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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, 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 85034-1826
(602) 302-8900
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(24,555,622 shares outstanding as of March 9, 2001)
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 9, 2001 was
approximately $177.9 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.
Items 10 (as to Directors), 11 and 12 of Part III incorporate by reference
information from the Registrant's Proxy Statement relating to its 2001 Annual
Meeting of Shareholders.
INTER-TEL, INCORPORATED
2000 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 24
and Related Shareholder Matters
Item 6 Selected Financial Data 25
Item 7 Management's Discussion and Analysis of Financial Condition 25
and Results of Operations
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 26
Financial Disclosure
PART III
Item 10 Directors and Executive Officers of the Registrant 26
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
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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 FUTURE OPERATING RESULTS" 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, IP and traditional long distance calling, and other
communications services. Inter-Tel's products and services include the AXXESS
and ECLIPSE2 digital business communication software platforms, with
integrated voice processing and unified messaging systems, InterPrise voice and
data routers, ClearConnect Talk-to-Agent e-Commerce software, and IP telephony
communications services. 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, or 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. As of December 31, 2000, the Company
had 47 direct sales offices in the United States, one in Japan and a network of
hundreds of dealers and VARs around the world who purchase directly from the
Company. The Company also maintains a wholesale distribution office in the
United Kingdom that supplies Inter-Tel's dealers and distributors throughout the
UK and parts of mainland Europe. In January 2001, the Company acquired selected
assets and liabilities of Convergent, Technologies, Inc. ("Convergent"). As a
result of the Convergent acquisition, the Company added 8 more direct sales
offices in the United States.
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 principally sells 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.
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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 BY INTER-TEL AND ECLIPSE2 BY INTER-TEL. The AXXESS and
ECLIPSE2 platforms, incorporate advanced technology for computer and telephone
integration. These platforms are designed to provide businesses with the ability
to customize applications to enhance their operations and to increase
productivity. The current system releases support up to 20,000 ports and include
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 platforms allow, through fully transparent digital
networking, two or more systems to operate as one integrated system, currently
with capacity up to 20,000 ports.
The AXXESS and ECLIPSE2 systems incorporate fully-digital processing
and transmission to the desktop and open architecture interfaces, which allow
the systems to be integrated with and controlled by attached computers such as
PCs and workstations. The systems incorporate object-oriented C++ software
developed by the Company, which facilitates upgrades and the incorporation of
additional features and functionality.
AXXESS and ECLIPSE2 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. These systems also
feature integrated voice processing, which 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 systems currently
offer English, Japanese and Spanish voice prompts and LCD displays and allows
the user to switch from one language to another. The systems can support the
addition of other languages that the Company expects to add in the future.
The AXXESS and ECLIPSE2 systems' open architecture interfaces permit
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 system is managed through a Microsoft Windows-based
graphical user interface on a PC.
The AXXESS and ECLIPSE2 systems utilize 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 and ECLIPSE2 SYSTEMS to server-based
communication systems by developing a Windows-NT server-based Central Processing
Unit, or CPU for the Inter-Tel systems. This CPU is designed to handle call
processing with greater speed and efficiency. By combining server-based
technology and Inter-Tel AXXESS and ECLIPSE2 technology, Inter-Tel leverages
the benefits of a standards-based computer server and the benefits of a PBX,
such as equipment maintenance during system operation. Because this server-based
CPU integrates with the Inter-Tel systems, current
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customers can benefit from the new functionality and call handling capacity,
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.
IP TELEPHONY PRODUCTS AND INTER-TEL.NET NETWORK
IP TELEPHONY VOICE AND DATA GATEWAYS/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 markets a line of voice and data routers under the
InterPrise brand.
INTERPRISE BY INTER-TEL. This product line consists of the InterPrise
400 (four analog PSTN access ports), the InterPrise 3200D (up to twenty-four
digital PSTN access ports), and the InterPrise 3200N (up to thirty 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, or WANs, and
virtual private networks, or VPNs. 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
WAN. The InterPrise 400 can be attached to analog trunk or station interfaces on
most US PBX systems. The PBX can then be programmed to use Automatic Route
Selection or Least Cost Routing features 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 an extent such 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 and can be connected to a T1 interface on most US PBX systems.
The 3200D provides the same functionality as the InterPrise 400, but has a
capacity of 24 channels.
CLEARCONNECT - SOFTPHONE is 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.
Callers connected to an IP network on their PC dial the destination
phone number from a familiar Windows graphical user interface. 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.
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The Company believes the ClearConnect SoftPhone could provide
telecommunications savings for mobile employees by providing long-distance
communication through Inter-Tel.NET at a lower total cost than standard long
distance telephone service.
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.
CLEARCONNECT - TALK TO AGENT. The Company has created web
communications software that can be integrated with e-commerce web sites to
provide real-time, two-way voice conversations. A Talk to Agent button
automatically connects e-commerce customers to call center agents that can
address their questions or provide sales assistance.
INTER-TEL.NET. The Company through its subsidiary, Inter-Tel.NET, Inc.,
provides high quality communications services over data networks using IP with
domestic points of presence (POPs) in Reno, New York, Los Angeles, Phoenix,
Dallas and Miami/Ft. Lauderdale and International POPs in Mexico City,
Monterrey, Guadalajara and Puebla Mexico and Hong Kong. Inter-Tel continues to
develop its IP network of high capacity switches/gateways and privately managed
bandwidth which can accommodate large volumes of traffic and provide quality and
reliable service at levels difficult to achieve over unmanaged networks using
the public internet. The managed network, routing structure and bandwidth
capacity are designed to create a cost-effective solution. Through international
alliances, Inter-Tel.NET is participating with businesses in Asia, Europe,
Mexico and South America to provide international IP telephony service. The
Company's core customer base includes telecommunication service providers, such
as long distance carriers, resellers, Competitive Local Exchange Carriers, or
CLECs, and data network providers that offer their end users access to voice,
fax and other enhanced service. Where Inter-Tel.NET or one of its network
partners does not have a POP, Inter-Tel.NET utilizes other IP networks or
traditional Long Distance Carriers to complete the call. For risks associated
with our Inter-Tel.NET business, see "Factors That May Affect Future Operating
Results."
COMPUTER-TELEPHONE INTEGRATION (CTI)
Through CTI, the computer and the telephone are linked into one
environment. Inter-Tel's AXXESS and Eclipse2 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 a 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 Call Center Suite products that can
manage automatic call distribution at peak efficiency or route incoming
telephone calls, based on various parameters, to a specific person. Inter-Tel's
Call Center Suite products can also collect, analyze and report real-time call
processing information for staff forecasting and analysis.
Through the use of Microsoft's TAPI and Novell's TSAPI standard
interfaces, Inter-Tel's software applications work 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 or LAN-based applications.
UNIFIED MESSAGING AND VOICE PROCESSING SOFTWARE
Inter-Tel's AXXESS and Eclipse2 Unified Messaging Software 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
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Eudora. Unified Messaging Software 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.
Inter-Tel's Voice Processing Unit and Unified Messaging Software, IVX500, and
Executone DVX, EVX, and VX2 voice processing platforms work with Inter-Tel's
AXXESS-brand, Eclipse2, and Executone 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
advanced 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 other devices 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.
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 Value Added Resellers, or 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.
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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.
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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. As of
December 31, 2000, in the United States, the Company had 47 direct sales offices
and a network of hundreds of dealers which 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 convergence of data communications and telecommunications. The
Company also maintains a wholesale distribution office in the United Kingdom
that supplies its dealers and distributors throughout the UK and parts of
mainland Europe. In addition, the Company maintains a direct sales office and a
dealer in Japan. In January 2001, the Company acquired selected assets and
liabilities of Convergent. As a result of the Convergent acquisition, the
Company added 8 more direct sales offices in the United States.
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. As of December 31, 2000,
the Company's direct sales office personnel consisted of a total of 1,035
persons.
The Company's sales through its direct sales offices and government and
national accounts group as a percentage of total sales have decreased from 56.7%
of net sales in 1999 to 52.6% of net sales in 2000. Sales to distributors,
dealers, and VARs have increased from 26.6% of net sales in 1999 to 27.0% of net
sales in 2000. Sales through the Company's long distance, IP and network
services operations have increased from 10.6% of net sales in 1999 to 13.5% of
net sales in 2000.
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.
International sales, which include digital communications platforms and
IP telephony products, accounted for approximately 2.6% of net sales in 2000,
compared to 2.5% in 1999. In order to sell its products to customers in other
countries, the Company must comply with local telecommunications standards. The
Company's AXXESS system, ECLIPSE2, and IP telephony products can be readily
altered through software modifications, which the Company believes would
facilitate compliance with these local regulations. In addition, the AXXESS and
ECLIPSE2 systems have been designed to support multi-lingual functionality,
and both currently support English, Japanese and Spanish.
The Company is working to expand its dealer network in the United
Kingdom, Europe, Japan and Latin 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.
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
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support hotline to provide a range of telephone support to its distributors,
dealers and end user customers through the web and 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. In 2000, The Company began an initiative to
greatly enhance its Internet and Extranet capabilities. The Company designed its
new website to offer state-of-the-art support for sales and technical support
activities, for both associates in our direct sales offices and dealer channel.
The Company is also designing the website to offer a wide array of sales and
technical information, including an on-line product and service catalog, more
efficient order processing, PDF sales brochures, competitive information,
on-line technical manuals, FAQ's in important areas, and convenient
"touch-to-talk" live operator help employing our own ClearConnect two-way voice
over IP technology. The new website launched in conjunction with The Company's
major annual dealer conference in January 2001.
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. The Company's direct sales
offices and resellers can receive service activity reports summarizing the
reasons that technicians are asking for assistance and common issues that give
rise to technical inquiries. This allows our direct sales offices and resellers
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 AXXESS
and Eclipse2 Call Processing and Voice Processing with additional
applications, incorporating IP convergence features into these platforms
including IP telephones, development of Unified Messaging Software applications,
and expanding the telecommunications networking package to include networking
over IP and frame relay networks. Over the last several years, the research and
development efforts have also focused on the development of the InterPrise
product line, the ClearConnect SoftPhone, and the ClearConnect Talk to Agent Web
Communications Software. The Company's current efforts are focused on the
development and enhancement of IP telephony products and features for the AXXESS
and ECLIPSE2 digital communication platforms, enhancements to Unified
Messaging Software, the IP PhonePlus digital telephone, the InterPrise voice and
data router product line, and enhancements to Inter-Tel's NT-CPU PBX. The
software-based architecture of the AXXESS and Eclipse2 systems facilitate
maintenance and support, upgrades, and incorporation of additional features and
functionality.
The Company had a total of 193 personnel engaged in research and
development and related technical service and support functions as of December
31, 2000. Research and development expenses were $19,489,000; $14,798,000; and
$11,373,000; for 2000, 1999, and 1998, 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 and
ECLIPSE2 products, the Inter-Tel Axxent systems, and most of the Executone
products 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. 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. Delays by our
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suppliers in delivering components integral to our manufacturing processes could
cause us to fail to produce our products in a timely manner, which could harm
our business.
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, an Extranet site offering up-to-date sales and support information, 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
Avaya, a spin-off of 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 regional Bell operating companies (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"), ADC Telecommunication, Inc. ("ADC") (via
acquisition of Centigram Communications Corporation), Lucent, Avaya 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 geared toward the enterprise
markets, the Company competes against existing IP telephony gateway providers
such as Lucent, Avaya, NorTel, CISCO Systems, 3Com, ADC, Motorola, and others.
The Company competes against existing IP long distance service providers such as
Concert, deltathree.com, iBasis, ITXC, Net2Phone and traditional telephone
carriers such as 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
11
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 or they may choose to develop
their own IP network. In addition, Inter-Tel's router IP solutions may also
compete with Cirilium products.
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 of
these competitors 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. Accordingly, the Company cannot assure
its investors 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 the Company cannot assure its investors
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 17 telecommunications and
unified messaging products. The remaining life of these patents ranges from 5 to
17 years in duration. The Company has also applied to the U.S. Patent and
Trademark Office for 6 additional patents. The Company also relies on copyright
and trade secret law and contractual provisions to protect its intellectual
property.
EMPLOYEES
As of December 31, 2000, the Company had a total of 1,763 employees, of
whom 1,418 were engaged in sales, marketing and customer support; 63 in quality,
manufacturing and related operations; 193 in research and development and
related technical service and support functions; and 89 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 Report on Form 10-K, the following
are important factors that should be considered in evaluating Inter-Tel and our
business. This Report on Form 10-K 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.
OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND TO COMPETE SUCCESSFULLY,
WE MUST CONTINUALLY INTRODUCE NEW AND ENHANCED PRODUCTS AND SERVICES THAT
ACHIEVE BROAD MARKET ACCEPTANCE.
The market for our products and services is characterized by rapid technological
change, evolving industry standards and vigorous customer demand for new
products, applications and services. To compete successfully, we must
continually enhance our existing telecommunications products, related software
and customer services 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
12
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, CTI applications or related
products fail to develop or continue to develop more slowly than we anticipate,
or if we are unable for any reason to capitalize on any of these emerging market
opportunities, our business, financial condition and operating results could be
significantly harmed.
OUR FUTURE SUCCESS LARGELY DEPENDS ON INCREASING COMMERCIAL ACCEPTANCE OF OUR
AXXESS AND ECLIPSE2 PLATFORMS, INTERPRISE PRODUCTS, AND RELATED COMPUTER
TELEPHONY PRODUCTS.
During the past few years, we have introduced transparent networking and unified
messaging on our AXXESS and ECLIPSE2 platforms and introduced our InterPrise
family of voice and data convergence products. In 2000, we introduced
ClearConnect, a software-based telephone that runs on a PC, ClearConnect
Talk-to-Agent, an e-commerce "touch-to-talk" web call product, a line of IP
voice terminals that add IP telephony to the AXXESS and ECLIPSE2 platforms,
and several other telephony-related products. 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 and related Computer Telephony products, the AXXESS
platform, and the ECLIPSE2 platform, as well as future upgrades and
enhancements to these products and networking platforms. We cannot assure that
these products or platforms will succeed in the future.
OUR PRODUCTS ARE COMPLEX AND MAY CONTAIN ERRORS OR DEFECTS THAT ARE DETECTED
ONLY AFTER THEIR RELEASE, WHICH MAY CAUSE US TO INCUR SIGNIFICANT UNEXPECTED
EXPENSES AND LOST SALES.
Our telecommunications products 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 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 that packet switched technology networks will become widespread. Even if
packet switched technology networks become widespread in the future, we cannot
assure that our products, particularly the Inter-Tel InterPrise product lines,
will successfully compete against other market players and attain broad market
acceptance.
Moreover, the adoption of packet switched technology 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. If the market for IP network voice communications fails 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. This
growth may be inhibited by a number of factors, such as quality of
infrastructure; security concerns; equipment, software or other technology
failures; regulatory encroachments; inconsistent quality of service; and lack of
availability of cost-effective, high-speed network capacity. Moreover, as
IP-based data communications and telephony usage grow, the infrastructure used
to support these IP networks, whether public or private, may not be able to
support the demands placed on them and their performance or reliability may
decline. The technology that allows voice and fax communications over the
Internet, and the delivery of other value-added services, is still in the early
stages of development.
Historically, the sound quality of calls placed over IP-based networks was poor.
As the IP-based telephony industry has grown, sound quality has improved, but
the technology requires further refinement. Data-based networks have not
achieved the levels of quality and reliability of the public-switched telephone
network. We cannot assure you that the data network will ever achieve the
reliability that the public-switched network has historically delivered.
Accordingly, we cannot assure you that communications service providers and
their end-user customers will be receptive to, and subscribe for, any other
additional services we elect to deploy on our network. Any problems, perceived
or real, with the reliability or functionality of any new services that we offer
could discourage communications service providers from offering these services
to their customers. In addition, the development of new services, such as
unified communications services, may require substantial capital expenditures to
be made well in advance of generating any revenue from such services or
demonstrating any market acceptance of such services. If carriers and
communications service providers do not employ our network to offer any new
services to their customers, or if their customers do not subscribe for the
services when offered, our financial condition and results of operations would
be materially adversely affected.
BUSINESS ACQUISITIONS OR JOINT VENTURES MAY DISRUPT OUR BUSINESS, DILUTE
SHAREHOLDER VALUE OR DISTRACT MANAGEMENT ATTENTION.
As part of our business strategy, we consider acquisitions of, or significant
investments in, businesses that offer products, services and technologies
complementary to ours. Such acquisitions could materially adversely affect our
operating results and/or the price of our common stock. Acquisitions also entail
numerous risks, 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
14
* 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 assumed certain
liabilities of Executone Information Systems, Inc. We were adversely affected by
several of the risks described above relating to our Executone acquisition,
including the risks related to unanticipated acquisition costs and impairment of
employee and customer relationships, as well as the erosion of gross and
operating margins, which risks substantially harmed our operating results. For
these and other reasons noted in the footnotes to our financial statements and
in the section titled Management's Discussion and Analysis of Financial
Condition and Results of Operations, we wrote-off our investment in Executone
during the second quarter of 2000. In addition to the Executone losses discussed
above, for the quarter ended September 30, 2000, we also recorded a pre-tax loss
of $2.0 million related to our equity share of Cirilium's net losses. As of the
close of the third quarter, the Company wrote off its remaining investment in
Cirilium of $2.0 million. Total pre-tax losses from Cirilium from all sources
were $8.6 million for 2000.
In January 2001, we acquired certain assets and assumed certain liabilities of
Convergent. Generally, Inter-Tel acquired the voice customer base, accounts
receivable, some inventory and fixed assets along with assumption of liabilities
for warranty, maintenance and specified leased premises costs. In connection
with the Convergent acquisition, we hired approximately 210 Convergent
employees, and opened 8 Inter-Tel branch offices in previous Convergent
locations. In addition to the foregoing risks and uncertainties we face
generally in our acquisitions, we may experience the following difficulties or
risks associated with the Convergent acquisition:
* substantially all of Convergent's sales were of our competitor's
products and services, and these manufacturers may make our service and
maintenance of such products expensive and difficult;
* a large number of Convergent's customers may decline the assignment of
their maintenance contracts to us;
* any number of the approximately 210 employees hired by Inter-Tel may
not integrate successfully or timely into the Inter-Tel business model
and plans; and
* some or all of the independent contractors who performed projects for
Convergent may not assume similar roles with Inter-Tel.
Moreover, to the extent that shares of our stock or the rights to purchase stock
are issued in connection with any future acquisitions, dilution to our existing
shareholders will result and our earnings per share may suffer. Any future
acquisitions may not generate additional revenue or provide any benefit to our
business, and we may not achieve a satisfactory return on our investment in any
acquired businesses.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY AND MAY BE
INFRINGING UPON THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS.
Our success depends upon our proprietary technology. We currently hold patents
for 17 telecommunication and unified messaging products and have also applied to
the U.S. Patent and Trademark Office for six 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 that any patent, trademark or copyright that we own or have
applied to own, will not be invalidated, circumvented or challenged by a third
party. Effective protection of intellectual property rights may be unavailable
or limited in foreign countries. We cannot assure that the protection of our
proprietary rights will be adequate or that competitors will not independently
develop similar technology, duplicate our services or design around any patents
or other intellectual property rights we hold. Litigation may be necessary in
the future to enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Litigation
could be costly, absorb significant management time and harm our business.
15
We also cannot assure 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 have viewed presentations from two of our
primary competitors, Lucent and Avaya, a spin-off of 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. This matter is also being investigated. 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
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, Voice Processing
Software, and Unified Messaging Software 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 THE INTER-TEL.NET NETWORK, AND REQUIRE MORE DEPENDENCE ON THIRD-PARTY
SUPPLIERS OF TELECOMMUNICATIONS AND NETWORK TRANSMISSION SERVICES
We may be vulnerable to the risk of network failure. Despite the use of security
measures, our network is susceptible to damage or interruption from earthquake,
fire, flood and other natural disasters; and power loss, network failure,
improper operation by employees, physical and electronic break-ins, and similar
events. We presently have no off-site back-up facilities for our Network
Operating Center (NOC), which handles all monitoring of our network, including
trouble reporting, network analysis and network testing. We also use our NOC for
monitoring our partners' networks. Any network interruption that impairs our
ability to transmit and complete calls, as well as conduct adequate monitoring
of our network and our partners' networks could damage our reputations and
reduce demand for our services.
We have installed new Cisco Systems and new Cirilium 6200 technology in the
Inter-Tel.NET network. We are also utilizing Inter-Tel InterPrise products to
develop our own IP long-distance network to carry voice and data traffic. The
Inter-Tel.NET network is still in the process of deployment and, accordingly, is
subject to risks and uncertainties. As noted earlier, we have replaced some and
expect to replace additional Vocal'Net Servers in the Inter-Tel.NET network with
new technology to improve the reliability, functionality and interoperability of
the network. We rely upon third-party vendors to provide us with the equipment
and software that we use to transfer and translate calls from traditional voice
networks to the IP-based networks, and vice versa. For example, we purchase
substantially all of our IP-based telephony
16
equipment and software from Cisco Systems, Inc., Cirilium, Inc., Info
Directions, Inc., XACCT Technologies, Inc. and Simplified Telesys. We cannot
assure you that we will be able to continue purchasing such equipment and
software from these vendors on acceptable terms, if at all or that these vendors
will continue to support their products. If we become unable to purchase from
these vendors the equipment needed to maintain and expand our network as
currently configured, or if these vendors discontinue support we may not be able
to maintain or expand our network to accommodate growth and we may consequently
be unable to grow revenues sufficiently to become profitable. Some of these
vendors are smaller companies with limited resources and capitalization, and may
not be able to sustain their business in the future. We also cannot assure that
products developed by our suppliers will not suffer from speed and scalability
problems that could harm our business.
In addition to its own network, Inter-Tel.NET has alliances with other third
party domestic and international IP long distance and local communications
service providers to originate and terminate calls. The successful expansion of
our IP network 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, or experience power or bandwidth outages, our operations and
business may be harmed. There is a risk that the local communications service
providers may be slow, or fail, to provide lines, which would affect our ability
to complete calls to those destinations. We also may not be able to enter into
relationships with enough overseas local service providers to handle increases
in the volume of calls that we receive from our customers. We cannot assure that
there will not be a significant disruption of service provided by these
suppliers, now or in the future. 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 technology, our Inter-Tel.NET
network could become financially burdensome to maintain or obsolete, which could
harm our business.
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 Avaya (formerly part of
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, ADC,
Lucent and Avaya;
* long distance services providers such as AT&T, MCI WorldCom, Sprint and
Qwest Communications;
* IP telephony product and service providers such as Lucent, Nortel, ADC,
iBasis, Concert, DeltaThree, ITXC, deltasix.com, Net2Phone, Cirilium
and others;
* 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;
17
* 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.
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,
the ECLIPSE2, the Inter-Tel Axxent, as well as substantially all of the
Executone Computer Telephony products. We have occasionally experienced delays
in the supply of components and finished goods. We cannot assure 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 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, voice
processing, and voice/data router system manufacturers for these dealers'
business, as most of our dealers carry products that compete with our products.
We cannot assure 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, 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. For example, our inability
18
to retain key executives of Executone following our Executone acquisition
impaired our ability to benefit from the Executone business and to grow revenues
from the Executone assets. Moreover, our operating results will be impaired if
we lose a substantial number of Convergent employees in the months to come
following the Convergent acquisition. We cannot assure 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.
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 packet switched technology 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 packet switched technology 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.
The regulatory treatment of IP-based telephony outside of the United States
varies widely from country to country. A number of countries currently prohibit
or limit competition in the provision of traditional voice telephony services.
Some countries prohibit, limit or regulate how companies provide IP-based
telephony. Increased regulation of the Internet and/or IP-based telephony
providers, or the prohibition of IP-based telephony in one or more countries
could limit our ability to provide our services or make them more expensive. If
foreign governments or other bodies begin to regulate or prohibit IP-based
telephony, this regulation could have a material adverse effect on our ability
to attain or maintain profitability.
GOVERNMENT REGULATION OF THIRD PARTY LONG DISTANCE AND NETWORK SERVICE ENTITIES
ON WHICH WE RELY MAY HARM OUR BUSINESS
Our supply of telecommunications services and information depends on several
long distance carriers, RBOCs, local exchange carriers, or LECs, and competitive
local exchange carriers, or CLECs. We rely on these carriers to provide network
services to our customers and to provide us with billing information. Long
distance services are subject to extensive and uncertain governmental regulation
on both the federal and state level. We cannot assure that the increase in
regulations will not harm our business. Our current contracts for the resale of
services through long distance carriers include multi-year periods during which
we have minimum use requirements and/or costs. The market for long distance
services is experiencing, and is expected to continue experiencing significant
price competition, and this may cause
19
a decrease in end-user rates. We cannot assure 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 few years, 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 six 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 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. Also, 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
20
and third 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.
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
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;
* announcements of acquisitions or planned acquisitions of other
companies or businesses;
* 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 that the market price of our Common Stock will not experience
significant fluctuations in the future, including fluctuations that are
unrelated to our performance.
OUR CHAIRMAN OF THE BOARD OF DIRECTORS, CEO AND PRESIDENT CONTROLS 21.5% OF OUR
COMMON STOCK AND BE ABLE TO SIGNIFICANTLY INFLUENCE MATTERS REQUIRING
SHAREHOLDER APPROVAL
As of December 31, 2000 Steven G. Mihaylo, the Company's Chairman of the Board
of Directors, Chief Executive Officer and President beneficially owned
approximately 20.3% of the outstanding shares of the Common Stock. As of March
9, 2001 Mr. Mihaylo owned approximately 21.5% of the outstanding shares of the
Company's Common Stock. As a result, he has the ability to exercise significant
influence over all matters requiring shareholder approval. In addition, the
concentration of ownership could have the effect of delaying or preventing a
change in control of the Company.
ANY OF THE FOREGOING COULD RESULT IN A MATERIAL ADVERSE EFFECT ON THE COMPANY'S
BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS.
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, 2001.
Name Age Position
- ---- --- --------
Steven G. Mihaylo 57 Chairman of the Board of
Directors, Chief Executive Officer
and President
Norman Stout 43 Executive Vice President/Chief
Administrative Officer
Craig W. Rauchle 45 Executive Vice President
Jeffrey T. Ford 39 Senior Vice President/Chief
Technology Officer
Kurt R. Kneip 38 Chief Financial Officer,
Vice President and Secretary
J. Robert Anderson 64 Director
Jerry W. Chapman 60 Director
Gary Edens 59 Director
C. Roland Haden 60 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.
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. 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. Mr.
Stout had been President of Superlite Block, a manufacturer of concrete block,
since February 1993. 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 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 and holds an SEP certificate from the
Stanford Graduate School of Business.
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
22
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 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 runs 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.
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, through December 31, 2000. The Audit Committee met seven times during the
last fiscal year. The Board of Directors adopted a charter governing the duties
and responsibilities of the Audit Committee. A copy of the Audit Committee
charter is included in the proxy statement filed on about March 23, 2001. The
Audit Committee performs quarterly reviews of financial information prior to
filing public documents with the Securities and Exchange Commission. This
Committee also recommends engagement of the Company's independent public
accountants and is primarily responsible for approving the services performed by
the Company's independent public accountants and for reviewing and evaluating
the Company's accounting principles, its system of internal controls and
financial management practices. The Compensation Committee consisted of
directors Anderson and Edens through December 31, 2000. The Compensation
Committee met three times during the last fiscal year. The Compensation
Committee reviews employee compensation and makes recommendations thereon to the
Board of Directors and administers the Company's Stock Incentive Plans. The
Compensation Committee also determines, upon review of relevant information, the
employees to whom options shall be granted.
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
November 2001, 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 54
locations in the United States, including approximately 147,000 square feet of
office space in Milford, Connecticut pursuant to the Executone acquisition (a
substantial portion of which has been subleased), and two locations overseas.
The Company's aggregate monthly payments under these leases were approximately
$555,286 at December 31, 2000. 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 9, 2001 there were of record approximately 1,237 shareholders of the
Company's Common Stock. The Company believes there are approximately 13,500
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 1997, 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.
2000 HIGH LOW 1999 HIGH LOW
First Quarter 46 3/8 21 1/2 First Quarter 28 1/8 13 3/8
Second Quarter 28 12 7/8 Second Quarter 19 11 1/2
Third Quarter 16 5/16 11 Third Quarter 25 1/2 15 1/8
Fourth Quarter 13 1/4 6 3/16 Fourth Quarter 26 3/8 14
24
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL SUMMARY
(In thousands, except
per share amounts and ratios) For the years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
Net Sales $ 402,723 $ 314,221 $ 274,504 $ 223,569 $ 185,884
Cost of sales 243,685(1) 159,463 140,946 122,363 104,966
Research and development 19,489 14,798 11,373 7,998 6,581
Selling, general and
administrative 127,468 98,430 86,554 69,942 56,386
Write-off in-process research
and development 5,433(1) -- 22,755(2) -- --
Special charge 45,245(1) -- -- -- 4,542(3)
- ------------------------------------------------------------------------------------------------------------------------
Operating (loss) income (38,597) 41,530 12,876(2) 23,266 13,409(3)
========================================================================================================================
Equity share of Cirilium losses (5,938) -- -- -- --
Write-off of Cirilium investment (2,045) -- -- -- --
Interest and other income 1,053 2,345 3,018 1,383 1,974
Interest expense (213) (110) (60) (47) (77)
- ------------------------------------------------------------------------------------------------------------------------
(Loss) income before taxes (45,740)(1) 43,765 15,834(2) 24,602 15,306(3)
Income taxes (16,817) 16,619 6,790 9,920 6,264
========================================================================================================================
Net (loss) income (28,923)(1) $ 27,146 $ 9,044(2) $ 14,682 $ 9,042(3)
========================================================================================================================
Net (loss) income per share
Basic $ (1.10)(1) $ 1.05 $ 0.34(2) $ 0.59 $ 0.35(3)
Diluted $ (1.10)(1) $ 1.01 $ 0.32(2) $ 0.57 $ 0.34(3)
- ------------------------------------------------------------------------------------------------------------------------
Weighted average basic
common shares 26,273 25,949 26,602 24,836 25,780
Weighted average diluted
common shares 26,273 27,004 27,846 25,983 26,572
- ------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $ 243,126 $ 247,517 $ 197,030 $ 194,988 $ 132,611
Working capital 86,008 60,799 96,317 123,814 79,709
Shareholders' equity 136,436 168,121 142,686 145,505 94,934
- ------------------------------------------------------------------------------------------------------------------------
KEY RATIOS
Current ratio 2.05 1.93 3.17 4.69 4.09
Return on equity-continuing
Operations (17.2)% 19.0% 6.2% 15.5% 10.6%
Return on equity-excluding
Charges 7.8%(1) 19.0% 15.6%(2) 15.5% 13.8%(3)
========================================================================================================================
(1) 2000 operating income includes charges of $66.8 million, which reduced
net income by $42.0 million, or $1.60 per share after tax. These
pre-tax charges reflect the write-off of the Executone acquisition of
$50.9 million ($7.6 million of which is included in cost of sales) in
the second quarter, the write-off of IPRD in connection with the
Executone purchase of $5.4 million during the first quarter, the
write-down to net realizable value of Inter-Tel.NET assets of $2.0
million during the second quarter, the equity share of Cirilium's
losses of $5.9 million for the year, and write-off of the Company's
investment in Cirilium of $2.6 million (including reserve adjustments)
during the third quarter. Without these charges, the Company would have
reported net income of $13.1 million ($0.50 per diluted share) for the
year ended December 31, 2001.
(2) 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.
(3) 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.
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.
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 on this report under the caption "Directors and Executive
Officers of the Registrant."
26
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
Two of the Company's executive officers received loans from Inter-Tel
during 1999 to acquire common stock in Cirilium, a company formed during 1999
that is jointly owned by Inter-Tel and Hypercom Corporation. Norman Stout and
Craig Rauchle received loans on December 29, 1999 of $250,000 and $200,000,
respectively, to acquire 375,000 and 300,000 shares, respectively, of voting
common stock of Cirilium. The Promissory Notes are interest-only notes with
balloon payments due or before March 15, 2004. The loans bear interest at the
mid-term applicable federal interest rate, compounded annually. Interest
payments are due on or before March 15 of each anniversary beginning on March
15, 2000. The notes are full recourse loans and the Company retains the Cirilium
common stock certificates as collateral.
In addition, in connection with their service as members of the board
of directors of Cirilium, on January 31, 2000, Steven Mihaylo and Norman Stout
were granted fully vested options to purchase stock in Cirilium of 50,000 shares
each at a price of $1.20 per share. Cirilium is a corporation that was formed as
a joint venture between the Company and Hypercom Corporation to develop and
market IP telephony products and services. The Company owns approximately 19.9%
of the outstanding capital stock of Cirilium.
In addition, unrelated to Jerry Chapman's participation on the board of
directors of Inter-Tel, Incorporated, but pursuant to a separate consulting
agreement to provide professional services to Cirilium Corporation ("Cirilium"),
on January 1, 2000, Mr. Chapman received rights to purchase 50,000 shares of
Cirilium common stock at a price of $.667 per share. In addition, Mr. Chapman
received cash compensation of $45,000, paid directly by Cirilium, for providing
consulting services during 2000. On March 1, 2000, Mr. Chapman acquired 50,000
shares pursuant to the rights granted in January. Each of these events occurred
prior to the date that Mr. Chapman joined the board of directors of Cirilium.
In April 2000, Mr. Chapman was elected to Cirilium's board of
directors. On June 1, 2000, for services as a member of the board of directors
of Cirilium, Mr. Chapman was granted vested options to purchase an additional
50,000 shares of Cirilium common stock at a price of $1.20 per share.
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, 2000 and 1999
Consolidated statements of income--years ended December 31, 2000, 1999
and 1998
Consolidated statements of shareholders' equity--years ended December 31,
2000, 1999 and 1998
Consolidated statements of cash flows--years ended December 31, 2000, 1999
and 1998
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, 2000:
Schedule II--Valuation and Qualifying Accounts Page No. 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.
10.61(18) * Inter-Tel, Incorporated Acquisition Stock Option Plan and form
of Stock Option Agreement.
28
10.61(19) Computer Telephony Asset Purchase Agreement dated as of
October 17, 1999 by and between Executone Information Systems,
Inc., Inter-Tel, Incorporated and Executone Inter-Tel Business
Information Systems, Inc.
13.0 (20) Excerpts from Annual Report to Security Holders.
- ---------------------
(1) Incorporated by reference to Registrant's Registration Statement on Form
S-1 (File No. 2-70437).
(2) Incorporated by reference to Registrant's Registration Statement on Form
S-8 (File No. 2-94805).
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended November 30, 1984 (File No. 0-10211).
(10) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1988 (File No. 0-10211).
(11) Incorporated by reference to Registrant's Registration Statement on Form
S-8 (File No. 33-40353).
(12) Incorporated by reference to Registrant's Registration Statement on Form
S-1 (File No. 33-70054).
(13) Incorporated by reference to Registrant's Registration Statement on Form
S-8 (File No. 33-73620).
(14) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998 (File No. 0-10211).
(15) Incorporated by reference to Registrant's Proxy Statement dated March 23,
1994.
(16) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995 (File No. 0-10211).
(17) Incorporated by reference to Registrant's Registration Statement on Form
S-8 (File No. 333-41197).
(18) Incorporated by reference to Registrant's Registration Statement on Form
S-8 (File No. 333-67261).
(19) Incorporated by reference to Registrant's Report on Form 8-K (File No.
333-67261).
(20) 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. 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. Filed herewith.
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 23, 2001
EXHIBIT 24.1--POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Steven G. Mihaylo and Kurt R. Kneip,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ Steven G. Mihaylo Chairman and Chief March 23, 2001
- --------------------- Executive Officer
Steven G. Mihaylo
/S/ Kurt R. Kneip Vice President and March 23, 2001
- ----------------- Chief Financial Officer
Kurt R. Kneip
/S/ J. Robert Anderson Director March 23, 2001
- -----------------------
J. Robert Anderson
/S/ Jerry W. Chapman Director March 23, 2001
- --------------------
Jerry W. Chapman
/S/ Gary D. Edens Director March 23, 2001
- -----------------
Gary D. Edens
/S/ C. Roland Haden Director March 23, 2001
- -------------------
C. Roland Haden
30
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
- ----------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------------------------------------------------------------------------
ADDITIONS
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, 2000
Deducted from asset accounts:
Allowance for doubtful accounts $8,814 $6,793 $4,994(3) $3,414(1) $17,187
Allowance for lease Accounts $6,734 $4,927 $-- $2,791(1) $ 8,870
Inventory allowance $5,849 $1,653 $6,278(3) $1,883(2) $11,897
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 (3) $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
----- ----- ---- -------- -----
- ----------------------------------------------------------------------------------------------------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Inventory written off.
(3) Acquired in purchase transaction.
31