 48.3
Research and development 5.9 5.0
Selling, general and administrative 32.1 31.4
IPRD write-off 5.6 --
----- -----
Operating income (loss) (0.5) 11.9
Equity share of Cirilium Corp.'s net losses (1.8) --
Interest and other income 0.3 0.6
Interest expense (0.1) 0.0
----- -----
Income (loss) before income taxes (2.0) 12.5
Income Taxes (0.8) 4.7
----- -----
Net Income (1.3)% 7.8%
===== =====
Gross profit for the first quarter of 2000 increased 31.2% to $41.5
million, or 43.1% of net sales, from $31.7 million, or 48.3% of net sales, in
the first quarter of 1999. The decline in gross profit as a percentage of sales
(or gross margin) was primarily attributable to Executone operations, which
generated significantly lower margins than the Company's principal segment, as
well as the impact of a different sales mix of products and services, and sales
through different distribution channels. Increases in sales of traditional and
Internet Protocol long distance services, through the Company's NetSolutions and
Inter-Tel.net subsidiaries, as a percentage of total sales, also contributed to
lower gross margins. In addition, competitive pricing pressures on telephone
systems negatively impacted gross margins during the first quarter of 2000.
Research and development expenses for the first quarter of 2000 increased
71.4% to $5.7 million, or 5.9% of net sales, from $3.3 million, or 5.0% of net
sales, for the first quarter of 1999. These increases were primarily
attributable to expenses relating to the Executone acquisition, the continued
development of the AXXESS networking software and systems, and the design and
development of the Company's CTI applications. The Company expects that for the
foreseeable future research and development expenses will continue to increase
in absolute dollars as the Company continues to enhance existing and develop new
technologies and products. These expenses may vary, however, as a percentage of
net sales.
9
Selling, general and administrative expenses in the first quarter of 2000
increased to $30.9 million, or 32.1% of net sales, from $20.6 million, or 31.4%
of net sales, in the first quarter of 1999. The increase in absolute dollars and
as a percentage of net sales was primarily due to the acquisition of Executone,
as well as increased selling, incentive, training and other compensation costs
attributable to the growth of the Company's direct sales offices and additional
personnel and marketing expenses to support the operations of Inter-Tel.net. The
Company expects that for the foreseeable future selling, general and
administrative expenses will continue to increase in absolute dollars, but may
vary as a percentage of net sales.
On January 1, 2000 Inter-Tel purchased certain computer telephony assets
and assumed certain liabilities of Executone Information Systems, Inc. for $44.3
million in cash plus related acquisition costs, subject to purchase price
adjustments as of the closing date. Of the total purchase price, $5.4 million,
or $3.4 million after taxes, was written-off as purchased in-process research
and development.
In December 1999, Inter-Tel entered into an agreement with Hypercom
Corporation to jointly form Cirilium Corporation ("Cirilium"). Cirilium
comprises parts of Hypercom's data and Inter-Tel's packet telephony products and
services, including Inter-Tel's Vocal'Net gateway products and technology. The
Company owns approximately 47.5% of the outstanding capital stock of Cirilium.
Accordingly, the Company recorded the net losses of Cirilium as a single line
item below operating income. Pretax losses from Cirilium totaled $1.7 million
during the first quarter of 2000.
Other income in both periods consisted primarily of interest income and
foreign exchange rate gains and losses. Income from interest decreased in 2000
compared to 1999 based on a lower level of invested funds, principally due to
expenditures relating to the Executone acquisition. Other changes in other
income primarily reflected differences in net foreign exchange rate gains and
losses.
Net loss for the first quarter was $1.2 million ($0.05 per diluted share)
reflecting the write-off of in-process research and development costs noted
above, compared to net income of $5.1 million ($0.19 per diluted share) for the
first quarter of 1999. Excluding the write-off of in-process research and
development costs, net income for the quarter ended March 31, 2000 would have
been $2.15 million, or $0.08 per diluted share.
INFLATION/CURRENCY FLUCTUATION
Inflation and currency fluctuations have not previously had a material
impact on Inter-Tel's operations. International procurement agreements have
traditionally been denominated in U.S. currency. Moreover, a significant amount
of contract manufacturing has been moved to domestic sources. The expansion of
international operations in the United Kingdom and Europe and anticipated
increased sales in Japan and Asia and elsewhere could result in higher
international sales as a percentage of total revenues, but international
revenues are currently not significant.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had $20.8 million in cash and equivalents,
which represented an increase of approximately $1.5 million from December 31,
1999. The Company maintains a $15.0 million unsecured revolving line of credit
with Bank One, Arizona, NA. This credit facility is annually renewable and is
available through June 1, 2000. Under the credit facility, the Company has the
option to borrow at a prime rate or adjusted LIBOR interest rate. Historically,
the Company has used the credit facility primarily to support international
letters of credit to suppliers. On December 31, 1999, the Company paid cash of
approximately $44.3 million plus acquisition costs to purchase certain assets of
Executone. This transaction closed on January 1, 2000. The remaining cash
balances may be used to further develop and expand Inter-Tel.net and for
potential acquisitions, strategic alliances, working capital and general
corporate purposes.
Net cash used in operating activities totaled $1.2 million for the
three months ended March 31, 2000, compared to cash provided by operating
activities of $3.6 million for the same period in 1999. The operating cash used
in the first quarter of 2000 was primarily the result of increases in net
operating assets and liabilities, offset by cash generated from operations
10
(excluding the write-off of in-process research and development costs of $5.4
million associated with the Executone acquisition), including non-cash
depreciation and amortization charges. Cash used in operating assets and
liabilities in the three month period ended March 31, 2000 was $14.4 million,
compared to cash used of $6.8 million in the same period of 1999. During the
first quarter of 2000, the Company had higher accounts receivable, inventory,
investment in sales-leases and prepaid expenses and other assets that were
attributable primarily to the Executone acquisition. The Company expects to
expand sales through its direct sales office and dealer networks, including
those acquired in the Executone acquisition, which is expected to require
working capital for increased accounts receivable and inventories. During the
first quarter of 2000, accounts payable and other current liabilities increased
primarily as a result of the assumption of liabilities of Executone.
Net cash provided by investing activities, primarily in the form of cash
received from the disposition of the manufacturing operations of Executone to
Varian of $6.6 million, offset by cash used for acquisitions, capital and
operating lease expenditures, totaled $2.0 million for the quarter ended March
31, 2000, compared to cash used of $5.2 million for the quarter ended March 31,
1999. Net cash used in acquisitions totaled approximately $1.6 million in 2000.
Capital expenditures totaled approximately $3.0 million for the same period. The
Company anticipates additional capital expenditures during 2000, principally
relating to expenditures for equipment and management information systems used
in its operations, for facilities expansion and Executone and Inter-Tel.net
operations.
Net cash provided by financing activities totaled $773,000 in the three
months ended March 31, 2000 compared to $593,000 for the same period in 1999,
related primarily to proceeds from the exercise of stock options, less cash
dividends paid.
The Company offers to its customers lease financing and other services,
including its Totalease program, through its Inter-Tel Leasing subsidiary. The
Company funds its Totalease program in part through the sale to financial
institutions of rental income streams under the leases. Resold Totalease rentals
totaling $175.5 million and $163.7 million remained unbilled at March 31, 2000
and December 31, 1999, respectively. The Company is obligated to repurchase such
income streams in the event of defaults by lease customers and, accordingly,
maintains reserves based on loss experience and past due accounts. Although the
Company to date has been able to resell the rental streams from leases under the
Totalease program profitably and on a substantially current basis, the timing
and profitability of lease resales could impact the Company's business and
operating results, particularly in an environment of fluctuating interest rates
and economic uncertainty. If the Company is required to repurchase rental
streams and realizes losses thereon in amounts exceeding its reserves, its
operating results will be adversely affected.
The Company believes that its working capital and credit facilities,
together with cash generated from operations, will be sufficient to develop and
expand its Executone operations and Inter-Tel.net network, to finance
acquisitions of additional resellers of telephony products and other strategic
acquisitions or corporate alliances, and to provide adequate working capital for
the next twelve months. However, to the extent that additional funds are
required in the future to address working capital needs and to provide funding
for capital expenditures, expansion of the business or the Inter-Tel.net network
or through additional acquisitions, the Company will seek additional financing.
There can be no assurance that additional financing will be available when
required or on acceptable terms.
FACTORS THAT MAY AFFECT RESULTS OF FUTURE OPERATIONS
THIS REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY RISK
FACTORS INCLUDING, WITHOUT LIMITATION, THOSE SET FORTH UNDER "FACTORS THAT MAY
AFFECT FUTURE RESULTS OF OPERATIONS" BELOW. 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.
11
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 do 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.
During the past few years, we have introduced unified messaging on our AXXESSORY
TALK platform, developed a number of enhancements to our existing AXXESS and
AXXESSORY Talk platforms, introduced the Inter-Tel Vocal'Net Gateway Server and
the Inter-Tel Vocal'Net Service Provider Package, and in April 1999, we released
the InterPrise 400 voice and data router, our first of a family of voice and
data convergence products. 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.
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. Although
the Inter-Tel Vocal'Net gateways and Service Provider Package were transferred
to Cirilium in 1999, the products continue to be used in the Inter-Tel.net
network. We cannot assure you that the functionality, scalability, and
reliability of the Inter-Tel Vocal'Net gateways, 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.
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.
12
Consequently, we cannot assure you that our expectations and objectives for the
Cirilium venture with Hypercom will be successfully attained. For the quarter
ended March 31, 2000, we recorded a net loss of $1.2 million, or $(0.04) per
share, related to our interest in Cirilium.
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.
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 and tested prior to release, they can only be fully
tested when used by a large customer base. Consequently, our customers may
discover program errors or 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, WHICH COULD CAUSE OUR BUSINESS TO 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.
13
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 begun to develop
only recently, is evolving rapidly and is characterized by an increasing number
of market entrants who have introduced or developed products and services for
Internet or other IP network voice communications. As is typical of a new and
rapidly evolving industry, the demand for and market acceptance of recently
introduced IP network products and services are highly uncertain. We cannot
assure you that voice communications over IP networks will become widespread.
Even if voice communications over IP networks become 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.
Substantial government regulation or government imposition of fees, charges,
taxes or regulation may significantly harm the acceptance and attractiveness of
IP network voice communications. Also, we 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 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 18 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
14
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 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 certain of our key products 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. Additionally, we recently received a letter from AT&T
alleging that certain of our IP products infringe upon certain intellectual
property protected by AT&T's patents. 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 and divert our
management's attention. In the event that a court renders an enforceable
decision with respect to our intellectual property, we may be required to pay
significant damages, develop non-infringing technology or acquire licenses to
the technology that is the subject of the 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 INTER-TEL.NET, OUR INTERNAL IP NETWORK, AND REQUIRE MORE DEPENDENCE 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 and data 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
domestic 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, and international points of presence in Monterey, Puebla,
Mexico City and Guadalajara. In addition, Inter-Tel.net has alliances with other
third party domestic and international IP long distance providers to originate
15
and terminate calls. 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.
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.
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;
16
* 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 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;
* the division of management's attention from our core business;
* 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.
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 this regard, our gross profit for the quarter
ended March 31, 2000 was negatively affected by Executone operations, which
generated significant operating losses. These losses were principally
attributable to significant margin erosion in Executone's system sales. 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
17
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 that 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 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 OR
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,
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 successfully attract, train, motivate and
manage new employees, to integrate new employees into our overall operations and
to continue to improve our operational, financial and management 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
we have minimum use requirements and/or costs. 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
18
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;
* the operating results of Cirilium, which are largely beyond our
ability to control;
* pricing pressures, the cost and effect of acquisitions, in particular
the Executone acquisition; and
* 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."
19
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.
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 material 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 20.6% 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 20.6% 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.
20
INTER-TEL, INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS--NOT APPLICABLE
ITEM 2. CHANGES IN SECURITIES--NOT APPLICABLE
ITEM 3. DEFAULTS ON SENIOR SECURITIES--NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS--NOT APPLICABLE
ITEM 5. OTHER INFORMATION
Pursuant to Rule 14a-4(c)(1) under the Securities Exchange Act of 1934, in
connection with the Company's annual meeting of shareholders, if a
stockholder of the Company fails to notify the Company at least 45 days
prior to the month and day of mailing of the prior year's proxy statement,
then the proxies of management would be allowed to use their discretionary
voting authority when any such proposal is raised at the Company's annual
meeting of stockholders, without any discussion of the matter in the proxy
statement. Since the Company mailed its proxy statement for the 2000 annual
meeting of stockholders on May 3, 2000, the deadline for receipt of any
such stockholder proposal for the 2001 annual meeting of stockholders is
March 9, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
Exhibits: Exhibit 27: Financial Data Schedule
Reports on Form 8-K:
During the quarter ended March 31, 2000 the Company filed the following
current reports on Form 8-K:
1. On January 14, 2000, effective on the report date of January 1, 2000,
the Company filed Form 8-K in connection with acquisition of the computer
telephony assets of Executone Information Systems, Inc. ("Executone") for $44.3
million in cash plus the assumption of certain liabilities, subject to purchase
price adjustments as of the closing date.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTER-TEL, INCORPORATED
May 15, 2000 /s/ Steven G. Mihaylo
----------------------------------------
Steven G. Mihaylo
Chairman of the Board, Chief Executive
Officer and President
May 15, 2000 /s/ Kurt R. Kneip
----------------------------------------
Kurt R. Kneip
Vice President and
Chief Financial Officer
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