ITEM 1 - -BUSINESS
GENERAL
Syntellect Inc. (together with its subsidiaries, collectively referred to as "Syntellect" or the "Company") develops, markets and integrates voice, internet, and call processing software and services worldwide. The Company offers a diversified product line which includes Interactive Voice Response ("IVR"), Interactive Web Response ("IWR"), Computer Telephony Integration ("CTI"), predictive dialing technologies, and a worldwide distribution network. While focused on enterprise call centers, the Company has developed industry solutions for financial services, media (cable/satellite TV and newspapers), utilities and healthcare industries. Syntellect also provides an interactive transaction-based service bureau for those customers who prefer to outsource their voice processing or web transaction-based applications, including cable and satellite pay-per-view orders and employee benefits enrollment. The Company has installed over 13,000 systems at more than 3,000 companies in 55 countries. Syntellect currently employs a total of 350 people, and in addition to its primary office facilities in Atlanta and Phoenix, maintains nine sales and support offices in the United States and one in London.
This report on Form 10-K may contain "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. These statements include, without limitation, certain statements contained in Part I, Item 1 - - "Business" under the captions "Historical Development of the Company", "Industry and Market Background", "Products and Services", "Sales, Marketing, Service & Support", "Product Development", "Manufacturing and Suppliers", "Backlog", "Proprietary Rights and Intellectual Property" and "Employees"; Part I, Item 3 - -"Legal Proceedings"; Part II, Item 5, "Market for the Company's Common Equity Securities and Related Shareholder Matters"; and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Also see "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of important factors that could affect the validity of any such forward-looking statements.
HISTORICAL DEVELOPMENT OF THE COMPANY
Founded in 1984, Syntellect was an early pioneer in the IVR industry, and by 1995 had become the fourth largest provider of IVR solutions in North America and the largest IVR provider in Europe. Virtually all of the Company's growth during this period was attributable to its proprietary IVR systems (Infobot and Premier). In the early 1990's, the IVR industry experienced a major shift in product demand as the market began to move from proprietary hardware and software applications to advanced, open architecture products. These products increased functionality with a wider range of options for self-service-- including telephones using speech recognition, personal computers and the Internet, to faxes, pagers and mobile phones. In 1993, Syntellect introduced its first open architecture product, the VocalPoint IVR, and announced the phase-out of its proprietary lines.
During 1995, Syntellect initiated a search within the voice processing industry for a strategic partner relationship that could potentially provide complementary product offerings, wider distribution channels and operating synergies. This search culminated on March 14, 1996 with Syntellect's acquisition of Pinnacle Investment Associates Inc. ("Pinnacle") in a transaction that was accounted for as a pooling of interests. Pinnacle subsequently was merged into its wholly owned subsidiary, Telecorp Systems, Inc. ("Telecorp"). Telecorp developed and distributed inbound and outbound call center systems worldwide, primarily in the cable television, newspaper and healthcare industries, and operated a transaction-based service bureau designed primarily to process pay-per-view orders for the cable television industry. Subsequent to the merger, all systems functions were merged into Syntellect Inc. and all service bureau functions were consolidated into Syntellect Interactive Services ("SIS"), a wholly owned subsidiary of Telecorp.
The merger between Syntellect Inc. and Pinnacle provided the combined company with several distinct marketing advantages including: (i) a more diversified product line which includes both inbound voice processing technology and outbound predictive dialer products; (ii) a larger sales force and distribution network together with improved access and cross-selling opportunities in new vertical markets; and (iii) the combination of recurring revenue from Syntellect's transaction-based service bureau and Telecorp's Home Ticket pay-per-view service, with the automated processing capacity of what the Company believes is one of the world's largest outsourced transaction centers. In addition, the merger provided the combined company with greater financial resources and access to a new management team with substantial expertise in the voice processing industry.
In 1998, the Company introduced Vista(TM). Vista, an advanced software platform, combines call center technologies with a distributed client-server architecture, powerful open standards components, a web-based management system and a graphical application development tool. This combination provides customers with flexibility, scalability and efficiency, redundancy, and excellent processing performance in comparison to previous proprietary solutions.
INDUSTRY AND MARKET BACKGROUND
Evolution of the Call Center. Traditionally, consumers contacting organizations to obtain data or services did so by talking with someone in person. While these "call centers" enabled a company to provide a personal touch with its customers, they also created inefficiencies and disadvantages such as (i) the high cost of maintaining a large pool of agents to answer calls and provide service, (ii) the practical limits on the amount of information and level of service that could be given to individual callers, and (iii) the increased potential for service delays and agent error as call volume increased or substantially varied with the time of day. As a result, organizations have increasingly turned to various methods of automation to process these calls and have redefined the role of their call centers by expanding the definition of a "call" from a person-to-person voice transaction to a range of transactions involving voice, data and workflow automation. Call centers have become "interactive communication centers," linking multiple sites and geographically dispersed resources through wide area networks, corporate intranets, extranets, and the Internet.
Automated self-service has become a major business requirement as companies realize that this type of fast, friendly and cost efficient service offers distinct competitive advantages. Automated self-service eliminates hold times, provides increased accuracy in transaction processing, and allows for expanded service offerings. Automated self-service applications can effectively handle up to 60% of most interactive customer transactions. Many issues still require the assistance of a customer service agent; however, technology has helped to automate the agent's interaction with the customer through the use of solutions such as CTI which integrates the transmission of voice and data in a single telephone call. For example, an inbound solution may involve a "screen pop" of customer information at the agent's workstation, and an outbound solution may involve the transfer of customer information to an agent's terminal in connection with an outbound calling campaign for telemarketing or collections.
The use of IVR systems has allowed businesses to broaden the type of transactions that can be conducted in this manner. These transactions now include order entry, package tracking, home banking, customer service, hospital patient information requests, student registration, catalog sales, benefits enrollment, dealer locator services, airline schedule information, pay-per-view ordering and fax-on-demand. As the market continues to evolve, the increased emphasis on cross-industry applications will require the IVR industry to develop solutions that will allow data to be accessible from an even wider range of database systems. This requires multi-vendor networking and application integration capabilities based on open architecture platforms. Standardization and interoperability are expected to facilitate the evolution of the IVR industry's next generation of products.
Market Potential and Industry Rank. The Gartner Group, an industry analyst firm, reports that the $3 billion call center market in North America is growing at a rate of 20% per year. The group estimates that there are approximately 55,000 call centers worldwide with 30,000 of those call centers operated in the United States.
Frost & Sullivan, a market research firm, forecasts that the compound annual growth rate in the U.S. call center services market from 1996-2003 will be 15.8%.
By the year 2000, it is predicted that 75% of all call centers will conduct up to 33% of their transactions electronically. Out of the 55,000 call centers in operation today, In-Stat, a market research firm, estimates that only 2,500, or 4.6%, are web-enabled. That number is expected to grow to 15% in 1999 and over 35% in the year 2000. The speech recognition market, as a significant component of the call center market, is projected to surpass $1 billion by the end of the decade.
Ovum, a market research firm, forecasts that the North American CTI market will approach $6.1 billion by the year 2000. The CTI market is divided into three distinct segments: formal call centers, typically large workgroups using an automatic call distributor ("ACD"); informal call centers, smaller workgroups not using an ACD; and small office/home office products targeted at small businesses and individual workers from the office. The Company competes primarily in the formal call center market with its IVR, IWR and predictive dialer products.
Ovum also reports that the European call center market is currently growing at 40% per year. DataQuest, a global market research and consulting firm serving the high-technology and financial communities, ranks Syntellect as the number one supplier of IVR in the United Kingdom with a total market share of 25%. Syntellect also ranks third in Western Europe with a market share of 8.9%.
Competition. The voice processing industry is highly competitive and the Company believes that competition will continue to intensify in the future. The industry is characterized by rapid technological advances, frequent introductions of new products, options and features, constant improvement in the performance of IVR products, and downward pressure on prices. Failure to keep pace with technological advances could adversely affect the Company's competitive position and results of operations. Syntellect believes the principal competitive factors affecting the voice processing industry are price, functionality, service and reputation in the industry. Although management believes that the Company competes favorably with respect to these factors, there can be no assurance that Syntellect can maintain its competitive position against current and potential competitors.
Syntellect's principal domestic competitors for IVR and web products include Lucent Technologies, InterVoice Inc., Aspect Telecommunications, Periphonics Corporation, Edify, Brite Voice Systems Inc., and IBM Corporation. The Company's principal domestic competitors for predictive dialer products are Davox Corporation, EIS International, Inc., Melita International Corporation and Mosaix, Inc. Internationally, Syntellect's primary competitors include InterVoice Inc., Telsis, Brite Voice Systems Inc., Aspect Telecommunications, Periphonics, and IBM Corporation. Many of the Company's competitors have more extensive engineering, manufacturing, and marketing capabilities, in addition to their substantially greater financial, technological and personnel resources. The Company also expects new competitors to enter its markets.
PRODUCTS AND SERVICES
Product Focus. Syntellect has undergone a significant transition in its product focus over the past several years in order to meet the changing requirements of its markets. Historically, the Company was a technology-driven organization focused on developing proprietary IVR systems. These products were designed primarily for the formal call center market and required customers to develop their own application software. In 1993, the Company took its first step toward an open architecture platform with the OS/2-based VocalPoint IVR that allowed for improved functionality which integrated industry-standard hardware with software developed by the Company. By 1995 the OS/2 operating system was clearly not the choice of IT professionals for mission critical server platforms. In 1996, with the acquisition of Pinnacle, the Company added predictive outbound dialing and the automated processing capacity of one of the world's largest transaction service bureaus. Syntellect began the migration of its product line to a new distributed client/server software architecture. While the VocalPoint product was open, it lacked the scalability for deployment in large, distributed enterprise call centers.
To replace the VocalPoint product line, in 1998, the Company introduced a new third generation software platform called Vista using Microsoft's Windows NT operating system and JAVA as the programming language for customer application development. Vista is designed to add functionality to existing products and expand the scope of the Company's product offerings. Vista includes the following features and capabilities.
Vista IVR, the Company's flagship product is designed to meet customer needs for a fully automated system. It combines voice processing, information retrieval, caller interaction and application generation capabilities with a distributed client/server architecture, and open standards. Vista provides intelligent, customer-friendly solutions to solve complex interactive communications problems. By utilizing off-the-shelf components, which leverage the research and development of the third parties, Syntellect is able to not only price competitively but to focus its engineering resources on value-added development. The standards used in the Vista framework include: Windows NT operating system, JAVA application development language, Dialogic Voice Boards, SQL database, and Intel-based computer hardware.
VistaView Call Center Management Tool is a management and reporting tool that allows monitoring and control of the entire Vista software platform from a standard Web browser on any desktop PC. This means system administrators can view and manage call center systems from a single location utilizing any Web browser either over an intranet or the Internet.
VistaGen Application Generator is an object oriented application development tool for Vista. VistaGen makes it easy for customers to build their applications from simple applications with an IVR to sophisticated ones that incorporate natural language speech recognition, IWR and CTI technologies.
Vista IWR allows companies to take advantage of the Internet with self- service solutions designed exclusively for the World Wide Web. The Vista IWR can be voice-enabled for Virtual Access applications accessible by both Web browsers and phones.
Vista Predictive Dialer Release 3.3 is a high-performance outbound dialing system. Release 3.3 includes new features that allow call center operators to increase agent efficiencies and the level of service for outbound and inbound calls over previous versions. Highlights of Release 3.3 include the following: Inbound Call Management--allows the system to directly receive inbound calls; Dialed Number Identification Service (DNIS) is supported--eliminates the need for Automatic Call Distributors (ACD); and Voice Message Delivery--allows campaign specific pre-recorded messages to be left by the system for outbound calls encountering answering machines.
Vista Fax Server receives fax requests from inbound or outbound agents and IVR and Interactive Web Response applications.
Vista CTI improves agents' productivity by allowing them to handle telephone calls more efficiently by allowing the simultaneous transfer of the phone calls and the information about the callers to the agents.
Service Bureau. The Company operates an outsourced transaction center through its Syntellect Interactive Services, Inc. ("SIS") subsidiary. Telemarketing(R) and Call Center Solution(TM) magazine ranked SIS third among interactive service bureaus in the United States for 1998. The ranking was based on the cumulative number of transactions processed over a 12-month period. The SIS Transaction Center ("Transaction Center") is a service bureau with nearly 5,000 ports, which offers complete automated transaction outsourcing and is designed with full system redundancy and fault-tolerant power protection for operation 24-hours a day, 7-days a week.
The Transaction Center is a call center that unlike most, which are labor intensive, features an automated "lights out" facility. The Transaction Center handles more than four million telephone calls and Internet-based inquiries each month for its customers. The Transaction Center is used for the Company's Home Ticket(TM) pay-per-view service.
Home Ticket combines the speed and convenience of 800 numbers, the user- friendly nature of IVR technology and real-time connectivity with cable system billing mainframes to process orders for over 700 cable and satellite television operators in North America including AT&T/TCI, Time Warner, Cablevision Systems, Cox Cable and Comcast. Home Ticket is the pay-per-view service utilized by approximately 10 million households in the United States alone. The Company has added additional features to the Home Ticket service, including Hot Spots advertising and promotion messaging, commercial ordering for hotels and motels, and Call Redirect which transfers an incoming call to a second destination for enhanced customer service and retailing options.
In 1997, SIS introduced CyberStats(TM), an online reporting tool for Home Ticket customers. CyberStats provides real-time reports on pay-per-view order calls. Users can access CyberStats on the Internet and select the report delivery method of choice: to their desktop screen, by e-mail, or to a fax machine.
The Service Bureau also offers a variety of other outsourced electronic commerce capabilities including audiotext, dealer locator, lead capture, broadcast faxing, call center processing, call center activation, benefits enrollment, and fulfillment. These transactions are typically billed on a per minute and per transaction basis.
The Company has three operating business segments. See Management's Discussion and Analysis of Financial Condition and Results of Operations-- Operating Business Segments for description of these business segments.
SALES, MARKETING, SERVICE & SUPPORT
General. Syntellect provides voice processing solutions to customers in a variety of industries, including banking, education, insurance, service providers, transportation, healthcare, media, telecommunications, public utilities, retailing, government agencies, oil and gas, financial services, manufacturing and newspaper publishing. Syntellect has installed in excess of 13,000 systems at more than 3,000 customers in 55 countries. Syntellect's customer base includes eight of the largest domestic banking firms, five of the ten largest insurance companies, most major domestic cable television providers and numerous other Fortune 500 companies. There can be no assurance that the Company's existing customers will continue their current buying patterns or that changes within those industries will not adversely affect the Company's ability to retain or attract new customers. Syntellect's products are sold through a direct sales force and through domestic and international distributors and value added resellers ("VARs"). The Company currently maintains nine sales offices in the United States and one in London.
Domestic Sales. Domestic sales including maintenance fees represented 78%, 76% and 73% of the Company's total revenues for 1998, 1997 and 1996, respectively. During these years no single distributor or customer accounted for more than 10% of total revenues. More than 96% of the Company's 1998 domestic sales were made by its direct sales force. A substantial portion of these direct sales are made by a limited number of sales representatives, the loss of whom could adversely affect future operating results.
International Sales. Revenues from international sales and maintenance fees represented 22%, 24% and 27% of the Company's total revenues for 1998, 1997 and 1996, respectively. For additional information regarding international operations, see Note 13 of Notes to Consolidated Financial Statements. All of the Company's product lines and services are sold world-wide and have been modified to meet specific power, safety and telecommunication requirements of the country of destination. The Company currently offers its products in 30 different languages. Syntellect maintains a direct sales force in London to market its systems in various countries around the world. Sales in Canada and the United Kingdom are denominated in Canadian dollars and pounds sterling, respectively, and are subject to foreign currency adjustments. Sales in all other foreign countries are denominated in United States dollars. Syntellect conducts business in international markets in compliance with each country's applicable laws and regulations, including safety and telecommunication laws, import duties and quotas. Syntellect has not experienced any difficulty in obtaining export licenses for foreign sales from the United States Department of Commerce.
Marketing Organization and Vertical Market Focus. Syntellect's marketing organization is charged with (i) enhancing the Company's corporate image; (ii) increasing demand for the Company's voice processing products; (iii) creating market differentiation; and (iv) identifying future development opportunities for market-driven features. The marketing organization conducts market and competitive research, participates in industry trade shows and conferences, creates sales literature and presentations, and maintains relationships with key industry analysts and media contacts. Syntellect's strategic marketing plan is focused on four vertical markets--financial services, media (cable/satellite television and newspaper), utilities and healthcare industries. Sales to these markets represented approximately 84% of the Company's total revenues for 1998; 81% for 1997; and 84% for 1996. Syntellect markets its products to industry leaders within these vertical markets as management believes the industry leaders have the greatest need for voice processing products, are most likely to require system expansion and additional services, and serve as an important source of customer referrals.
Professional Services. Syntellect has enhanced its customer support service in the areas of consulting services, project management, application services, installation, education services, helpline warranty and maintenance, moves/adds/changes, scripting and voice file production, and database maintenance services for cable television IVR customers. These services are generally sold as part of the initial sale of a system or in some cases as post implementation add-ons. Syntellect provides warranties on its various product lines for periods generally ranging from three to six months after system installation. After the initial warranty period, hardware and software maintenance services are available on both a contractual and on-demand time and material basis. Hardware maintenance and support provided to domestic customers is performed on-site under contractual arrangements with independent third party service providers. Internationally, the Company provides training, service and support through a combination of its direct customer support function, third party service providers and distributors.
PRODUCT DEVELOPMENT
Syntellect believes that its success is dependent upon its ability to expand the market for its existing products, provide new options and features on a timely basis, and develop new applications that can be incorporated into commercially viable voice processing products. While the Company introduced a major new product in 1998 and early acceptance has been positive, it believes there can be no assurance that this new product or its features will receive market acceptance. Further, there can be no assurance that future announcements of new products will not cause customers to defer purchases of existing products, which could adversely affect the Company's results of operations.
Product development consists of hardware specification, hardware integration, third party software integration, system design and proprietary software design and coding. All product development is performed by employees of, and contractors managed by, the Company's research and development organization. Syntellect performs rigorous testing prior to releasing new products and features. Nevertheless, products as complex as those produced by the Company often contain undetected errors, or "bugs" when first released. These "bugs" are often discovered only after the product has been used by many different customers and in varying applications. There can be no assurance that errors will not be discovered in the future, causing delays in product introductions and shipments or requiring design modifications which could adversely affect the Company's results of operations.
Syntellect's product development organization consisted of 55, 61, and 73 individuals at December 31, 1998, 1997 and 1996, respectively. The Company spent $5.6 million, $5.9 million, and $5.9 million for research and development during 1998, 1997 and 1996, respectively.
MANUFACTURING AND SUPPLIERS
Syntellect's manufacturing operation consists of in-house configuration, product assembly, product testing and quality control. The Company obtains hardware components from third parties for its products, including telephony interface and voice recognition boards. The Company does not believe it is dependent on single source suppliers for components used in any of its product lines. Syntellect is currently able to obtain key components
in a timely manner from a variety of sources; however, any inability to secure alternate suppliers of key components or alternate assembly sources in a timely manner could adversely affect the Company's results of operations.
BACKLOG
The Company's backlog at December 31, 1998 and 1997 was approximately $15.4 million and $10.2 million, respectively. The Company believes that all orders in backlog at December 31, 1998 are firm and will be delivered within the fiscal year. Because the possibility exists for customers to make changes to their original order, to alter or significantly delay delivery schedules or to cancel their order, the backlog total as of any particular date may not be indicative of actual revenues for any future period.
PROPRIETARY RIGHTS AND INTELLECTUAL PROPERTY
Syntellect is licensed to use certain patents, technology and other intellectual property rights owned by others, and, similarly, other companies are licensed to use certain patents, technology and intellectual rights formerly owned by Syntellect. In July 1992, Syntellect acquired an extensive patent portfolio in connection with its acquisition of Dytel Inc., a manufacturer of equipment for the voice messaging and call processing industry. Syntellect sold the Dytel product line in February 1995 to a third party but retained the rights to their patent portfolio. On October 25, 1997, Syntellect signed a Patent Assignment Agreement with Aspect Telecommunications Corporation ("ATC") assigning their patent portfolios and related applications worldwide to ATC (see Note 3 of Notes to Consolidated Financial Statements).
Syntellect establishes and protects proprietary rights in its products and technologies through a combination of registered copyrights, trademarks, service marks, trade secret and patent protection. The Company also enters into confidentiality agreements with its employees, distributors and customers, and seeks to limit access to the distribution of its software, documentation and other proprietary information. Syntellect can provide no assurance that the steps it has taken to protect its licensing and proprietary rights will be adequate to deter misappropriation and/or development of its technologies and products by independent third parties or that third parties will not assert that Syntellect's products infringe upon the rights of others. The Company believes that factors such as technological innovation and expertise and market responsiveness can be as important as the legal protections described above.
VocalPoint is a registered trademark and Vista (VocalPoint Interactive Services Transaction Architecture), Home Ticket and Interactive Web Response are trademarks of Syntellect. All other products mentioned in this Form 10-K are trademarks or registered trademarks of their respective companies.
Syntellect's new Vista product line uses a licensed third party software. This software provides a portion of the architectural foundation for Vista. The Company has full rights to modify all components as necessary to meet the requirements of its customers and business. The initial agreement with the third party extends to December 31, 2000. Subsequent terms extend automatically each year on January 1 for an additional one year unless either party shall give written notice to the contrary to the other party prior to January 1 of any year, in which case the agreement shall terminate at the end of the most recently extended five-year term.
EMPLOYEES
At December 31, 1998, Syntellect employed a total of 350 employees, 344 on a full-time basis and 6 on a part-time basis: 46 in sales, 28 in marketing, 104 in customer support, 20 in manufacturing, 55 in product development, 49 in the service bureau operation, and 48 in administration. The Company's success depends on a number of technical employees. Competition for highly skilled people with extensive experience in systems and applications software and advanced electronics is intense. Syntellect's inability to retain these employees could severely impact the Company's ability to conduct its business. The Company has never had a work stoppage and none of its employees are represented by a labor organization.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information with respect to the names, ages, positions and offices held with Syntellect by the Executive Officers as of March 31, 1999.
J. Lawrence Bradner, 47, became Syntellect's Chairman and Chief Executive Officer upon completion of the merger with Pinnacle on March 14, 1996. He had served as Chairman and Chief Executive Officer of Pinnacle and its wholly owned subsidiary, Telecorp, since their formation in 1991. From 1977 to 1990, Mr. Bradner was employed by Scientific-Atlanta, Inc. ("Scientific-Atlanta"), a leading provider of satellite and other telecommunications products based in Atlanta, Georgia. Mr. Bradner served as President of the Broadband Communications Business Division of Scientific-Atlanta and as Corporate Vice President from 1987 to 1990. Mr. Bradner holds a Bachelors Degree, with honors, in Industrial and Systems Engineering from the Georgia Institute of Technology and a Master of Business Administration Degree from Harvard Business School. Mr. Bradner assumed the positions of President and Chief Operating Officer of Syntellect with the resignation of Mr. Steve Nussrallah on March 31, 1998.
Neal L. Miller, 39, became Syntellect's Corporate Vice President, Chief Financial Officer, Secretary and Treasurer in December 1995. In February 1998, Mr. Miller was promoted to Division President of SIS, the Company's Service Bureau business. Mr. Miller served as Division Finance Director/Controller for the Communications Division of Tandem Computers, Inc. from 1993 to 1995. Prior to that, Mr. Miller served as Vice President and Chief Financial Officer of American Software, Inc. from 1990 to 1993, and in various finance and sales positions with American Software from 1984 to 1990. Mr. Miller is a Certified Public Accountant and holds a Bachelors Degree in Business Administration, with honors, in Accounting from Georgia State University.
Peter W. Pamplin, 44, served as Syntellect's Vice President and Controller since June 2, 1997. On August 13, 1998, Mr. Pamplin was promoted to Corporate Vice President, Chief Financial Officer, Secretary and Treasurer. Prior to joining the Company, Mr. Pamplin was employed by American Software, Inc. beginning in February 1985 and served as its Corporate Controller from August 1987 until May 1997. Mr. Pamplin holds a Bachelors Degree in Biochemistry and a Master of Business Administration Degree from Virginia Polytechnic Institute and State University.
W. Scott Coleman, 43, has served as Syntellect's President--Call Center Systems since May 5, 1997. Mr. Coleman, together with former director Daniel D. Ross, served in Syntellect's Office of the Chief Executive Officer from November 10, 1995 to March 14, 1996. On February 1, 1996, Mr. Coleman was promoted to the position of Syntellect's Senior Vice President and General Manager--Call Center Systems. Prior to that time, Mr. Coleman served as Syntellect's Vice President of Product Development from 1993 to 1995. Mr. Coleman has been involved in the voice processing industry since 1982, serving as Vice President of American Telesystems Corporation, where he was responsible for product strategy, business development and product development activities. Mr. Coleman holds a Master of Science Degree in Electrical Engineering from the Georgia Institute of Technology.
ITEM 2
ITEM 2 - -PROPERTIES
Syntellect's principal corporate offices are located in 38,904 square feet of leased space in Roswell, Georgia. This facility is also used for certain of the Company's sales and service bureau functions. The lease extends through 2001. In June 1996, the Company entered into a ten year lease for a new 70,564 square foot office facility in Phoenix, Arizona. This lease commenced in April 1997. The new facility has provided for expansion and consolidation of the Company's systems business, and includes space for customer support, research and development, sales, marketing, production, training and administrative functions.
Syntellect leases a 1,619 square foot facility in Atlanta, Georgia for its National Transaction Center. This facility is used for the Home Ticket pay- per-view service and other service bureau applications offered through the Company's Syntellect Interactive Services subsidiary. The Company also leases five sales and support offices in the United States, including a 4,207 square foot facility in Lombard, Illinois, and one in London. Aggregate monthly rental payments for Syntellect's office facilities are approximately $130,900.
ITEM 3
ITEM 3 - -LEGAL PROCEEDINGS
Syntellect is from time to time involved in legal proceedings of a character normally incident to its business. Syntellect is not currently a party to any material pending legal proceedings.
ITEM 4
ITEM 4 - -SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Syntellect's shareholders during the fourth quarter of 1998.
PART II
ITEM 5
ITEM 5 - -MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Syntellect's common stock has been traded in the over-the-counter market and quoted through The Nasdaq Stock Market ("NASDAQ") since March 29, 1990, under the symbol "SYNL". The following table sets forth the high and low sale prices of the common stock for the two most recent fiscal years as reported on NASDAQ.
On March 23, 1999, the closing sale price for Syntellect's common stock was $1 3/4 per share. On such date, there were 244 holders of record of Syntellect's common stock. This figure does not reflect beneficial ownership of shares held in nominee names. Syntellect has never declared or paid a cash dividend on its common stock. Syntellect presently intends to retain earnings for use in its business and does not anticipate paying cash dividends on its outstanding shares in the foreseeable future.
As is frequently the case with stock of high technology companies, the market price of Syntellect's common stock has been and may continue to be quite volatile. Factors such as quarterly fluctuations in results of operations, announcements of technological innovations or the introduction of new products by Syntellect or its competitors, and macroeconomic conditions in the computer hardware and software industries generally, may have a significant impact on the market price of Syntellect's common stock. In addition, if revenue or earnings in any quarter were to fail to meet expectations of the investment community, there could be an immediate impact on Syntellect's stock price. Further, the stock market has from time to time experienced extreme price and volume fluctuations which have affected the market price for many high technology companies and which, on occasion, have been unrelated to the operating performance of those companies. These broad market fluctuations may adversely affect the market price of Syntellect's common stock.
ITEM 6
ITEM 6 - -SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with Syntellect's consolidated financial statements and related notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. The selected consolidated financial data presented below under the captions "Statement of Operations Data" and "Balance Sheet Data" for, and as of the end of, each of the years in the five-year period ended December 31, 1998, are derived from the consolidated financial statements of Syntellect Inc. The consolidated financial statements as of December 31, 1998 and 1997, and for each of the years in the three-year period ended December 31, 1998, and the report thereon, are included elsewhere herein.
Statement of Operations Data (in thousands, except per share amounts)
ITEM 7
ITEM 7 - -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACQUISITION OF PINNACLE INVESTMENT ASSOCIATES INC.
On March 14, 1996, Syntellect completed its acquisition of Pinnacle Investment Associates Inc. ("Pinnacle") in a transaction accounted for as a pooling of interests. Pursuant to the terms of the merger, Syntellect issued 4,685,838 shares of common stock and assumed outstanding options belonging to Pinnacle stockholders for the purchase of an additional 740,848 shares of common stock at a weighted average exercise price of $1.04 per share. The common stock issued in this transaction had a total value of $20.5 million based on the fair market value of the common stock on the date of issuance. Pinnacle subsequently merged into its wholly owned subsidiary, Telecorp Systems, Inc. ("Telecorp"). Telecorp developed and distributed inbound and outbound call center systems worldwide, primarily in the cable television, newspaper and health care industries, and operated a transaction-based service bureau designed primarily to process pay-per-view orders for the cable television industry. The financial position and results of operations of Syntellect and Pinnacle for all periods presented have been restated to give effect to the merger.
The merger between Syntellect Inc. and Pinnacle provided the combined company with several distinct marketing advantages including: (i) a more diversified product line which includes both inbound voice processing technology and outbound predictive dialer products; (ii) a larger sales force and distribution network together with improved access and cross-selling opportunities in new vertical markets; and (iii) the combination of recurring revenue from Syntellect's transaction-based service bureau and Telecorp's Home Ticket pay-per-view service, with the automated processing capacity of what the Company believes is one of the world's largest outsourced transaction centers. In addition, the merger provided the combined company with greater financial resources and access to a new management team with substantial expertise in the voice processing industry.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Revenues
Net revenues for 1998 remained stable at $48.0 million as compared to $48.2 million reported for 1997. Net revenues consist of System Sales, Service Bureau Revenues and Maintenance and Other Service Revenues, which represented 47%, 19% and 34% of net revenues, respectively, for 1998, and 51%, 20% and 29% of net revenues, respectively, for 1997.
On May 12, 1998, the Company announced the release of Vista(TM), an open standards-based Interactive Communications Management ("ICM") software platform for enterprise customer call centers. Vista combines serveral call center technologies with a distributed client-server architecture, open standard components, web-based management system and a graphical application development tool. It provides customers with flexibility, scalability and efficiency, high degrees of redundancy, and superior processing performance. Vista Interactive Voice Response ("IVR") and Vista Computer Telephony Integration ("CTI") are currently available. Other available products include VocalPoint IVR, an open architecture system; Predictive Dialer, an outbound system; and Interactive Web Response ("IWR").
System Sales for 1998 were $22.6 million, a decrease of $1.7 million, or 7%, over the $24.3 million reported for 1997. The third quarter of 1998 marked the first recognition of revenues from the Company's Vista IVR product in the amount of $1.5 million. The fourth quarter of 1998 included $1.9 million of Vista revenues for a total of $3.4 million for 1998, or 15% of total System Sales.
The decrease in System Sales was caused by strong System Sales revenue in the first quarter of 1997 of $8.7 million relative to the first quarter of 1998 of $4.3 million. Revenues from the other major product lines decreased in 1998 including VocalPoint IVR which declined from $14.6 million to $13.6 million, or 7%. With the introduction of Vista, the Company's backlog at December 31, 1998 includes $9 million of Vista orders out of a total of $15.4 million. As the Vista product line gains acceptance, the Company will continue to experience a decline in sales and system revenues from its VocalPoint products.
Service Bureau Revenues decreased $824,000, or 8.5%, between the comparable years which includes the Company's Home Ticket, a pay-per-view service for cable television providers which is offered through the Company's SIS subsidiary. The cable TV industry has experienced a decline in the consumer purchases of pay-per-view events which resulted in lower than expected transaction processing fees by the Company. Offsetting the decline in pay-per- view buy rates, the Service Bureau has offered other outsourced electronic capabilities including benefits enrollment, broadcast faxing, call center processing, audiotext, and dealer locators. The Company expects that these outsourced services of the business will continue to grow in 1999.
Maintenance and Other Service Revenues increased $2.4 million, or 17%, between the comparable years. The increase is primarily due to settlements of patent lawsuits for which the Company retained economic rights after the sale of the patent portfolio in October 1997. Patent revenues increased 142% from $1.2 million in 1997 to $2.9 million in 1998. The Company is still pursuing certain litigation against third parties but the timing and payments, if any, from potential settlements are uncertain after 1998.
Domestic and International Sales for 1998 were $37.5 million, or 78%, and $10.5 million, or 22%, of total revenues, respectively, compared to $36.8 million, or 76%, and $11.4 million, or 24% of total revenues, respectively, for 1997.
Gross Margin
The gross margin percentage for the year ended December 31, 1998 was 53% of net revenues, as compared with 47% for the year ended December 31, 1997. Gross margins on System Sales increased from 34% to 42% between years primarily due to the proportion of fixed costs in overhead relative to the decline in revenues and change in product mix caused by the introduction of the Vista product line. Gross margins for the Service Bureau increased from 39% to 44% between years as a result of lower fixed costs, lower negotiated transport rates and an increase in revenues that did not have incremental transport costs. Gross margins for Maintenance and Other Service Revenues decreased from 74% to 73% between years and may continue to decline because patent revenues maintain a high gross margin and are doubtful beyond the fourth quarter of 1998. The Company includes those costs directly associated with the generation of revenue in its computation of gross margin, including direct labor, application development, travel, maintenance, customer support, supplies and hardware. Gross margins will fluctuate on a year-to-year basis due to changes in competitive pressures, sales volume, product mix, variations in the ratio of domestic versus international sales, or changes in the mix of direct and indirect sales activity. Accordingly, the gross margins reported for 1998 are not necessarily indicative of the results to be expected for future periods.
Operating Expenses
Operating expenses for 1998 were $28.5 million, a decrease of $2 million, or 7%, from the $30.5 million reported for 1997. Included in 1997 was a fixed asset write-down of $1.3 million which partially caused the decrease in depreciation and amortization expense in 1998 by $1.4 million, or 35%. Selling, marketing, and administrative expenses increased $923,000, or 5%, primarily due to costs associated with the increase in revenues from patent lawsuit settlements and an increase in allowance for doubtful accounts. Research and development costs decreased $301,000, or 5%.
Net Income (Loss)
Syntellect reported a net loss of $2.6 million, or $(.19) per share, for 1998, compared to a net income of $141,000, or $.01 per share, for 1997. Net income for 1997 included a fixed asset write-down and a gain on the sale of the patent portfolio. Excluding these effects, the Company incurred a net loss of $6.4 million for 1997, or $(.48) per share.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Revenues
Net revenues for 1997 were $48.2 million, a decrease of 13% over the $55.3 million reported for 1996. Net revenues consist of System Sales, Service Bureau Revenues and Maintenance and Other Service Revenues, which represented 51%, 20% and 29% of net revenues, respectively, for 1997, and 57%, 17% and 26% of net revenues, respectively, for 1996.
System Sales for 1997 were $24.3 million, a decrease of $7.5 million, or 23%, over the $31.8 million reported for 1996. System sales include sales of core and non-core products. Core product sales include the Company's primary inbound product line, VocalPoint, an open architecture Interactive Voice Response ("IVR") platform; Computer Telephony Integration ("CTI"); and Interactive Web Response ("IWR"). Non-core products, Premier and Premier 030 IVR systems and the VocalPoint Audio Response Unit ("ARU"), declined $6.5 million, or 53%, between comparable periods and the Company expects these revenues to continue to decline over time as the Company migrates its customer base to the core product offerings.
The decrease in System Sales was related to two major factors. First, in late 1996, the Company introduced its new product and marketing strategy around the Interactive Communications Management ("ICM") solution set. This strategy is designed to sell a more complex, fully-integrated and higher value solution. As the Company began introducing this strategy, the average selling price of new customer orders began to increase. This resulted in an elongation of the selling cycle as the Company experienced more involvement from executive management and third party consultants in the prospective customer base. Second, the change in management of the Company associated with the merger with Pinnacle, combined with the change in the sales and marketing strategy, resulted in a significant turnover in the Company's sales force beginning in early 1997. The Company believes that there is a direct relationship between system sales volume and the number of sales representatives employed. The Company made significant progress in increasing the size of the direct sales force from its lowest levels in 1997 as it entered into 1998.
Service Bureau Revenues increased $465,000, or 5.0%, between the comparable years primarily from the Company's Home Ticket, a pay-per-view service for cable television providers which is offered through the Company's SIS subsidiary. Maintenance and Other Service Revenues decreased $126,000, or 1%, between the comparable years. This decrease results from a $1.2 million decrease in patent revenue (see Note 13 of the Notes to Consolidated Financial Statements) and a $1.1 million increase in maintenance and other services between periods.
Domestic and International Sales for 1997 were $36.8 million, or 76%, and $11.4 million, or 24%, of total revenues, respectively, compared to $40.3 million, or 73%, and $15.0 million, or 27% of total revenues, respectively, for 1996.
Gross Margin
The gross margin percentage for the year ended December 31, 1997 was 47% of net revenues, as compared with 50% for the year ended December 31, 1996 primarily due to the proportion of fixed costs in overhead relative to the decline in revenues. Gross margins on System Sales declined from 41% to 34% between years. Gross margins for the Service Bureau decreased from 40% to 39% between years with the Company's decision to increase spending on infrastructure that will facilitate continued growth of the Home Ticket pay- per-view service and other service bureau applications. Gross margins for Maintenance and Other Service Revenues decreased from 75% to 74% between years. The Company includes those costs directly associated with the generation of revenue in its computation of gross margin, including direct labor, application development, travel, maintenance, customer support, supplies and hardware. Gross margins will fluctuate on a year-to-year basis due to changes in competitive pressures, sales volume, product mix, variations in the ratio of domestic versus international sales, or changes in the mix of direct and indirect sales activity. Accordingly, the gross margins reported for 1997 are not necessarily indicative of the results to be expected for future periods.
Operating Expenses
During 1997, the Company initiated and completed a consolidation of the assembly, customer support and product development operations of the Systems business into the Company's Phoenix location. This consolidation is expected to result in cost savings in future periods.
Operating expenses for 1997 were $30.5 million, a decrease of $7,000, or .02%, from the $30.6 million reported for 1996, which includes a fixed asset write-down of $1.3 million discussed below. Excluding this write-down, operating expenses would have been $29.2 million, a decrease of $1.3 million, or 4%, as compared to 1996. Selling, marketing and administrative expenses decreased $1.9 million, or 9%, between years. This decrease resulted primarily from the lowering of expenses which vary with revenues and profits and lower expenses associated with the reductions in personnel that were completed in 1997 as part of overall consolidation plans. Research and development expenses remained flat between years. The Company reallocated its development resources to the development of market-driven features and upgrades for the Company's core
product lines and away from its non-core products. Depreciation and amortization expense increased $679,000, or 21%, between years as a result of capital expenditures in 1996 and 1997, primarily additional equipment required for the expansion of the Company's Service Bureau operation and the Company's move to a new Phoenix, Arizona facility in April 1997.
Fixed Asset Write-down
The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121) effective January 1, 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles held and used by a company be reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In 1997, the Company recorded a $1.3 million write-down to fixed assets. The change is expected to result in a significant reduction in depreciation and amortization expense in future periods.
Gain on Sale of Patent Portfolio
The Company recognized a gain on sale of $7.9 million due to the terms of a Patent Assignment Agreement by and among the Company, Syntellect Technology Corporation, a wholly owned subsidiary of the Company ("STC"), and Aspect Telecommunications Corporation ("ATC"). The Company and STC assigned to ATC their respective patent portfolios and related applications worldwide. The Company received consideration of $10 million, $5 million of which was paid at closing and $5 million of which is payable in 20 equal quarterly installments of $250,000 on the last day of each calendar quarter, under a promissory note maturing December 31, 2002. This note bears no interest and consequently had a present value of $4 million. As an additional consideration under the agreement, the Company has retained certain economic rights, including the right to pursue certain litigation against third parties. In September 1998, the third party paid the balance of the $3.7 million promissory note.
Net Income (Loss)
Syntellect reported a net income of $141,000, or $.01 per share, for 1997, compared to a net loss of $2.8 million, or $(.21) per share, for 1996. Excluding the effects of the fixed asset write-down and the gain on sale of the patent portfolio, the Company incurred a net loss for 1997 of $6.4 million, or $(.48) per share.
LIQUIDITY AND CAPITAL RESOURCES
Syntellect had working capital of $14.8 million at December 31, 1998, compared with $13.5 million at December 31, 1997, and the current ratio was 2.2:1 and 2.1:1 on such dates, respectively. Cash, cash equivalents and marketable securities available-for-sale at the end of 1998 totaled $11.5 million compared with the $10.5 million reported at the end of 1997. The Company used $1.2 million in cash flows from operating activities during 1998, received $191,000 in proceeds from issuance of common stock, added $166,000 in long-term debt related to capital leases for additional telephone equipment, purchased $2 million of property and equipment, and paid $194,000 in principal payments on long-term debt. Receivables, net of reserves were $11.2 million at December 31, 1998, an increase of $300,000 from the $10.9 million reported at December 31, 1997. The average collection period for trade receivables decreased from 89 days at December 31, 1997 to 79 days at December 31, 1998. The allowance for doubtful accounts decreased from $1.2 million at December 31, 1997 to $932,000 at December 31, 1998. In October 1997, the Company sold its patent portfolio to a third party for $10 million. The Company received $5 million in cash and a $5 million promissory note maturing on December 31, 2002. In September 1998, the third party paid the remaining balance of the $3.7 million promissory note.
Syntellect expects that its current cash, cash equivalents and marketable securities, combined with future cash flows from operating activities will be sufficient to support the Company's operations during 1999. The Company does not believe that inflation has had a material effect on its business, however, there can be no
assurance that inflation in the future will not cause an adverse effect on operating results. The Company negotiated a $2.0 million revolving credit agreement with a commercial bank during 1996 to replace an existing $500,000 credit line. In 1996, the Company used $1.1 million of the available credit line to secure a letter of credit as a security deposit on the Company's new facility in Phoenix, Arizona. On November 7, 1997, the Board of Directors approved the termination of this line of credit. The $1.1 million letter of credit is now secured by a mortgage-backed security held in the Company's available-for-sale portfolio and accordingly, this marketable security is restricted as to the disposal by such letter of credit agreement. In 1998, the Illinois sales office was moved to a new location. The Company issued a letter of credit of $125,000 as a security deposit that is secured by a certificate of deposit held in the Company's available-for-sale portfolio and accordingly, this marketable security is restricted as to the disposal by such letter of credit agreement.
On November 13, 1998, the Board of Directors of Syntellect approved the stock buyback plan to purchase up to 1.5 million shares of its stock over the next two years. As of December 31, 1998, the Company has repurchased 3,500 shares.
YEAR 2000 COMPLIANCE
The Year 2000 issue is related to the date-sensitive computer programs and applications using two digits rather than four to designate the year. After January 1, 2000, these systems may incorrectly recognize the year as 1900 causing system failures or incorrect processing of financial information.
The Company is addressing the Year 2000 compliance issues. The Company's state of readiness can be explained via three elements: (1) information technology ("IT") and non-IT systems, (2) external customers on maintenance, and (3) third party issues, as listed in the table below:
Costs related to remedying Year 2000 compliance issues are not fully known at this time. The Company is currently analyzing the issues as stated above. The following table provides the status as currently known:
Major risks caused by Year 2000 compliance are primarily related to customers. The Company has reviewed the current products available to customers and has determined that all are Year 2000 compliant. Of the products still supported under maintenance contracts, VocalPoint ARU (Audio Response Unit) is not Year 2000 compliant and will not be made so. ARU customers have been notified of this issue and informed that maintenance contracts of this product will be discontinued by December 31, 1999. The Company will be extending services to these customers on a time and materials basis as their maintenance contracts expire. Total exposure for lost maintenance revenue from this product line is approximately $1.9 million annually based on 1998 revenues earned. The time and materials services plus any ARU customers who choose to migrate to a current product that is Year 2000 compliant will mitigate the exposure of lost ARU maintenance revenue. As of December 31, 1998, the Backlog included $2.6 million of orders converting ARU customers to Vista.
Other customers may also be on earlier versions of current products, which are not Year 2000 compliant. As described above, the Company has notified all customers on maintenance as to whether products purchased are Year 2000 compliant and options in migrating to the Company's current products which are on versions that are Year 2000 compliant. The risk of lost revenue is unknown at this time but the Company is in progress of assessing this risk and determining any possible contingency plans.
Because costs related to this project are based on estimates by management of the Company, there is no assurance that actual costs will not differ materially from the current expectations which may cause an adverse effect on the Company's financial position or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1997, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." On January 1, 1998, the Company adopted SOP 97-2 which is effective for financial statements for fiscal years beginning after December 15, 1997. The implementation of this statement did not have a material impact on the Company's consolidated financial statements for the fiscal year 1998.
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." On January 1, 1998, the Company adopted SFAS No. 130, which is effective for fiscal years beginning December 15, 1997. Comprehensive income includes all changes in equity during a period except those resulting in investments by owners and distribution to owners.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires that an enterprise disclose certain information about operating segments. SFAS No. 131 is effective for financial statements for fiscal periods beginning after December 15, 1997 and has been adopted by the Company beginning with the reporting of fiscal year 1998.
OPERATING BUSINESS SEGMENTS
An operating segment is defined as a component of an enterprise that engages in business activities which may earn revenues and incur expenses, whose results are regularly reviewed by a chief operating decision maker, and for which discrete financial information is available. The Company has three operating segments which are organized around differences in products and services: Systems; Service Bureau; and Patents (see Note 13).
Systems is the operating segment which has products and services including IVR, IWR, CTI, predictive dialing technologies, and maintenance. Expenditures for Segment Assets for the year ended December 31, 1998 were $1.1 million as compared to $2.0 million for the year ended December 31, 1997. The decrease is due to the Company's effort to control the expenditures for capital assets. Segment Assets as of December 31, 1998 was $28 million as compared to $27 million as of December 31, 1997. Included in System's Segment Assets are cash, cash equivalents, and marketable securities available-for-sale for the Company which increased $1 million year-over-year.
Service Bureau is the operating segment which has products and services including Home Ticket pay-per-view, Hot Spots, Call Redirect, Cyberstats, and a variety of outsourced electronic capabilities such as benefits enrollment and broadcast faxing. Expenditures for Segment Assets for Service Bureau increased by $244,000 in 1998 as compared to 1997. This was caused primarily for purchases to upgrade equipment in the Transaction Center to improve functionality and to address Year 2000 compliance issues.
Patents is the operating segment which held the Company's patent portfolio. In October 1997, the Company sold the patent portfolio to a third party for $10 million. The Company received cash of $5 million paid at closing and a $5 million promissory note. As additional consideration under the agreement, the Company retained certain economic rights, including the right to pursue certain litigation against third parties. In September 1998, the third party paid in full the remaining balance of the promissory note. Revenues from Customers include payments for settlement of patent lawsuits. The Company is still pursuing certain litigation against third parties but the timing and payments, if any, from potential settlements are uncertain after 1998. The Segment Income(loss) for the year ended December 31, 1997 includes $7.9 million gain on sale of the patent portfolio.
ITEM 7A.
ITEM 7A.--QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates relates to its cash investment portfolio. The Company's general policy is to limit the risk of principal loss and to ensure the safety of invested funds by
limiting market and interest rate risk. Investments are placed in instruments with high credit quality issuers. All liquid investments with a maturity date of three months or less are classified as cash equivalents and investments with a maturity date between three and twelve months are classified as marketable securities (see Note 4). The average interest rate on marketable securities is 4.9%. The Company does not expect any material loss with respect to its cash investment portfolio since marketable securities have generally been held until maturity and unrealized gains and losses are negligible.
The Company's only long-term liabilities are capital lease obligations at a fixed rate. Therefore, the Company does not believe there is any material exposure to market risk changes in interest rates as it relates to its current or long-term liabilities.
Foreign Currency Exchange Rate Risk
The Company invoices all international customers in U. S. dollars except customers of the Company's United Kingdom (U.K.) subsidiary which are invoiced in Sterling. The U.K. subsidiary's financials including balance sheet, revenue, and operating expenses are transacted in Sterling. Therefore, the Company's exposure to foreign currency exchange rate risk occurs when translating the financial results of the U.K. subsidiary to U.S. dollars in consolidation. At this time, the Company does not use instruments to hedge its foreign exposure in the U.K. because the effect of foreign exchange rate fluctuations are not material.
ITEM 8
ITEM 8 - -FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This report on Form 10-K may contain "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.
The Independent Auditors' Report of KPMG LLP and the Consolidated Financial Statements of Syntellect, Inc. and subsidiaries as of December 31, 1998 and 1997, and for each of the years in the three-year period ended December 31, 1998, follows:
Independent Auditors' Report
The Board of Directors and Shareholders Syntellect Inc.:
We have audited the accompanying consolidated balance sheets of Syntellect Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations and comprehensive income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Syntellect Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
Atlanta, Georgia February 12, 1999
SYNTELLECT INC. AND SUBSIDIARIES
Consolidated Balance Sheets December 31, 1998 and 1997 (in thousands, except share amounts)
See accompanying notes to consolidated financial statements.
SYNTELLECT INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income Years ended December 31, 1998, 1997 and 1996 (in thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
SYNTELLECT INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity Years Ended December 31, 1998, 1997 and 1996 (In thousands, except share amounts)
See accompanying notes to consolidated financial statements.
SYNTELLECT INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996 (in thousands)
Noncash Investing and Financing Activities:
The Company entered into two capital lease obligations of $61 and $105 in 1998 for additions to its existing telephone system and $559 during 1997 for furniture for the new Phoenix, Arizona facility.
See accompanying notes to consolidated financial statements.
SYNTELLECT INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
Nature of Business and Principles of Consolidation
Syntellect Inc. develops, markets, and integrates voice and information processing systems and application software worldwide. The Company offers a diversified product line which includes both inbound voice processing and outbound predictive dialer products, a worldwide distribution network, and a vertical market focus in the financial services, media, telecommunications and healthcare industries. Syntellect also provides an interactive transaction- based service bureau for those customers who prefer to outsource their voice processing applications, including cable and satellite pay-per-view orders and employee benefits enrollment.
The consolidated financial statements include the accounts of Syntellect Inc. and its wholly-owned subsidiaries ("Syntellect" or the "Company"). The consolidated financial statements also include the accounts of Syntellect Network Systems, Inc. through March 31, 1996 (See Note 3). All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
Revenue Recognition
Syntellect recognizes revenue from sales of systems and services in accordance with Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"). Prior to January 1, 1998, Syntellect recognized revenue in accordance with SOP 91-1.
Cash Equivalents
Cash equivalents consist of money market accounts and overnight deposits with original maturities of three months or less.
Marketable Securities
Marketable securities (see Note 4) are classified as available-for-sale and are available to support current operations. These securities are stated at estimated fair value based on market quotes with any net unrealized holding gain or loss included in the consolidated financial statements as a component of shareholders' equity until realized.
Inventories
Inventories are stated at the lower of cost or market. Cost is primarily determined using the weighted average method.
Property and Equipment
Property and equipment are stated at cost. Equipment held under capital leases is stated at the lower of the present value of minimum lease payments or fair value at the inception of the lease. Property and equipment are depreciated using the straight-line method over estimated useful lives ranging from three to five years. Equipment held under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset.
SYNTELLECT INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
The Company accounts for impairment of long-lived assets under the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Warranty Expense
Syntellect generally provides customers with product warranties for periods ranging from three months to six months after shipment. The Company has provided a reserve for estimated warranty expense.
Product Development
Development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional costs would be capitalized in accordance with SFAS No. 86. Because Syntellect believes its current process for developing software is essentially completed concurrent with the establishment of technological feasibility, no costs have been capitalized to date.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Foreign Currency Translation
Financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for the revenues and expenses reported in each fiscal period. Foreign currency translation adjustments are recorded as a separate component of shareholders' equity.
Stock-Based Compensation
Prior to January 1, 1996, the Company applied the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense would be recorded on the date of grant if the current market price of the underlying stock exceeded the exercise price.
SYNTELLECT INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 1998, 1997 and 1996
(2) Acquisition Of Pinnacle Investment Associates, Inc.
On March 14, 1996, Syntellect completed its acquisition of Pinnacle Investment Associates, Inc. ("Pinnacle") in a transaction accounted for as a pooling of interests. Pursuant to the terms of the merger, Syntellect issued 4,685,838 shares of common stock and assumed outstanding options belonging to Pinnacle stockholders for the purchase of an additional 740,848 shares of common stock at a weighted average exercise price of $1.04 per share. The common stock issued in this transaction had a total value of $20.5 million based on the fair market value of the common stock on the date of issuance. Pinnacle subsequently merged into its wholly owned subsidiary, Telecorp Systems, Inc. ("Telecorp"). Telecorp develops and distributes inbound and outbound call center systems worldwide, primarily in the cable television, newspaper and health care industries, and operates a transaction-based service bureau designed primarily to process pay-per-view orders for the cable television industry.
The consolidated financial statements herein have been restated to include the accounts of Pinnacle for 1996.
(3) Disposition of Syntellect Network Systems Inc. Subsidiary and Patent Portfolio
In April 1996, the Company sold its Syntellect Network Systems Inc. subsidiary ("SNS") under a stock purchase agreement with an unrelated third party. Under the agreement, the Company sold all of the issued and outstanding shares of SNS common stock for $720,000. The Company received $30,000 of the sales price in cash at closing with the remaining $690,000 to be received in 23 monthly installments of $30,000, without interest, beginning May 1996. The Company recognized the gain on this transaction on a cash collected basis. In 1998, the third party filed bankruptcy and the Company was unable to collect and recognize the balance of $180,000 in deferred gain on sale.
In October 1997, the Company sold its patent portfolio to a third party for $10 million. The Company received cash of $5 million paid at closing and a $5 million promissory note payable in 20 equal quarterly installments of $250,000, maturing on December 31, 2002. This note bears no interest and consequently had a present value of approximately $4 million based on the Company's incremental borrowing rate of 8.5%. As additional consideration under the agreement, the Company retained certain economic rights, including the right to pursue certain litigation against third parties. As a result of this transaction, the Company reported a gain on the patent portfolio sale of $7.9 million in 1997. In September 1998, the third party paid in full the remaining balance of the promissory note.
SYNTELLECT INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
(4) Marketable Securities
The Company has classified all marketable securities as available-for-sale at December 31, 1998 and 1997. The amortized cost, gross unrealized holding gains and losses and fair value of the available-for-sale securities by major security type are as follows:
All marketable securities held at December 31, 1998 have contractual maturities of one year or less. There were no sales of securities classified as available-for-sale for the years ended December 31, 1998 and 1997.
(5) Inventories
Inventories consist of the following:
The Company contracts with several third parties to perform on-site hardware maintenance for customers in certain geographic areas. Inventory held by the Company for the third party maintenance program is included in repair, warranty and maintenance inventory.
SYNTELLECT INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
(6) Property and Equipment
Property and equipment consist of the following:
During 1997, the Company wrote off all fully depreciated property and equipment.
In 1997, the Company assessed its long-lived assets in accordance with SFAS No. 121 and recorded a write-down of $1.3 million. This charge represents the amount by which the carrying amount of the assets exceeded the fair value of the assets. Fair value was determined based on the future net cash flows expected to be generated by the assets.
(7) Accrued Liabilities
Accrued liabilities consist of the following:
(8) Credit Facilities and Lease Commitments
Credit facilities:
In July 1996, the Company negotiated a new $2.0 million revolving credit agreement with a commercial bank to replace its prior credit facilities. The new line of credit was collateralized by accounts receivable and accrued interest at the prime rate. There were no amounts outstanding on this line of credit at December 31, 1997 or 1996, however, the Company used $1.1 million of the available credit line at December 31, 1996 to secure a letter of credit to be used as a security deposit on the Company's new facility in Phoenix, Arizona. On November 7, 1997, the Board of Directors approved the termination of this line of credit. The $1.1 million letter of credit is now secured by a marketable security held in the Company's available-for-sale portfolio and accordingly this marketable security is restricted as to the disposal by such letter of credit agreement.
SYNTELLECT INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
Capital leases consist of the following:
Equipment held under capital lease is included in property and equipment as follows:
The Company leases office facilities and various equipment under noncancellable operating leases that expire at various dates through 2007. In June 1996, the Company entered into a ten year lease for a new 70,564 square foot office facility in Phoenix. The lease commenced in April 1997 at an initial monthly rate of $61,000. Rental expense under operating leases was $1.8 million in 1998, $1.6 million in 1997, and $1.4 million in 1996. Future minimum lease payments under noncancellable operating leases (with initial or remaining lease terms in excess of one year) and the present value of future minimum capital lease payments at December 31, 1998 are as follows:
(9) Litigation
Syntellect is involved in various legal proceedings and claims arising in the ordinary course of business. Management believes that the disposition of these matters will not have a material adverse effect on the Company's financial position or results of operations.
SYNTELLECT INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
(10) Shareholders' Equity
Stock Option Plans
Syntellect maintains various stock option plans for employees, consultants and non-employee directors as follows:
Syntellect adopted a stock option plan in 1984 that provides for the issuance of up to 1,590,000 shares of common stock to employees under incentive and nonstatutory stock option grants. The plan was amended in July 1994 to include Syntellect's consultants and advisors as eligible participants. Incentive stock options may be granted at a price not less than the fair market value of the common stock at the date of grant. Nonstatutory stock options may be granted at a price not less than 50% of the fair market value of the common stock at the date of grant. The options generally become exercisable over a 50 month period commencing at the date of grant and expire in six years. The plan terminates in September 2004, and as of December 31, 1995, all options under this plan have been granted.
Syntellect adopted a long-term incentive plan effective February 1, 1995, as amended, that provides for the issuance of up to 750,000 shares of common stock to employees, consultants and advisors under incentive stock options, non-qualified stock options, stock appreciation rights, performance shares, restricted stock, dividend equivalents and other stock-based awards. Incentive and non-qualified stock options may be granted at a price not less than the fair market value of the common stock at the date of grant, generally become exercisable over a 50 month period commencing at the date of grant, and expire in six years. In no case shall the term of any option issued under this plan exceed ten years from the date of grant. The plan terminates in February 2005. On May 20, 1997, the number of shares authorized for issuance under the plan increased from 750,000 to 1,500,000.
Syntellect adopted a non-employee directors stock option plan in 1990 that provides for the issuance of up to 60,000 shares of common stock to eligible participants. Options may be granted at a price not less than the fair market value of the common stock at the date of grant, generally become exercisable over a 50 month period commencing at the date of grant, and expire in six years. As of December 31, 1995, all options under this plan have been granted. The plan terminates in December 1998.
Syntellect adopted a non-employee director stock plan in 1995 that provides for the issuance of up to 50,000 shares of common stock to eligible participants under non-qualified stock option grants. Under the plan, non- employee directors receive a one time grant to purchase 10,000 shares upon appointment to the Board of Directors and an annual grant to purchase 2,000 shares from June 1995 through June 1998. Options may be granted at a price not less than the fair market value at the date of grant, become exercisable over a 50 month period commencing at the date of grant, and expire in six years. The plan has no scheduled termination date. The Company authorized an increase of 500,000, 750,000, and 100,000 shares for the years 1996, 1997, and 1998, respectively.
In connection with the acquisition of Pinnacle, Syntellect assumed outstanding options for the purchase of 740,848 shares of common stock (see Note 2). A portion of these options were granted to certain executive officers in connection with the negotiation of their employment agreements. These options, covering 565,702 shares, were granted fully vested and immediately exercisable. The Company recognized compensation expense of $394,000 in 1995 related to these options and credited the same to paid-in capital. The remaining options are accounted for as non-compensatory stock options, and generally become exercisable over a 48 month period commencing at the date of grant, and expire in 10 years. Unexercised options will be terminated and not available for future grants in the event an employee holding such options terminates his employment.
SYNTELLECT INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
At December 31, 1998, 1,155,918 options were exercisable under the above plans at prices ranging from $0.87 to $7.00. A summary of the combined stock option activity for all plans during the three-year period ended December 31, 1998 is as follows:
INTELLECT INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
Syntellect has adopted the disclosure-only provisions of SFAS No. 123. Had compensation cost for Syntellect's stock option grants been determined based on the fair value at the grant date, as prescribed by the provisions of SFAS No. 123, the Company's net income (loss) and net income (loss) per common share would have been:
On February 5, 1998, the Board of Directors amended all option plans to extend the expiration date for all unexpired options from six years to ten years from the original grant date.
Employee Stock Purchase Plan
Syntellect has an employee stock purchase plan that provides for the purchase of up to 800,000 shares of common stock. The number of shares was increased by 400,000 as approved by the shareholders on May 21, 1998. Under the plan, eligible participants may purchase common stock semi-annually at the lower of 85% of the fair market value on either the first day or last day of the offering period, whichever is lower. During 1998, 49,825 and 41,316 shares were purchased at $1.59 and $1.91 per share, respectively. During 1997, 31,627 and 53,268 shares were purchased at $2.13 and $1.54 per share, respectively. During 1996, 11,674 and 35,167 shares were purchased at $2.87 and $3.51 per share, respectively. At December 31, 1998, 332,353 shares of common stock were available for issuance under the plan. Amounts that would be expensed under SFAS No. 123 are included in proforma net loss above.
(11) Employee Benefit Plans
Syntellect maintained two 401(k) plans during 1996; one covering eligible employees of Syntellect (the "Syntellect 401(k) Plan") and one covering eligible employees of Pinnacle (the "Pinnacle 401(k) Plan"). Participants could contribute up to 15% and 6%, respectively of their total compensation under these plans. The Company provided matching contributions under the Pinnacle 401(k) Plan equal to 50% of employee contributions, up to a maximum of 2% of the employee's total compensation. The Company could also make discretionary contributions to either plan in amounts determined by the Board of Directors. Amounts contributed by the Company vest over a six year period. The Company made matching contributions to the Pinnacle 401(k) Plan of $91,000 in 1996. There were no matching contributions to the Syntellect 401(k) Plan in 1996.
Effective January 1, 1997, Syntellect adopted a single 401(k) plan covering all eligible employees of the Company. Under the new plan, participants can contribute up to 15% of their total compensation. The Company
SYNTELLECT INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996 provides matching contributions equal to one third of employee contributions up to a maximum of 7% of the employee's total compensation. Syntellect made matching contributions to the 401(k) plan of $249,000 in 1998 and $244,000 in 1997. The matching contribution is subject to annual review and adjustment by the Board of Directors. Additional discretionary contributions may also be made to the plan in amounts determined by the Board of Directors. Amounts contributed by the Company vest over a four year period.
(12) Income Taxes
The provision for income taxes includes income taxes currently payable (receivable) and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future and any increase or decrease in the valuation allowance for deferred income tax assets.
Income (loss) before income tax expense (benefit) for the years ended December 31, 1998, 1997 and 1996 consists of the following:
The components of income tax expense (benefit) included in the Consolidated Statement of Operations are as follows:
SYNTELLECT INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
Income tax expense (benefit) differed from the amounts computed by applying the statutory U.S. federal income tax rate of 34% to income (loss) before income taxes as a result of the following:
The income tax effects of temporary differences that give rise to the Company's deferred income tax assets and liabilities are as follows:
The increase in the valuation allowance for the net deferred income tax asset for the years ended December 31, 1998 and 1997 was $1,349,000 and $(252,000), respectively. Under SFAS No. 109, deferred income tax assets and liabilities are recognized for differences between the financial statement carrying amounts and the tax bases of assets and liabilities which will result in future deductible or taxable amounts and for net operating loss and tax credit carryforwards. A valuation allowance is then established to reduce the deferred income tax assets to the level at which it is "more likely than not" that the income tax benefits will be realized. Realization of income tax benefits of deductible temporary differences and operating loss and tax credit carryforwards depends on having sufficient taxable income within the carryback and carryforward periods. Sources of taxable income that may allow for realization of income tax benefits include (1) taxable income in the current year or prior years that is available through carryback, (2) future taxable income that will result from the reversal of existing taxable temporary differences, and (3) future taxable income generated by future operations.
SYNTELLECT INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
As of December 31, 1998 the Company had net operating loss, investment tax credit, alternative minimum tax credit, and research and development tax credit carryforwards of approximately $28.1 million, $15,000, $77,000, and $1.2 million, respectively, which expire at various dates through the year 2013.
(13) Business Segments, Geographic Data and Major Customers
Syntellect develops, markets, and integrates voice and information processing systems and application software worldwide. The Company offers a diversified product line which includes both inbound voice processing and outbound dialer products, a worldwide distribution network, and a vertical market focus on the financial services, media, telecommunications and healthcare industries. The Company also provides an interactive transaction- based service bureau for those customers who prefer to outsource their voice processing applications. In addition to its primary office facilities in Atlanta and Phoenix, the Company also maintains nine sales offices in the United States and one in London.
Effective for financial statements for fiscal periods beginning after December 15, 1997, Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," requires that an enterprise disclose certain information about operating segments. An operating segment is defined as a component of an enterpise that engages in business activities which may earn revenues and incur expenses, whose results are regularly reviewed by a chief operating decision maker, and for which discrete financial information is available. The Company has three operating segments in 1998 and 1997 which are organized around differences in products and services: Systems, Service Bureau ("SB"), and Patents:
SYNTELLECT INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
In 1996, Syntellect merged with Pinnacle Investments Associates, Inc. which was subsequently merged into its wholly owned subsidiary, Telecorp Systems, Inc. The operating segments were the original Syntellect (SYN), Telecorp and Patents. In 1997, the Company reorganized based on products and services.
Net revenues, by geographic area, for the three-year period ended December 31, 1998 are as follows:
No single customer accounted for more than 10% of the Company's revenues in 1998, 1997 or 1996.
The Company conducts business with a major media company who is also a significant shareholder of the Company. Revenues from this customer were $1.4 million, $1 million and $1.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. The Company was due $138,000 and $247,000 in outstanding accounts receivable from the customer at December 31, 1998 and 1997, respectively.
(14) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires that Syntellect disclose estimated fair values for its financial instruments. The carrying amount of cash and cash equivalents approximates fair value because their maturity is generally less than three months. The fair value of marketable securities classified as available-for-sale is based on quoted market prices at the reporting date for those or similar investments. The fair value of notes receivable is based on the present value of the note, discounted at 8.5% which can be currently earned on similar instruments. The carrying amount of accounts receivable, accounts payable and accrued liabilities approximates fair value as they are expected to be collected or paid within 90 days of year-end. The fair value of long-term debt, which is comprised of capital lease obligations, is estimated by discounting the future cash flows at rates currently offered to the Company for similar debt instruments.
SYNTELLECT INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
December 31, 1998, 1997 and 1996
(15) Supplemental Financial Information
A summary of additions and deductions related to the allowances for accounts receivable and inventories for the years ended December 31, 1998, 1997 and 1996 follows:
ITEM 9
ITEM 9 - -CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10
ITEM 10 - -DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding continuing directors and nominees of Syntellect is set forth under the caption "Information Concerning Directors and Nominees" in the Registrant's Proxy Statement relating to its 1999 Annual Meeting of Shareholders (the "1999 Proxy Statement") incorporated by reference into this Form 10-K, which will be filed with the Securities and Exchange Commission. With the exception of the foregoing information and other information specifically incorporated by reference into this Form 10-K, the 1999 Proxy Statement is not being filed as a part hereof. Information concerning executive officers of the Registrant is set forth in Part I of this Form 10-K.
ITEM 11
ITEM 11 - -EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by reference to the information furnished under the caption "Executive Compensation" in the 1999 Proxy Statement, provided, however, that the "Board Compensation Committee Report on Executive Compensation" and the "Stock Price Performance Graph" contained in the 1999 Proxy Statement are not incorporated by reference herein.
ITEM 12
ITEM 12 - -SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and management of Syntellect is incorporated herein by reference to the information furnished under the caption "Security Ownership of Certain Beneficial Owners and Management" in the 1999 Proxy Statement.
ITEM 13
ITEM 13 - -CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14
ITEM 14 - -EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. Index to Consolidated Financial Statements.
The following consolidated financial statements of Syntellect Inc. and Subsidiaries are filed as part of this report on Form 10-K:
2. Consolidated Supplemental Schedules
All schedules have been omitted because the information required to be set forth therein is not applicable or is included in the Consolidated Financial Statements or notes thereto.
(B) Exhibits.
(C) Reports on Form 8-K.
No Report on Form 8-K was filed during 1998.
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Syntellect has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SYNTELLECT INC.
/s/ Peter W. Pamplin By: _________________________________ Peter W. Pamplin Vice President, Chief Financial Officer, Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities of the dated indicated.