-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HniTyFMPwlU7caGELxhJ1dhLV7ws9eM9FuAbImgdTvLDJtYkFesZTD9tSJmlfyya lHCWoLv1k/efXYKUW7bO2Q== 0000931763-99-001122.txt : 19990412 0000931763-99-001122.hdr.sgml : 19990412 ACCESSION NUMBER: 0000931763-99-001122 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990409 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYNTELLECT INC CENTRAL INDEX KEY: 0000758830 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 860486871 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18323 FILM NUMBER: 99590215 BUSINESS ADDRESS: STREET 1: 1000 HOLCOMB WOODS PARKWAY STREET 2: SUITE 410A CITY: ROSWELL STATE: GA ZIP: 30076 BUSINESS PHONE: 7705870700 MAIL ADDRESS: STREET 1: 1000 HOLCOMB WOODS PARKWAY STREET 2: SUITE 410A CITY: ROSWELL STATE: GA ZIP: 30076 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0-18323 SYNTELLECT INC.(R) (Exact name of Registrant as specified in its charter) Delaware 86-0486871 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization)
1000 Holcomb Woods Parkway, Suite 410A, Roswell, Georgia 30076 (Address of principal executive office) (Zip Code) (770) 587-0700 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: Title or Class Name of exchange on which registered ---------------------------- ------------------------------------ Common Stock, $.01 par value Nasdaq National Market System
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At March 23, 1999, the aggregate market value of common stock held by non- affiliates of the Registrant was $22,820,222. (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the Registrant's classes of common stock, par value $.01 per share ("Common Stock"), as of the latest practicable date. 13,478,863 shares of Common Stock outstanding on March 26, 1999. DOCUMENTS INCORPORATED BY REFERENCE Materials from the Registrant's Proxy Statement relating to its 1999 Annual Meeting of Shareholders (the "Proxy Statement") have been incorporated by reference into Part III, Items 10, 11, 12 and 13. TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. BUSINESS..................................................... 1 ITEM 2. PROPERTIES................................................... 8 ITEM 3. LEGAL PROCEEDINGS............................................ 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 9 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................... 10 ITEM 6. SELECTED FINANCIAL DATA...................................... 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................... 11 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..................................... 38 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 38 ITEM 11. EXECUTIVE COMPENSATION....................................... 38 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................... 38 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 38 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................................................... 39 SIGNATURES 42
PART I 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. 1 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. 2 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. 3 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. 4 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. 5 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 6 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. 7 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--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. 8 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--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. 9 PART II 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.
High Low Year Ended 1998 ---- --- 1st Quarter............................................. $2 13/32 $1 5/8 2nd Quarter............................................. 2 7/8 1 15/16 3rd Quarter............................................. 2 1/2 1 1/16 4th Quarter............................................. 3 15/16
High Low Year Ended 1997 ---- --- 1st Quarter.............................................. $4 3/4 $3 1/4 2nd Quarter.............................................. 3 7/8 2 11/32 3rd Quarter.............................................. 3 5/16 1 7/8 4th Quarter.............................................. 3 1/4 1 21/32
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--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. 10 Statement of Operations Data (in thousands, except per share amounts)
Years Ended December 31, -------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- -------- ------- Net revenues...................... $47,953 $48,182 $55,305 $ 49,510 $57,396 Cost of revenues.................. 22,658 25,678 27,783 26,147 28,065 ------- ------- ------- -------- ------- Gross margin.................. 25,295 22,504 27,522 23,363 29,331 Operating expenses: Selling, marketing and administrative.................. 20,386 19,463 21,383 23,026 19,263 Product development.............. 5,573 5,874 5,943 4,884 4,893 Depreciation and amortization.... 2,538 3,908 3,229 3,079 3,401 Fixed asset write-down........... -- 1,303 -- -- -- Special charge................... -- -- -- 8,800 879 ------- ------- ------- -------- ------- Total operating expenses...... 28,497 30,548 30,555 39,789 28,436 ------- ------- ------- -------- ------- Operating income (loss)........... (3,202) (8,044) (3,033) (16,426) 895 Gain on sale of patent portfolio.. -- 7,860 -- -- -- Other income, net................. 584 304 253 302 297 ------- ------- ------- -------- ------- Income (loss) before income taxes............................ (2,618) 120 (2,780) (16,124) 1,192 Income tax expense (benefit)...... -- (21) -- 134 75 ------- ------- ------- -------- ------- Net income (loss)................. $(2,618) $ 141 $(2,780) $(16,258) $ 1,117 ======= ======= ======= ======== ======= Earnings (loss) per share-- diluted.......................... $ (.19) $ .01 $ (.21) $ (1.24) $ .08 ------- ------- ------- -------- ------- Shares used in per share calculation...................... 13,617 13,964 13,256 13,159 13,468 ======= ======= ======= ======== ======= Balance Sheet Data (in thousands) As of December 31, -------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- -------- ------- Working capital................... $14,797 $13,488 $13,677 $ 17,443 $31,989 Total assets...................... 32,133 34,808 34,808 39,719 51,395 Long-term debt, less current portion.......................... 445 530 229 175 875 Shareholders' equity.............. 19,813 22,186 22,021 24,176 39,538
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. 11 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. 12 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. 13 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 14 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 15 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:
YEAR 2000 ISSUE DESCRIPTION COMPLIANT STATUS - -------------------------------------------------------------------------------------- IT-internal Production problems Yes Installed and in financial necessitated an upgrade production system to new version of current software - -------------------------------------------------------------------------------------- IT-systems Internal hardware and In progress Plan in place to evaluate software, primarily internal hardware and desktop PC's, servers, software which is and SIS Transaction currently being executed Center equipment with deadline of completion by early fourth quarter of 1999. Purchase of new equipment requires vendors' warranty of being Year 2000 compliant. - -------------------------------------------------------------------------------------- Non-IT systems Building and equipment In progress Completion by end of second quarter of 1999. - -------------------------------------------------------------------------------------- External Inform customers as to Not applicable All maintenance customers customers on whether product purchased have been informed via Maintenance is Year 2000 compliant letter as to status of and options in migrating their product and options to versions which are available. compliant - -------------------------------------------------------------------------------------- Third party Assess third party In progress Ongoing assessment in issues risks-- place via accessing primarily suppliers suppliers' WEB page via the Internet and direct contact with suppliers.
16 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:
ISSUE COSTS REASON - ---------------------------------------------------------------------------------- IT-internal financial None Production problems required system the Company to upgrade to new version of current software regardless of Year 2000 compliance issue. - ---------------------------------------------------------------------------------- IT-systems Unknown Evaluation of PC related hardware and software has been integrated into current staffs' responsibilities and has not required additional assistance. At this time, the Company does not anticipate the costs to remedy this issue to be material. $490,000 (1998) Cost to upgrade equipment in $700,000 (1999 estimate) the Service Bureau Transaction Center to improve functionality and address Year 2000 compliance issues. - ---------------------------------------------------------------------------------- Non-IT systems Not material Completion of projects has been integrated into current staffs' responsibilities. - ---------------------------------------------------------------------------------- Third party suppliers Not material Evaluation of suppliers has been integrated into current staffs' responsibilities and has not required additional assistance. - ---------------------------------------------------------------------------------- External customers $25,000 Administration of customer letters and coordination of project
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. 17 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.--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 18 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--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: 19 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 20 SYNTELLECT INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997 (in thousands, except share amounts)
1998 1997 ------- ------- Assets Current assets: Cash and cash equivalents................................... $ 3,236 $ 2,290 Marketable securities ($1.2 million restricted at December 31, 1998 and $1.1 million restricted at December 31, 1997)...................................................... 8,298 8,233 Trade receivables, net of allowance for doubtful accounts of $932 and $1,199 at December 31, 1998 and 1997, respectively............................................... 11,202 10,894 Notes receivable-current portion............................ -- 856 Inventories................................................. 2,973 2,593 Prepaid expenses............................................ 963 714 ------- ------- Total current assets....................................... 26,672 25,580 ------- ------- Property and equipment, net.................................. 5,429 5,813 Notes receivable--noncurrent portion......................... -- 3,361 Other assets................................................. 32 54 ------- ------- Total assets................................................. $32,133 $34,808 ======= ======= Liabilities and Shareholders' Equity Current liabilities: Accounts payable............................................ $ 2,560 $ 2,160 Accrued liabilities......................................... 3,278 5,471 Customer deposits........................................... 3,080 1,081 Deferred revenue............................................ 2,717 3,197 Capital lease obligations--current portion.................. 240 183 ------- ------- Total current liabilities.................................. 11,875 12,092 ------- ------- Capital lease obligations, less current portion.............. 445 530 ------- ------- Total liabilities.......................................... 12,320 12,622 ------- ------- Shareholders' equity: Preferred stock, $.01 par value. Authorized 2,500,000 shares; no shares issued or outstanding.................... -- -- Common stock, $.01 par value. Authorized 25,000,000 shares; issued 13,699,095 and 13,576,761, respectively............. 137 136 Additional paid-in capital.................................. 60,917 60,727 Deferred compensation....................................... -- (33) Accumulated deficit......................................... (40,072) (37,454) Accumulated other comprehensive loss........................ (21) (49) ------- ------- 20,961 23,327 Treasury stock, at cost, 179,232 and 175,732 shares, respectively................................................ (1,148) (1,141) ------- ------- Total shareholders' equity................................. 19,813 22,186 ------- ------- Commitments (note 8)......................................... -- -- ------- ------- Total liabilities and shareholders' equity................... $32,133 $34,808 ======= =======
See accompanying notes to consolidated financial statements. 21 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)
1998 1997 1996 ------- ------- ------- Net revenues: System sales....................................... $22,585 $24,349 $31,811 Service bureau..................................... 8,925 9,749 9,284 Maintenance and other services..................... 16,443 14,084 14,210 ------- ------- ------- Total net revenues................................ 47,953 48,182 55,305 ------- ------- ------- Cost of revenues: System sales....................................... 13,189 16,093 18,645 Service bureau..................................... 5,025 5,967 5,560 Maintenance and other services..................... 4,444 3,618 3,578 ------- ------- ------- Total cost of revenues............................ 22,658 25,678 27,783 ------- ------- ------- Gross margin........................................ 25,295 22,504 27,522 ------- ------- ------- Operating expenses: Selling, marketing and administrative.............. 20,386 19,463 21,383 Research and development........................... 5,573 5,874 5,943 Depreciation and amortization...................... 2,538 3,908 3,229 Fixed asset write-down............................. -- 1,303 -- ------- ------- ------- Total operating expenses.......................... 28,497 30,548 30,555 ------- ------- ------- Operating loss.................................... (3,202) (8,044) (3,033) ------- ------- ------- Other income (expense), net: Interest income, net............................... 629 355 341 Gain on sale of patent portfolio................... -- 7,860 -- Gain on sale of SNS................................ -- 47 -- Other expense, net................................. (45) (98) (88) ------- ------- ------- Total other income, net........................... 584 8,164 253 ------- ------- ------- Income (loss) before income taxes................. (2,618) 120 (2,780) Income tax (benefit) expense........................ -- (21) -- ------- ------- ------- Net income (loss)................................. $(2,618) $ 141 $(2,780) ======= ======= ======= Earnings (loss) per common share--basic............. $ (.19) $ .01 $ (.21) ======= ======= ======= Earnings (loss) per common share--diluted........... $ (.19) $ .01 $ (.21) ======= ======= ======= Weighted average shares--basic...................... 13,441 13,328 13,256 ======= ======= ======= Weighted average shares--diluted.................... 13,441 13,788 13,256 ======= ======= ======= Other comprehensive income (loss), net of tax: Foreign currency translation adjustment............ 16 (179) 276 Unrealized gain on marketable securities........... 12 1 10 ------- ------- ------- Other comprehensive income (loss)................... 28 (178) 286 ------- ------- ------- Comprehensive loss.................................. $(2,590) $ (37) $(2,494) ======= ======= =======
See accompanying notes to consolidated financial statements. 22 SYNTELLECT INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years Ended December 31, 1998, 1997 and 1996 (In thousands, except share amounts)
Common Stock ------------------- Additional Accumulated Total $.01 Par Paid-in Deferred Accumulated Comprehensive Treasury Shareholders' Shares Value Capital Compensation Deficit Income(Loss) Stock Equity ---------- -------- ---------- ------------ ----------- ------------- -------- ------------- Balance at January 1, 1996................... 13,381,753 $134 $60,246 $(91) $(34,815) $(157) $(1,141) $24,176 Issuance of common stock upon exercise of stock options................ 49,533 1 143 -- -- -- -- 144 Issuance of common stock under employee stock purchase plan.......... 46,841 -- 156 -- -- -- -- 156 Amortization of deferred compensation related to stock options.......... -- -- -- 39 -- -- -- 39 Net loss................ -- -- -- -- (2,780) -- -- (2,780) Foreign currency translation adjustment............. -- -- -- -- -- 276 -- 276 Net unrealized holding gain on marketable securities............. -- -- -- -- -- 10 -- 10 ---------- ---- ------- ---- -------- ----- ------- ------- Balance at December 31, 1996............. 13,478,127 135 60,545 (52) (37,595) 129 (1,141) 22,021 Issuance of common stock upon exercise of stock options................ 13,739 -- 34 -- -- -- -- 34 Issuance of common stock under employee stock purchase plan.......... 84,895 1 148 -- -- -- -- 149 Amortization of deferred compensation related to stock options.......... -- -- -- 19 -- -- -- 19 Net income.............. -- -- -- -- 141 -- -- 141 Foreign currency translation adjustment............. -- -- -- -- -- (179) -- (179) Net unrealized holding gain on marketable securities............. -- -- -- -- -- 1 -- 1 ---------- ---- ------- ---- -------- ----- ------- ------- Balance at December 31, 1997............. 13,576,761 136 60,727 (33) (37,454) (49) (1,141) 22,186 Issuance of common stock upon exercise of stock options................ 31,193 -- 33 -- -- -- -- 33 Issuance of common stock under employee stock purchase plan.......... 91,141 1 157 -- -- -- -- 158 Amortization of deferred compensation related to stock options.......... -- -- -- 33 -- -- -- 33 Net loss................ -- -- -- -- (2,618) -- -- (2,618) Foreign currency translation adjustment............. -- -- -- -- -- 16 -- 16 Net unrealized holding gain on marketable securities............. -- -- -- -- -- 12 -- 12 Purchase of 3,500 shares of treasury stock...... -- -- -- -- -- -- (7) (7) ---------- ---- ------- ---- -------- ----- ------- ------- Balance at December 31, 1998............. 13,699,095 $137 $60,917 $-- $(40,072) $ (21) $(1,148) $19,813 ========== ==== ======= ==== ======== ===== ======= =======
See accompanying notes to consolidated financial statements. 23 SYNTELLECT INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996 (in thousands)
1998 1997 1996 ------- ------- ------- Cash flows from operating activities: Net income (loss).................................. $(2,618) $ 141 $(2,780) ------- ------- ------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain on sale of patent portfolio.................. -- (7,860) -- Depreciation and amortization..................... 2,538 3,908 3,229 Fixed asset write-down............................ -- 1,303 -- Provision for doubtful accounts................... 597 493 480 Provision for inventory obsolescence.............. -- 30 36 Stock option compensation expense................. 33 19 39 (Increase) decrease in accounts receivable........ (905) 1,908 1,235 (Increase) decrease in inventories................ (380) 1,462 799 Increase (decrease) in accounts payable........... 400 858 (2,355) Decrease in accrued liabilities................... (2,193) (858) (1,065) Change in other assets and liabilities............ 1,292 691 1,997 ------- ------- ------- Net cash provided by (used in) operating activities....................................... (1,236) 2,095 1,615 ------- ------- ------- Cash flows from investing activities: Purchase of marketable securities.................. (23,289) (23,851) (11,825) Sales of marketable securities..................... -- -- 851 Maturities of marketable securities................ 23,236 16,894 13,934 Purchase of property and equipment................. (1,988) (2,717) (4,741) Proceeds from notes receivables.................... 4,217 -- -- Proceeds from sale of patent portfolio............. -- 5,000 -- Proceeds from disposition of SNS subsidiary........ -- 300 30 Proceeds from other sales.......................... -- -- 110 ------- ------- ------- Net cash provided by (used in) investing activities...................................... 2,176 (4,374) (1,641) ------- ------- ------- Cash flows from financing activities: Proceeds from sale of common stock................. 191 183 300 Purchase of treasury stock......................... (7) -- -- Principal payments on long-term debt............... (194) (363) (747) ------- ------- ------- Net cash used in financing activities............ (10) (180) (447) Effect of exchange rates on cash.................... 16 (179) 276 ------- ------- ------- Net increase (decrease) in cash and cash equivalents........................................ 946 (2,638) (197) Cash and cash equivalents at beginning of year...... 2,290 4,928 5,125 ------- ------- ------- Cash and cash equivalents at end of year............ $ 3,236 $ 2,290 $ 4,928 ======= ======= ======= Supplemental disclosure of cash flow information: Cash paid for interest........................... $ 68 $ 97 $ 33 ======= ======= ======= Cash paid for income taxes....................... $ 2 $ 5 $ 276 ======= ======= =======
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. 24 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. 25 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. 26 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. 27 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:
(in thousands) -------------------------------------- Gross Gross Unrealized Unrealized Amortized Holding Holding Fair Cost Gains Losses Value --------- ---------- ---------- ------ As of December 31, 1998 ----------------------- Mortgage-backed securities.......... $7,073 $ 6 $-- $7,079 Mortgage-backed securities: restricted......................... 1,088 -- -- 1,088 Certificate of deposit: restricted.. 131 -- -- 131 ------ --- --- ------ $8,292 $ 6 $-- $8,298 ====== === === ====== As of December 31, 1997 ----------------------- Mortgage-backed securities.......... $7,188 $-- $(4) $7,184 U.S. Treasury securities: restricted......................... 1,051 -- (2) 1,049 ------ --- --- ------ $8,239 $-- $(6) $8,233 ====== === === ======
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:
(in thousands) ---------------- December 31, 1998 1997 ------- ------- Finished goods............................................. $ 795 $ 913 Purchased components....................................... 1,746 2,742 Repair, warranty and maintenance inventories............... 2,695 2,346 ------- ------- 5,236 6,001 Less allowance for obsolescence............................ (2,263) (3,408) ------- ------- $ 2,973 $ 2,593 ======= =======
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. 28 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:
(in thousands) -------------- December 31, 1998 1997 ------ ------ Furniture, fixtures and computer equipment................... $8,521 $7,074 Service bureau equipment..................................... 5,371 4,671 Leasehold improvements....................................... 492 394 ------ ------ 14,384 12,139 Less accumulated depreciation and amortization............... (8,955) (6,326) ------ ------ $5,429 $5,813 ====== ======
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:
(in thousands) ------------- December 31, 1998 1997 ------ ------ Accrued compensation and benefits............................. $1,671 $2,427 Accrued legal and accounting.................................. 223 425 Accrued royalties............................................. 239 494 Other accrued liabilities..................................... 1,145 2,125 ------ ------ $3,278 $5,471 ====== ======
(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. 29 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) December 31, 1998, 1997 and 1996 Capital leases consist of the following:
(in thousands) -------------- December 31, 1998 1997 ------ ------ Capital lease obligations with interest ranging from 9.43% to 10%, collateralized by equipment...................... $ 685 $ 713 Less current portion...................................... (240) (183) ------ ------ $ 445 $ 530 ====== ======
Equipment held under capital lease is included in property and equipment as follows:
(in thousands) ------------- December 31, 1998 1997 ------ ----- Furniture, fixtures and computer equipment.................... $1,069 $ 900 Less accumulated amortization................................. (432) ( 214) ------ ----- $ 637 $ 686 ====== =====
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:
(in thousands) ----------------- Capital Operating Year Leases Leases ---- ------- --------- 1999.................................................... $298 $ 1,667 2000.................................................... 246 1,607 2001.................................................... 194 1,315 2002.................................................... 43 1,085 2003.................................................... -- 1,063 Thereafter.............................................. -- 3,392 ---- ------- Total minimum lease payments............................ $781 $10,129 ---- ------- Less amounts representing interest...................... (96) ---- Net minimum lease payments.............................. $685 ====
(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. 30 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. 31 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:
Options --------------------------------------- Weighted average Available Outstanding exercise price for grant Shares per share --------- ----------- ---------------- Balance, January 1, 1996................. 108,600 745,491 $5.24 Assumption of Pinnacle options......... -- 740,848 1.04 Termination of Pinnacle options........ -- (14,551) 1.48 Increase in reserved shares............ 500,000 -- -- Expiration of reserved shares.......... (277,551) -- -- Granted................................ (613,750) 613,750 4.69 Canceled............................... 345,241 (345,241) 6.24 Exercised.............................. -- (49,533) 5.07 -------- --------- ----- Balance, December 31, 1996............... 62,540 1,690,764 3.10 Increase in reserved shares............ 750,000 -- -- Granted................................ (315,500) 315,500 3.04 Canceled............................... 197,668 (197,668) 4.49 Exercised.............................. -- (13,338) 3.18 -------- --------- ----- Balance, December 31, 1997............... 694,708 1,795,258 2.94 Increase in reserved shares............ 100,000 -- -- Granted................................ (729,300) 729,300 1.77 Canceled............................... 369,510 (369,510) 3.48 Exercised.............................. -- (31,193) 1.92 -------- --------- ----- Balance, December 31, 1998............... 434,918 2,123,855 $2.42 ======== ========= =====
1998 1997 1996 ----- ----- ----- Options exercisable at year-end (in thousands).............. 1,156 831 439 Weighted average fair value of options granted during the year....................................................... $1.23 $1.60 $2.25
32 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:
(in thousands except per share amounts) --------------------------- 1998 1997 1996 ---------- ------ ------- Net income (loss)--as reported................ $ (2,618) $ 141 $(2,780) Net loss--pro forma........................... $ (3,143) $ (762) $(3,723) Net income (loss) per common share--as reported..................................... $ (0.19) $ 0.01 $ (0.21) Net loss per common share--pro forma.......... $ (0.23) $(0.06) $ (0.28) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: Expected dividend yield....................... 0% Expected stock price volatility............... 87% Risk-free interest rate....................... 5.7% Expected life of options...................... 2.35 years
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 33 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:
(in thousands) ----------------------- 1998 1997 1996 -------- ---- ------- U.S. operations.................................... $ (3,603) $216 $(2,275) International operations........................... 985 (96) (505) -------- ---- ------- $(2,618) $120 $(2,780) ======== ==== =======
The components of income tax expense (benefit) included in the Consolidated Statement of Operations are as follows:
(in thousands) ---------------- 1998 1997 1996 ---- ---- ----- Current income tax expense (benefit): Federal.................................................. $-- $-- $(399) Foreign.................................................. -- (21) -- State.................................................... -- -- (69) ---- ---- ----- -- (21) (468) ---- ---- ----- Deferred income tax expense (benefit): Federal.................................................. -- -- 399 Foreign.................................................. -- -- -- State.................................................... -- -- 69 ---- ---- ----- -- -- 468 ---- ---- ----- Total income tax expense (benefit)........................ -- $(21) $ -- ==== ==== =====
34 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:
(in thousands) --------------------- 1998 1997 1996 ------ ----- ------ Computed "expected" income tax expense (benefit).... $ (890) $ 41 $ (945) Increase (decrease) in income tax expense resulting from: State income tax expense (benefit) net of federal income tax effect................................. (146) 18 (74) Increase (decrease) in valuation allowance......... 1,349 (252) 1,028 Utilization of foreign net operating losses not previously recognized............................. (306) -- -- Other, net......................................... (7) 172 (9) ------ ----- ------ Total income tax expense (benefit)................ $ -- $ (21) $ -- ====== ===== ======
The income tax effects of temporary differences that give rise to the Company's deferred income tax assets and liabilities are as follows:
(in thousands) ------------------ December 31, 1998 1997 -------- -------- Deferred income tax assets: Net operating loss and tax credit carryforwards........ $ 12,584 $ 11,886 Warranty and inventory allowances...................... 1,094 1,518 Accrued expenses....................................... 568 673 Allowance for doubtful accounts........................ 358 395 Property and equipment due to differences in depreciation.......................................... 36 352 -------- -------- Gross deferred income tax assets....................... 14,640 14,824 -------- -------- Deferred income tax liabilities: Deferred gain on installment sale of patent portfolio.. -- (1,533) -------- -------- Gross deferred income tax liabilities.................. -- (1,533) -------- -------- Less valuation allowance............................... (14,640) (13,291) -------- -------- Net deferred income tax asset.......................... $ -- $ -- ======== ========
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. 35 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:
(in thousands) Year ended December 31, 1998 Systems SB Patents Total - ---------------------------- ------- ------ ------- ------- Revenues from customers...................... $36,098 $8,925 $2,930 $47,953 Depreciation and amortization................ 1,893 645 -- 2,538 Segment income (loss)........................ (5,517) 900 1,999 (2,618) Expenditures for segment assets.............. 1,073 915 -- 1,988 As of December 31, 1998 - ----------------------- Segment assets............................... $28,023 $4,110 $ -- $32,133 Capital lease obligation..................... 685 -- -- 685 Year ended December 31, 1997 - ---------------------------- Revenues from customers...................... $37,212 $9,749 $1,221 $48,182 Depreciation and amortization................ 2,878 968 62 3,908 Fixed asset write-down....................... 733 570 -- 1,303 Segment income (loss)........................ (7,777) (779) 8,697 141 Expenditures for segment assets.............. 2,046 671 -- 2,717 As of December 31, 1997 - ----------------------- Segment assets............................... $26,811 $3,958 $4,039 $34,808 Notes receivable............................. 178 -- 4,039 4,217 Capital lease obligation..................... 713 -- -- 713
36 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.
SYN Telecorp Patents Total ------- -------- ------- ------- Year ended December 31, 1996 - ---------------------------- Revenues from customers.................... $32,684 $20,216 $2,405 $55,305 Depreciation and amortization.............. 2,393 762 74 3,229 Segment income (loss)...................... (3,693) (853) 1,766 (2,780) Expenditures for segment assets............ 2,226 2,515 -- 4,741 As of December 31, 1996 - ----------------------- Segment assets............................. $23,493 $10,388 $ 927 $34,808 Capital lease obligation................... 517 -- -- 517
Net revenues, by geographic area, for the three-year period ended December 31, 1998 are as follows:
(in thousands) ----------------------- Geographic Area 1998 1997 1996 - --------------- ------- ------- ------- United States.......................................... $37,471 $36,836 $40,296 International markets.................................. 10,482 11,346 15,009 ------- ------- ------- $47,953 $48,182 $55,305 ======= ======= =======
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. 37 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:
(in thousands) Charged Balance at to costs Balance Beginning and at end of year expenses Deductions of year ---------- -------- ---------- ------- Allowance for doubtful accounts: 1998 $1,199 $597 $ (864) $ 932 1997 1,233 493 (527) 1,199 1996 1,528 480 (775) 1,233 Allowance for inventory obsolescence: 1998 $3,408 $-- $(1,145) $2,263 1997 4,145 30 (767) 3,408 1996 9,025 36 (4,916) 4,145
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III 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--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--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--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. 38 PART IV 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:
Page or Method of Filing ------- Independent Auditors' Report--KPMG LLP Page 20 Consolidated Balance Sheets--December 31, 1998 and 1997 Page 21 Consolidated Statements of Operations and Comprehensive Income--Years ended December 31, 1998, 1997 and 1996 Page 22 Consolidated Statements of Shareholders' Equity--Years ended December 31, 1998, 1997 and 1996 Page 23 Consolidated Statements of Cash Flows--Years ended December 31, 1998, 1997 and 1996 Page 24 Notes to Consolidated Financial Statements Page 25
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.
Ehibitx No. Description Page or Method of Filing - ------- --------------------------------------- --------------------------------------- 2 Agreement and Plan of Reorganization as Incorporated by reference to Exhibit of December 6, 1995, between Syntellect No. 2 to Syntellect's Registration Inc., Syntellect Acquisition Co., and Statement on Form S-4 dated February 9, Pinnacle Investment Associates Inc. 1996 (the "S-4") 3.1(a) Restated Certificate of Incorporation Incorporated by reference to Exhibit of Registrant No. 3-A to Syntellect's Registration Statement on Form S-1 dated February 23, 1995 (the "S-1") 3.1(b) Certificate of Amendment to Restated Incorporated by reference to Exhibit Certificate of Incorporation of No. 3.1(b) to Syntellect's S-4 Registrant, filed with the Delaware Secretary of State on May 18, 1993 3.1(c) Certificate of Amendment to Restated Incorporated by reference to Exhibit Certificate of Incorporation of 3.1(c) to Syntellect's 1995 Form 10-K Registrant filed with the Delaware Secretary of State on March 14, 1996 3.2 Amended and Restated Bylaws of Incorporated by reference to Exhibit Registrant No. 3-B to Syntellect's S-1 4 Specimen Certificate representing Incorporated by reference to Exhibit Common Stock No. 4 to Amendment No. 1 of Syntellect's S-1 10.1 Restated Stock Option Plan, as amended Incorporated by reference to Exhibit through May 23, 1995 10.1 to Syntellect's 1995 Form 10-K
39
Ehibitx No. Description Page or Method of Filing - ------- --------------------------------------- --------------------------------------- 10.2 Employee Stock Purchase Plan, as Incorporated by reference to amended Syntellect's 1998 Annual Proxy Statement 10.3 Long-Term Incentive Plan, as amended Incorporated by reference to Exhibit August 8, 1996 10.4 to Syntellect's 1996 Form 10-K 10.4 1997 Management Incentive Plan Incorporated by reference to Exhibit 10.4 to Syntellect's 1997 Form 10-K 10.5 Nonemployee Director Stock Plan, as Incorporated by reference to amended Syntellect's 1998 Annual Proxy Statement 10.6(c) Lease Agreement dated June 28, 1996, Incorporated by reference to Exhibit together with first amendment to lease 10.6(c) to Syntellect's 1996 Form 10-K dated October 6, 1996, between Opus Southwest Corporation and Syntellect for an office facility in Phoenix, Arizona 10.7 Form of Indemnification Agreement Incorporated by reference to Exhibit between Syntellect and its directors No. 10-L to Syntellect's S-1 and officers 10.8(a) Agreement for Licensing of IBM Software Incorporated by reference to Exhibit Technology dated February 3, 1993 10-I of Syntellect's 1992 Form 10-K between Syntellect and IBM 10.8(b) Amendment Number One (1) to Agreement Incorporated by reference to Exhibit for the Licensing of IBM Technology, No. 10.8(b) to Syntellect's S-4 Agreement Number JWQ9308, dated March 25, 1993 10.8(c) Amendment Number Two (2) to Agreement Incorporated by reference to Exhibit for the Licensing of IBM Technology, No. 10.8(c) to Syntellect's S-4 Agreement Number JWQ9308, dated June 8, 1993 10.8(d) Amendment Number Three (3) to Agreement Incorporated by reference to Exhibit for the Licensing of IBM Technology, No. 10.8(d) to Syntellect's S-4 Agreement Number JWQ9308, dated December 16, 1993 10.8(e) Amendment Number Four (4) to Agreement Incorporated by reference to Exhibit for the Licensing of IBM Technology, No. 10.8(e) to Syntellect's S-4 Agreement Number JWQ9308, dated October 4, 1994 10.8(f) Amendment Number Five (5) to Agreement Incorporated by reference to Exhibit for the licensing of IBM Technology, 10.8(f) to Syntellect's 1996 Form 10-K Agreement Number JWQ9308, dated February 13, 1995 10.8(g) Amendment Number Six (6) to Agreement Incorporated by reference to Exhibit for the Licensing of IBM Technology, 10.8(g) to Syntellect's 1996 Form 10-K Agreement number JWQ9308, dated June 6, 1995 10.8(h) Amendment Number Seven (7) to Agreement Incorporated by reference to Exhibit for the Licensing of IBM Technology, 10.8(h) to Syntellect's 1996 Form 10-K Agreement Number JWQ9308, dated September 9, 1996 10.8(i) Amendment Number Eight (8) to Agreement Incorporated by reference to Exhibit for Licensing of IBM Technology, 10.8(i) to Syntellect's 1996 Form 10-K Agreement Number JWQ9308, dated March 11, 1997
40
Ehibitx No. Description Page or Method of Filing - ------- --------------------------------------- --------------------------------------- 10.9 Asset Purchase Agreement dated February Incorporated by reference to Exhibit 21, 1995 between Syntellect Technology 10-K of Syntellect's 1994 Form 10-K Corp. (formerly known as Dytel Inc.) and Dytel Incorporated 10.10 Form of Affiliate Agreement between Incorporated by reference to Exhibit Syntellect Inc. and affiliates of No.10.10 to Syntellect's S-4 Pinnacle Investment Associates Inc. 10.11 Employment Agreement between J. Incorporated by reference to Exhibit Lawrence Bradner and Syntellect Inc. No. 10.11 to Syntellect's S-4 dated March 14, 1996 10.12 Separation Agreement between Steve Incorporated by reference to Exhibit Nussrallah and Syntellect Inc. dated No. 10.12 to Syntellect's 1997 Form 10- February 20, 1998 K 10.13 Form of Registration Rights Agreement Incorporated by reference to Exhibit 10.13 to Syntellect's S-4 10.14 Stock Purchase Agreement, dated April Incorporated by reference to Exhibit 1, 1996, between Syntellect Inc. and 10.14 to Syntellect's quarterly report Atlas Telecom, Inc. on Form 10-Q, dated May 13, 1996. 10.15 Employment Agreement between Peter W. Incorporated by reference to Exhibit Pamplin and Syntellect Inc. dated No. 10.15 to Syntellect's 1998 Form 10- November 1, 1998 K. 10.16 Employment Agreement between Neal L. Incorporated by reference to Exhibit Miller and Syntellect Inc. dated August No. 10.16 to Syntellect's 1998 Form 10- 24, 1998 K. 10.17 Employment Agreement between W.Scott Incorporated by reference to Exhibit Coleman and Syntellect Inc. dated No. 10.17 to Syntellect's 1998 Form 10- September 19, 1998 K. 10.18 Employment Agreement between J. Incorporated by reference to Exhibit Lawrence Bradner and Syntellect Inc. No. 10.18 to Syntellect's 1998 Form 10- dated November 1, 1998 K. 21 Subsidiaries of Registrant Page 23 Independent Auditors' Consent Page 27.1 Financial Data Schedule--1998 Page 27.2 Financial Data Schedule--1997 Page 27.3 Financial Data Schedule--1996 Page
(C) Reports on Form 8-K. No Report on Form 8-K was filed during 1998. 41 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.
Signature Title Date --------- ----- ---- /s/ J. Lawrence Bradner Chairman of the Board, Chief March 24, 1999 _________________________________ Executive Officer J. Lawrence Bradner (Principal Executive Officer) /s/ Peter W. Pamplin Vice President, Chief March 24, 1999 _________________________________ Financial Officer, Peter W. Pamplin Secretary & Treasurer (Principal Financial Officer) /s/ William P. Conlin Director March 24, 1999 _________________________________ William P. Conlin /s/ Michael R. Bruce Director March 24, 1999 _________________________________ Michael R. Bruce /s/ Anthony V. Carollo Director March 24, 1999 _________________________________ Anthony V. Carollo /s/ Michael D. Kaufman Director March 24, 1999 _________________________________ Michael D. Kaufman
42 EX-10.15 2 EMPLOYMENT AGREEMENT EXHIBIT 10.15 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (this "Agreement"), is made and entered into on this 1st day of November, 1998, by and between Peter W. Pamplin, an individual resident of the State of Georgia (the "Employee"), and SYNTELLECT INC., a Delaware corporation (the "Company"); W I T N E S S E T H: -------------------- WHEREAS, the Company desires to continue to employ the Employee, and the Employee desires to continue to be employed by the Company on the terms and conditions contained herein; NOW, THEREFORE, in consideration of the mutual promises and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: Section 1. Employment ---------- The Employee shall continue to serve as Chief Financial Officer of the Company and shall devote his full business time, skills and best efforts to rendering services on behalf of the Company. In addition, the Employee shall use his best efforts in the performance of any other reasonable duties relating to the operation of the business of the Company as may be assigned to him from time to time by the Chief Executive Officer or President of the Company or by the Board of Directors of the Company. In the performance of such duties, the Employee shall exercise such care as is customarily required by employees undertaking similar duties for companies similar to the Company. Section 2. Compensation; Expenses ---------------------- 2.1 Salary. During the term of his employment hereunder, the ------ Employee shall be paid a Base Salary by the Company for the period commencing (i) on the date hereof and ending December 31, 1998 ("Year One") in an amount on an annual basis equal to $120,000, and (ii) on January 1, 1999 and ending December 31, 1999 ("Year Two") in an amount to be approved by the Board of Directors, but in any case not to be an amount less than the Base Salary in Year One (in any such case, the "Base Salary"). The Base Salary shall be paid to the Employee in equal monthly installments (or more frequently if in accordance with the Company's payment policies of general application), less all applicable withholding taxes. 2.2 Bonus. ----- (a) Amount of Bonus. In addition to the Base Salary payable to the --------------- Employee in each of Years One and Two, the Employee shall be entitled to receive a bonus for each such year as the Board of Directors shall determine in its sole and absolute discretion. (b) Payment of Bonus. The Employee's Bonus, if any, for either of ---------------- Years One or Two shall be payable by the Company to the Employee within 30 days after the end of such year, but subject to adjustment after completion of the Company's annual audit for that year. 2.3 Expenses. The Employee shall be reimbursed for all reasonable -------- expenses incurred by the Employee at the request and on behalf of the Company. Section 3. Term; Termination of Agreement. The employment of the ------------------------------ Employee hereunder shall commence as of the date hereof and shall continue until the earlier of (i) December 31, 1999, or (ii) the occurrence of any of the following events: (a) the death or total disability of the Employee (total disability meaning the failure of the Employee to perform his normal required services hereunder for a period of six consecutive months during the term hereof by reason of the Employee's mental or physical disability) (a "Disability Termination Event"); (b) termination by the Company of the Employee's employment hereunder, upon 10 days prior written notice to the Employee, for "Good Cause," which shall exist upon the occurrence of any of the following: (i) the Employee is convicted of, pleads guilty to, or confesses to any felony or any act of fraud, misappropriation or embezzlement, (ii) the Employee has engaged in a fraudulent act to the material damage or prejudice of the Company or any affiliate of the Company, (iii) the Employee illegally used controlled substances, (iv) any material act or omission by the Employee involving malfeasance or negligence in the performance of the Employee's duties to the Company to the material detriment of the Company and, within thirty (30) days after written notice from the Company of any such act or omission, the Employee has not corrected such act or omission, (v) the entry of an order of a court that remains in effect and is not discharged for a period of at least sixty (60) days, which enjoins or otherwise limits or restricts the performance by the Employee in any material way of any of his duties to the Company under this Agreement, that relates to any contract, agreement or commitment made by or applicable to the Employee in favor of any former employer or any other person, or (vi) the Employee otherwise fails to comply with the terms of this Agreement or deviates from any written policies or directives of the Board of Directors, in either such case to the material detriment of the Company, and, within thirty (30) days after written notice from the 2 Company of such failure or deviation, the Employee has not corrected such failure (in any such case, a "Good Cause Termination Event"); (c) termination by the Company of the Employee's employment hereunder, upon ten (10) days prior written notice to the Employee, for any reason other than as a result of a Good Cause Termination Event or Disability Termination Event (a "No Cause Termination Event"); or (d) voluntary termination by the Employee of the Employee's employment hereunder (a "Voluntary Termination Event"). Section 4. Result of Termination. --------------------- 4.1 Termination As Result Of Voluntary Or Good Cause Termination ------------------------------------------------------------ Events. If the Employee's employment hereunder is terminated prior to December - ------ 31, 1999 as a result of the occurrence of a Voluntary Termination Event or a Good Cause Termination Event, as of the date of the termination of the Employee's employment, the Company shall have no further obligation to pay to the Employee any Base Salary, Bonus or any other additional benefits pursuant to Section 5 of this Agreement except to the extent the Company is required to provide fringe benefits following termination of employment to former employees of the Company generally under the terms of a specific fringe benefit plan or policy. If such termination occurs prior to the end of any pay period, the Employee shall be entitled to receive a portion of the Base Salary for such pay period pro rated to the date on which the Employee's employment is terminated. 4.2 Disability Termination Event. If the Employee's employment ---------------------------- hereunder is terminated prior to December 31, 1999 as a result of the occurrence of a Disability Termination Event, as of the date of the termination of the Employee's employment hereunder, the Company shall have no further obligation to pay the Employee any Base Salary or any other additional benefits pursuant to Section 5 of this Agreement other than medical insurance except to the extent the Company is required to provide fringe benefits following termination of employment to former employees of the Company generally under the terms of a specific fringe benefit plan or policy. The Employee shall be entitled to receive a portion of the Bonus for the year pro rated to the date on which the Employee's employment is terminated. If such termination occurs prior to the end of any pay period, the Employee shall be entitled to receive a portion of the Base Salary for such pay period pro rated to the date on which the Employee's employment is terminated. In addition, Employee shall be entitled to receive a payment equal to the sum of (i) the product of 12 and the amount of the monthly premium that Employee would be charged to continue his or her medical coverage pursuant to the continuation requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and (ii) 46% of the amount determined under (i) to assist Employee in paying his income taxes on such amount. 3 4.3 Termination As Result Of No Cause Termination Event. If the --------------------------------------------------- Employee's employment hereunder is terminated prior to December 31, 1999 as a result of the occurrence of a No Cause Termination Event, the Company shall pay to the Employee as severance pay and in lieu of any other payments under this Agreement other than as contemplated by Section 2.3 hereof, (i) in six equal monthly installments commencing 10 days after such termination, an amount equal to the aggregate Base Salary then in effect that would have been payable to the Employee pursuant to this Agreement if the Employee had remained employed by the Company for the six consecutive months immediately following the termination of his employment and (ii) in a lump sum payment, an amount equal to the Bonus for the year (when finally determined) pro rated to the date on which the Employee's employment is terminated. If such termination occurs prior to the end of any pay period, the Employee also shall be entitled to receive a portion of the Base Salary for such pay period pro rated to the date on which the Employee's employment is terminated. If, at the end of the six month period referenced in clause (i) above, the Employee has not obtained employment and is diligently searching for such employment, then the Employee shall be entitled to receive additional monthly installments (the "Salary Continuation Payments") in an amount equal to the aggregate monthly Base Salary that would have been payable to the Employee if the Employee had remained employed by the Company. Such Salary Continuation Payments shall be payable until the earlier of (i) the date the Employee obtains other employment (any partial month to be pro rated) or (ii) such time as Employee has received Salary Continuation Payments for a period of six months. As of the date of the termination of the Employee's employment, the Company shall have no further obligation to pay any of the additional employment benefits pursuant to Section 5 of this Agreement except to the extent the Company is required to provide fringe benefits following termination of employment to former employees of the Company generally under the terms of a specific fringe benefit plan or policy. In addition, Employee shall be entitled to receive a payment equal to the sum of (i) the product of 12 and the amount of the monthly premium that Employee would be charged to continue his or her medical coverage pursuant to the continuation requirements of COBRA and (ii) 46% of the amount determined under (i) to assist Employee in paying his income taxes on such amount. Section 5. Additional Employment Benefits ------------------------------ The Company shall provide the Employee with the following fringe benefits: 5.1 Fringe Benefits. The Company shall provide the Employee with --------------- medical, dental, life insurance, disability, retirement and other fringe benefits as the Board of Directors of the Company shall authorize from time to time for the benefit of employees of the Company generally. 5.2 Automobile. The Company shall pay to the Employee a monthly ---------- allowance to reimburse the cost of leasing an automobile for use by the Employee. The monthly allowance for leasing an automobile shall be $650. 4 5.3 Vacation. The Employee shall be entitled to receive vacation in -------- accordance with the vacation policies of the Company. Section 6. Confidential Information, Trade Secrets and Noncompetition ---------------------------------------------------------- Covenant - -------- 6.1 Confidential Information. The Employee hereby agrees that, ------------------------ except as otherwise required in the course of his performance of any duties he may have as an employee of the Company, during the period commencing on the date hereof and ending on the second anniversary of the date on which the Employee's employment is terminated: (a) Neither the Employee nor any company or organization in which the Employee has a direct or indirect financial interest will directly or indirectly own, manage, operate, join, control or participate in the ownership, management, operation or control of or be connected in any manner with, any business conducted under any corporate or trade name of the Company or name similar thereto without the prior written consent of the Company; and (b) The Employee shall hold in confidence and not directly or indirectly disclose to anyone or use or otherwise appropriate for the Employee's own benefit (i) any pricing information, marketing information or sales technique of the Company, or any subsidiary of the Company, or (ii) any other of the following confidential information or documents of or relating to the Company or any subsidiary of the Company: confidential records, computer software programs, client and customer lists, terms of license or franchise agreements, terms of contracts with clients and customers, and planning and financial information of the Company or any subsidiary of the Company (collectively, the "Confidential Data"). Notwithstanding the foregoing, Confidential Data shall not include any information of the type specified above to the extent that such materials or information have become generally available to the public by the act of one who has the right to disclose such information without violating any right of the Company to which such information pertains. The Employee hereby acknowledges and agrees that the prohibitions against disclosure of Confidential Data recited herein are in addition to, and not in lieu of, any rights or remedies that the Company or any subsidiary of the Company may have pursuant to the laws of any jurisdiction or at common law to prevent the disclosure of trade secrets, and the enforcement by any such corporation of its rights and remedies pursuant to this Agreement shall not be construed as a waiver of any other rights or available remedies that it may possess in law or equity in the absence of this Agreement. 6.2 Use of Confidential Information. The Employee represents and ------------------------------- warrants to the Company that he has not knowingly or wrongfully utilized any trade secrets or confidential information proprietary to any former employer or other party, including, but not limited to, 5 confidential business information of such former employer or other party. The Employee covenants that during the term of this Agreement he will not induce the Company to use any confidential information that belongs to a former employer or other party. 6.3 Noncompetition -------------- (a) Coverage. The Company is engaged in the business of developing, -------- marketing and selling (i) computer hardware, software, support services, pay- per-view ordering services and outsourced telephony, internet and faxed-based transactions and services for the purpose of automating certain customer service functions, and (ii) computerized outbound telephone dialing hardware, software and support services (these businesses, and any other businesses in which the Company competes during the term hereof are hereafter referred to as the "Company Business") in the United States and throughout the world addressing a variety of vertical markets, including the financial institutions, education, cable television, health care, newspaper, utilities and telecommunications industries. The Employee acknowledges that the goodwill of the Company and the business activities of the Company extend throughout the areas in which it conducts business. (b) Covenants. In consideration of the Company's continued employment --------- of the Employee pursuant to the terms of this Agreement, the Employee hereby agrees that the Employee will not, during the period commencing on the date hereof and ending on the first anniversary of the date on which the Employee's employment is terminated, provided that if the Employee's employment is terminated as a result of the occurrence of a No Cause Termination Event, such period shall end on the first anniversary of the date on which the Employee receives his last severance payment pursuant to Section 4.3 hereof (in either case, the "Noncompete Period") (other than as an employee of or a consultant to the Company), directly or indirectly: (i) engage in, for the purpose of competing with the Company Business in any state(s) in which the Employee anticipated working for the Company when he entered into this Agreement and worked for the Company at any time during the twelve (12) months prior to the termination of Employee's employment (the "Pre-Termination Period"), any activities or services identical or similar to any of the Employee's principal responsibilities with the Company at any time during the Pre-Termination Period; (ii) call on or solicit, or attempt to call on or solicit, for the purpose of competing with the Company Business, any client or customer, or actively sought prospective client or customer, of the Company with whom or which the Employee had material contact at any time during the Pre- Termination Period; and/or (iii) solicit or attempt to solicit, for the purpose of enticing or encouraging the employee to leave the Company, any employee of the Company 6 with whom the Employee had material contact at any time during the Pre-Termination Period. The Employee agrees that the restrictions contained herein are reasonable and designed to protect only the legitimate business interests of the Company. Employee further agrees that during the course of his employment, he will receive training from the Company and be exposed to its proprietary information so that the Employee would be uniquely qualified to compete against the Company. Accordingly, the Employee acknowledges that he could cause irreparable injury to the Company by violating these covenants. 6.4 Severability. If a judicial determination is made that any of ------------ the provisions of this Section 6 constitutes an unreasonable or otherwise unenforceable restriction against the Employee, the provisions of this Section 6 shall be rendered void only to the extent that such judicial determination finds such provisions to be unreasonable or otherwise unenforceable. In this regard, the Company and the Employee hereby agree that any judicial authority construing this Agreement shall be empowered to sever or modify any portion of any geographic restriction, any prohibited business activity or any time period from the coverage of this Section 6 and to apply the provisions of this Section 6 to the remaining portion of the geographic restriction, the remaining business activities or the remaining time period not so severed or modified by such judicial authority. 6.5 Equitable Relief. The Employee acknowledges that the services to ---------------- be rendered by the Employee hereunder are of a special character, the loss of which cannot be compensated adequately in damages in an action at law. By reason thereof, the Employee agrees that the Company shall be entitled, in addition to any other remedies it may have under this Agreement or otherwise, to injunctive and other equitable relief to prevent or curtail any breach of this Agreement by the Employee. Section 7. Miscellaneous ------------- 7.1 Binding Effect. This Agreement shall inure to the benefit of and -------------- shall be binding upon the Employee and his executor, administrator, heirs, personal representative and assigns, and the Company and its successors and assigns; provided, however, that the Employee shall not be entitled to assign or delegate any of his rights or obligations hereunder without the prior written consent of the Company. 7.2 Governing Law. This Agreement shall be deemed to be made in, and ------------- in all respects shall be interpreted, construed and governed by and in accordance with, the laws of the State of Georgia. No provision of this Agreement or any related document shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or drafted such provision. 7 7.3 Headings. The section and paragraph headings contained in this -------- Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 7.4 Notices. Unless otherwise agreed to in writing by the parties ------- hereto, all communications provided for hereunder shall be in writing and shall be deemed to be given when delivered in person or five (5) business days after being sent by first class mail and addressed as follows: (a) If to the Employee: Peter W. Pamplin 2390 Prince Howard Way Marietta, Georgia 30062 (b) If to the Company, addressed to: Syntellect Inc. 1000 Holcomb Woods Parkway Suite 410A Roswell, Georgia 30076 Attention: Chief Executive Officer 7.5 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 7.6 Entire Agreement. This Agreement is intended by the parties ---------------- hereto to be the final expression of their agreement with respect to the subject matter hereof and is the complete and exclusive statement of the terms thereof, notwithstanding any representations, statements or agreements to the contrary heretofore made. This Agreement may be modified only by a written instrument signed by each of the parties hereto. 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. SYNTELLECT INC. By: /s/ Larry Bradner ------------------------------------- Name: J. Lawrence Bradner ----------------------------- Title: Chairman and CEO ---------------------------- EMPLOYEE /s/ Peter W. Pamplin ---------------------------------------- Peter W. Pamplin 9 EX-10.16 3 EMPLOYMENT AGREEMENT EXHIBIT 10.16 K&S DRAFT 8/25/97 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (this "Agreement"), is made and entered into on this ___ day of __________, 1997, by and between NEAL L. MILLER, an individual resident of the State of Georgia (the "Employee"), and SYNTELLECT INC., a Delaware corporation (the "Company"); W I T N E S S E T H: -------------------- WHEREAS, the Company desires to continue to employ the Employee, and the Employee desires to continue to be employed by the Company on the terms and conditions contained herein; NOW, THEREFORE, in consideration of the mutual promises and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: Section 1. Employment ---------- The Employee shall continue to serve as Vice President, Chief Financial Officer, Secretary and Treasurer of the Company and shall devote his full business time, skills and best efforts to rendering services on behalf of the Company. In addition, the Employee shall use his best efforts in the performance of any other reasonable duties relating to the operation of the business of the Company as may be assigned to him from time to time by the Chief Executive Officer or President of the Company or by the Board of Directors of the Company. In the performance of such duties, the Employee shall exercise such care as is customarily required by employees undertaking similar duties for companies similar to the Company. Section 2. Compensation; Expenses ---------------------- 2.1 Salary. During the term of his employment hereunder, the ------ Employee shall be paid a Base Salary by the Company for the period commencing (i) on the date hereof and ending December 31, 1997 ("Year One") in an amount on an annual basis equal to $_________, and (ii) January 1, 1998 and ending December 31, 1998 ("Year Two") and January 1, 1999 and ending December 31, 1999 ("Year Three"), in an amount to be approved by the Board of Directors, but in any case not to be an amount less than the Base Salary in the immediately preceding year (in any such case, the "Base Salary"). The Base Salary shall be paid to the Employee in equal monthly installments (or more frequently if in accordance with the Company's payment policies of general application), less all applicable withholding taxes. 2.2 Bonus. ----- (a) Amount of Bonus. In addition to the Base Salary payable to the --------------- Employee in each of Years One, Two and Three, the Employee shall be entitled to receive a bonus for each such year [based upon the Company's target financial performance for any such year (in any such year, the "Target Performance"). For purposes of this Agreement, Target Performance shall have the meaning set forth in Exhibit A hereto. For Year One, the Target Performance shall be $_________. The Board of Directors shall determine in good faith the Target Performance for Years Two and Three prior to the commencement of each such year. At the end of Years One, Two and Three, if the Company's actual financial performance ("Actual Performance") is equal to or greater than 85% of the Target Performance for that year, then the Employee shall be entitled to receive a bonus (the "Bonus") for any such year equal to a percentage of the Employee's Base Salary for such year, which percentage (the "Bonus Percentage") shall be determined as described in the Management Incentive Program attached as Exhibit B hereto] OR [as the Board -- of Directors shall determine in its sole and absolute discretion]. (b) Payment of Bonus. The Employee's Bonus, if any, for any of Years ---------------- One, Two or Three shall be payable by the Company to the Employee within 30 days after the end of such year. 2.3 Expenses. The Employee shall be reimbursed for all reasonable -------- expenses incurred by the Employee at the request and on behalf of the Company. Section 3. Term; Termination of Agreement. The employment of the ------------------------------ Employee hereunder shall commence as of the date hereof and shall continue until the earlier of (i) [December 31, 1999], or (ii) the occurrence of any of the following events: (a) the death or total disability of the Employee (total disability meaning the failure of the Employee to perform his normal required services hereunder for a period of six consecutive months during the term hereof by reason of the Employee's mental or physical disability) (a "Disability Termination Event"); (b) termination by the Company of the Employee's employment hereunder, upon 10 days prior written notice to the Employee, for "Good Cause," which shall exist upon the occurrence of any of the following: (i) the Employee is convicted of, pleads guilty to, or confesses to any felony or any act of fraud, misappropriation or embezzlement, (ii) the Employee has engaged in a fraudulent act to the material damage or prejudice of the Company or any affiliate of the Company, (iii) the Employee illegally used controlled substances, (iv) any material act or omission by the Employee involving malfeasance or negligence in the performance of the Employee's duties to the Company to the material 2 detriment of the Company and, within thirty (30) days after written notice from the Company of any such act or omission, the Employee has not corrected such act or omission, (v) the entry of an order of a court that remains in effect and is not discharged for a period of at least sixty (60) days, which enjoins or otherwise limits or restricts the performance by the Employee in any material way of any of his duties to the Company under this Agreement, that relates to any contract, agreement or commitment made by or applicable to the Employee in favor of any former employer or any other person, or (vi) the Employee otherwise fails to comply with the terms of this Agreement or deviates from any written policies or directives of the Board of Directors, in either such case to the material detriment of the Company, and, within thirty (30) days after written notice from the Company of such failure or deviation, the Employee has not corrected such failure (in any such case, a "Good Cause Termination Event"); (c) termination by the Company of the Employee's employment hereunder, upon ten (10) days prior written notice to the Employee, for any reason other than as a result of a Good Cause Termination Event or Disability Termination Event (a "No Cause Termination Event"); or (d) voluntary termination by the Employee of the Employee's employment hereunder (a "Voluntary Termination Event"). Section 4. Result of Termination. --------------------- 4.1 Termination As Result Of Voluntary Or Good Cause Termination ------------------------------------------------------------ Events. If the Employee's employment hereunder is terminated prior to [December - ------ 31, 1999] as a result of the occurrence of a Voluntary Termination Event or a Good Cause Termination Event, as of the date of the termination of the Employee's employment, the Company shall have no further obligation to pay to the Employee any Base Salary, Bonus or any other additional benefits pursuant to Section 5 of this Agreement. If such termination occurs prior to the end of any pay period, the Employee shall be entitled to receive a portion of the Base Salary for such pay period prorated to the date on which the Employee's employment is terminated. 4.2 Disability Termination Event. If the Employee's employment ---------------------------- hereunder is terminated prior to [December 31, 1999] as a result of the occurrence of a Disability Termination Event, as of the date of the termination of the Employee's employment hereunder, the Company shall have no further obligation to pay the Employee any Base Salary or any other additional benefits pursuant to Section 5 of this Agreement other than medical insurance. The Company shall provide medical insurance substantially similar to the medical insurance provided to the Employee prior to the termination of his employment for the [thirty-six] consecutive months immediately following such termination. The Employee shall be entitled to receive a portion of the Bonus for the year prorated to the date on which the Employee's employment is terminated. If such termination occurs prior to the end of any pay period, the Employee shall be 3 entitled to receive a portion of the Base Salary for such pay period prorated to the date on which the Employee's employment is terminated. Notwithstanding the foregoing, the Employee shall be entitled to whatever benefits are available pursuant to the disability insurance contemplated by Section 5.2 hereof. 4.3 Termination As Result Of No Cause Termination Event. If the --------------------------------------------------- Employee's employment hereunder is terminated prior to [December 31, 1999] as a result of the occurrence of a No Cause Termination Event, in addition to any other rights the Employee may have pursuant to Section 2.2(b), the Company shall pay to the Employee as severance pay and in lieu of any other payments under this Agreement other than as contemplated by Section 2.3 hereof, in six equal monthly installments commencing 10 days after such termination, an amount equal to the aggregate Base Salary then in effect that would have been payable to the Employee pursuant to this Agreement if the Employee had remained employed by the Company for the six consecutive months immediately following the termination of his employment. If such termination occurs prior to the end of any pay period, the Employee shall be entitled to receive a portion of the Base Salary for such pay period prorated to the date on which the Employee's employment is terminated. If, at the end of such six month period, the Employee has not obtained employment on terms and conditions which are suitable to the Employee and Employee is diligently searching for such employment, then the Employee shall be entitled to receive additional monthly installments (the "Salary Continuation Payments") in an amount equal to the aggregate monthly Base Salary that would have been payable to the Employee if the Employee had remained employed by the Company. Such Salary Continuation Payments shall be payable until the earlier of (i) the date the Employee obtains additional employment (any partial month to be pro rated) or (ii) such time as Employee has received Salary Continuation Payments for a period of six months. In addition, the Company shall provide medical insurance substantially similar to the medical insurance provided to the Employee prior to the termination of his employment for the six consecutive months immediately following such termination and for such additional period of time that the Employee shall receive salary in accordance with the provisions of the previous sentence. The Employee shall be entitled to receive a portion of the Bonus for the year pro rated to the date on which the Employee's employment is terminated. Section 5. Additional Employment Benefits ------------------------------ The Company shall provide the Employee with the following fringe benefits: 5.1 Medical Insurance. The Company shall provide the Employee with ----------------- medical, dental and life insurance as the Board of Directors of the Company shall authorize from time to time for the benefit of employees of the Company generally. To the extent any group life insurance policy maintained by the Company for the benefit of its employees generally provides that employees may purchase additional insurance at premiums in accordance with such policy's group rates, the Employee shall be entitled to purchase such additional insurance provided the Company incurs no cost or expense in connection therewith. 4 5.2 Disability Insurance. The Company shall provide the Employee -------------------- with disability insurance in the amount equal to [sixty (60)] percent on an annualized basis of full Base Salary plus Bonus [calculated on a basis that Actual Performance is equal to Target Performance] at no cost to the Employee. [5.3 Automobile. The Company shall pay to the Employee a monthly ---------- allowance to reimburse (i) the cost of leasing an automobile for use by the Employee, and (ii) the operating expense including the cost of gasoline used in the course of Company business. The monthly allowance for leasing an automobile shall be $_______ and the operating expense allowance shall be $_______ per month.] 5.4 Vacation. The Employee shall receive [three (3)] weeks of paid -------- vacation time each calendar year during the term of his employment hereunder, which vacation shall be prorated if the Employee's employment hereunder is terminated prior to December 31 of any year. 5.5 Fringe Benefits. In addition to the foregoing, the Employee --------------- shall have the right to receive such additional fringe benefits as the Board of Directors shall authorize from time to time for the benefit of employees of the Company generally. Section 6. Confidential Information, Trade Secrets and Noncompetition ---------------------------------------------------------- Covenant - -------- 6.1 Confidential Information. The Employee hereby agrees that, ------------------------ except as otherwise required in the course of his performance of any duties he may have as an employee of the Company, during the period commencing on the date hereof and ending on the second anniversary of the date on which the Employee's employment is terminated: (a) Neither the Employee nor any company or organization in which the Employee has a direct or indirect financial interest will directly or indirectly own, manage, operate, join, control or participate in the ownership, management, operation or control of or be connected in any manner with, any business conducted under any corporate or trade name of the Company or name similar thereto without the prior written consent of the Company; and (b) The Employee shall hold in confidence and not directly or indirectly disclose to anyone or use or otherwise appropriate for the Employee's own benefit (i) any pricing information, marketing information or sales technique of the Company, or any subsidiary of the Company, or (ii) any other of the following confidential information or documents of or relating to the Company or any subsidiary of the Company: confidential records, computer software programs, client and customer lists, terms of license or franchise agreements, terms of contracts with clients and customers, and planning and financial information of the Company or any subsidiary of the Company (collectively, the "Confidential 5 Data"). Notwithstanding the foregoing, Confidential Data shall not include any information of the type specified above to the extent that such materials or information are publicly known or utilized by others engaged in the same business or activities. The Employee hereby acknowledges and agrees that the prohibitions against disclosure of Confidential Data recited herein are in addition to, and not in lieu of, any rights or remedies that the Company or any subsidiary of the Company may have pursuant to the laws of any jurisdiction or at common law to prevent the disclosure of trade secrets, and the enforcement by any such corporation of its rights and remedies pursuant to this Agreement shall not be construed as a waiver of any other rights or available remedies that it may possess in law or equity in the absence of this Agreement. 6.2 Use of Confidential Information. The Employee represents and ------------------------------- warrants to the Company that he has not knowingly or wrongfully utilized any trade secrets or confidential information proprietary to any former employer or other party, including, but not limited to, confidential business information of such former employer or other party. The Employee covenants that during the term of this Agreement he will not induce the Company to use any confidential information that belongs to a former employer or other party. [6.3 Noncompetition -------------- (a) Coverage. The Company is engaged in the business of developing, -------- marketing and selling (i) computer hardware, software, support services and pay- per-view ordering services for the purpose of automating certain telephone-based customer service functions, and (ii) computerized outbound telephone dialing hardware, software and support services (these businesses, and any other businesses in which the Company competes during the term hereof are hereafter referred to as the "Company Business") in the United States and throughout the world (the "Territory") addressing a variety of vertical markets, including the financial institutions, education, cable television, health care and newspaper industries. The Employee acknowledges that the goodwill of the Company and the business activities of the Company extend throughout the Territory. (b) Covenants. In consideration of the Company's continued employment --------- of the Employee pursuant to the terms of this Agreement, the Employee hereby agrees that the Employee will not, during the period commencing on the date hereof and ending on the first anniversary of the date on which the Employee's employment is terminated, provided that if the Employee's employment is terminated as a result of the occurrence of a No Cause Termination Event, such period shall end on the first anniversary of the date on which the Employee receives his last severance payment pursuant to Section 4.3 hereof (in either case, the "Noncompete Period") (other than as an employee of or a consultant to the Company), directly or indirectly compete in any way by performing directly or indirectly any managerial, executive, or consulting services relating to the Company Business within the Territory for the Employee or for any corporation, individual or other entity engaged 6 in such business. For the purposes of this Agreement: (i) the words "compete in any way" shall mean, with respect to the Employee, (A) calling on, soliciting, taking away, accepting as a client or customer or attempting to call on, solicit, take away or accept as a client or customer any individual, partnership, corporation, or association that is or was a client or customer of the Company; (B) hiring, soliciting, taking away or attempting to hire, solicit, or take away any employee of the Company either on the Employee's behalf or on behalf of any other person or entity; or (C) entering into any business engaging in any aspect of the Company Business competing with the Company, either alone or with any individual, partnership, corporation, or association; and (ii) the words "directly or indirectly" as they modify the word "compete" shall include (A) acting as an agent, representative, consultant, officer, director, independent contractor or employee of any entity or enterprise in the Company Business competing in any way with the Company; (B) participating in any such competing entity or enterprise as a owner, partner, limited partner, joint venturer or stockholder; or (C) communicating to any competing person, entity, or enterprise the names or addresses of any past, present, or prospective client or customer of the Company or any entity having title to the goodwill of the Company. Notwithstanding anything contained in this Agreement to the contrary, the Employee shall not be prohibited from owning, directly or indirectly, up to 1% of the outstanding equity interest of any company the stock of which is publicly traded on a national securities exchange or in the over-the-counter market.] 6.4 Severability. If a judicial determination is made that any of ------------ the provisions of this Section 6 constitutes an unreasonable or otherwise unenforceable restriction against the Employee, the provisions of this Section 6 shall be rendered void only to the extent that such judicial determination finds such provisions to be unreasonable or otherwise unenforceable. In this regard, the Company and the Employee hereby agree that any judicial authority construing this Agreement shall be empowered to sever or modify any portion of the Territory, any prohibited business activity or any time period from the coverage of this Section 6 and to apply the provisions of this Section 6 to the remaining portion of the Territory, the remaining business activities or the remaining time period not so severed or modified by such judicial authority. 6.5 Equitable Relief. The Employee acknowledges that the services to ---------------- be rendered by the Employee hereunder are of a special character, the loss of which cannot be compensated adequately in damages in an action at law. By reason thereof, the Employee agrees that the Company shall be entitled, in addition to any other remedies it may have under this 7 Agreement or otherwise, to injunctive and other equitable relief to prevent or curtail any breach of this Agreement by the Employee. Section 7. Miscellaneous ------------- 7.1 Binding Effect. This Agreement shall inure to the benefit of and -------------- shall be binding upon the Employee and his executor, administrator, heirs, personal representative and assigns, and the Company and its successors and assigns; provided, however, that the Employee shall not be entitled to assign or delegate any of his rights or obligations hereunder without the prior written consent of the Company. 7.2 Governing Law. This Agreement shall be deemed to be made in, and ------------- in all respects shall be interpreted, construed and governed by and in accordance with, the laws of the State of Georgia. No provision of this Agreement or any related document shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or drafted such provision. 7.3 Headings. The section and paragraph headings contained in this -------- Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 7.4 Notices. Unless otherwise agreed to in writing by the parties ------- hereto, all communications provided for hereunder shall be in writing and shall be deemed to be given when delivered in person or five (5) business days after being sent by first class mail and addressed as follows: (a) If to the Employee: Mr. Neal L. Miller ___________________ ___________________ (b) If to the Company, addressed to: Syntellect Inc. 1000 Holcomb Woods Parkway Suite 410A 8 Roswell, Georgia 30076 Attention: Chief Executive Officer 7.5 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 7.6 Entire Agreement. This Agreement is intended by the parties ---------------- hereto to be the final expression of their agreement with respect to the subject matter hereof and is the complete and exclusive statement of the terms thereof, notwithstanding any representations, statements or agreements to the contrary heretofore made. This Agreement may be modified only by a written instrument signed by each of the parties hereto. 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. SYNTELLECT, INC. By: /s/ Larry Bradner -------------------------------- Name: J. Lawrence Bradner Title: Chairman and CEO EMPLOYEE /s/ Neal L. Miller ----------------------------------- Neal L. Miller 10 EXHIBIT A For Years One, Two and Three, Target Performance shall mean net income before taxes, excluding interest income of the Company determined in accordance with generally accepted accounting principles consistently applied. 11 EXHIBIT B Management Incentive Program 12 EX-10.17 4 EMPLOYMENT AGREEMENT EXHIBIT 10.17 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (this "Agreement"), is made and entered into on this 19th day of September, 1998, by and between W. Scott Coleman, an individual resident of the State of Georgia (the "Employee"), and SYNTELLECT INC., a Delaware corporation (the "Company"); W I T N E S S E T H: -------------------- WHEREAS, the Company desires to continue to employ the Employee, and the Employee desires to continue to be employed by the Company on the terms and conditions contained herein; NOW, THEREFORE, in consideration of the mutual promises and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: Section 1. Employment ---------- The Employee shall continue to serve as President, Call Center Systems, of the Company and shall devote his full business time, skills and best efforts to rendering services on behalf of the Company. In addition, the Employee shall use his best efforts in the performance of any other reasonable duties relating to the operation of the business of the Company as may be assigned to him from time to time by the Chief Executive Officer or President of the Company or by the Board of Directors of the Company. In the performance of such duties, the Employee shall exercise such care as is customarily required by employees undertaking similar duties for companies similar to the Company. Section 2. Compensation; Expenses ---------------------- 2.1 Salary. During the term of his employment hereunder, the ------ Employee shall be paid a Base Salary by the Company for the period commencing (i) on the date hereof and ending December 31, 1998 ("Year One") in an amount on an annual basis equal to $185,000, and (ii) on January 1, 1999 and ending December 31, 1999 ("Year Two") in an amount to be approved by the Board of Directors, but in any case not to be an amount less than the Base Salary in Year One (in any such case, the "Base Salary"). The Base Salary shall be paid to the Employee in equal monthly installments (or more frequently if in accordance with the Company's payment policies of general application), less all applicable withholding taxes. 2.2 Bonus. ----- (a) Amount of Bonus. In addition to the Base Salary payable to the --------------- Employee in each of Years One and Two, the Employee shall be entitled to receive a bonus for each such year as the Board of Directors shall determine in its sole and absolute discretion. (b) Payment of Bonus. The Employee's Bonus, if any, for either of ---------------- Years One or Two shall be payable by the Company to the Employee within 30 days after the end of such year. 2.3 Expenses. The Employee shall be reimbursed for all reasonable -------- expenses incurred by the Employee at the request and on behalf of the Company. Section 3. Term; Termination of Agreement. The employment of the ------------------------------ Employee hereunder shall commence as of the date hereof and shall continue until the earlier of (i) December 31, 1999, or (ii) the occurrence of any of the following events: (a) the death or total disability of the Employee (total disability meaning the failure of the Employee to perform his normal required services hereunder for a period of six consecutive months during the term hereof by reason of the Employee's mental or physical disability) (a "Disability Termination Event"); (b) termination by the Company of the Employee's employment hereunder, upon 10 days prior written notice to the Employee, for "Good Cause," which shall exist upon the occurrence of any of the following: (i) the Employee is convicted of, pleads guilty to, or confesses to any felony or any act of fraud, misappropriation or embezzlement, (ii) the Employee has engaged in a fraudulent act to the material damage or prejudice of the Company or any affiliate of the Company, (iii) the Employee illegally used controlled substances, (iv) any material act or omission by the Employee involving malfeasance or negligence in the performance of the Employee's duties to the Company to the material detriment of the Company and, within thirty (30) days after written notice from the Company of any such act or omission, the Employee has not corrected such act or omission, (v) the entry of an order of a court that remains in effect and is not discharged for a period of at least sixty (60) days, which enjoins or otherwise limits or restricts the performance by the Employee in any material way of any of his duties to the Company under this Agreement, that relates to any contract, agreement or commitment made by or applicable to the Employee in favor of any former employer or any other person, or (vi) the Employee otherwise fails to comply with the terms of this Agreement or deviates from any written policies or directives of the Board of Directors, in either such case to the material detriment of the Company, and, within thirty (30) days after written notice from the Company of such failure or deviation, the Employee has not corrected such failure (in any such case, a "Good Cause Termination Event"); 2 (c) termination by the Company of the Employee's employment hereunder, upon ten (10) days prior written notice to the Employee, for any reason other than as a result of a Good Cause Termination Event or Disability Termination Event (a "No Cause Termination Event"); or (d) voluntary termination by the Employee of the Employee's employment hereunder (a "Voluntary Termination Event"). Section 4. Result of Termination. --------------------- 4.1 Termination As Result Of Voluntary Or Good Cause Termination ------------------------------------------------------------ Events. If the Employee's employment hereunder is terminated prior to December - ------ 31, 1999 as a result of the occurrence of a Voluntary Termination Event or a Good Cause Termination Event, as of the date of the termination of the Employee's employment, the Company shall have no further obligation to pay to the Employee any Base Salary, Bonus or any other additional benefits pursuant to Section 5 of this Agreement except to the extent the Company is required to provide fringe benefits following termination of employment to former employees of the Company generally under the terms of a specific fringe benefit plan or policy. If such termination occurs prior to the end of any pay period, the Employee shall be entitled to receive a portion of the Base Salary for such pay period pro rated to the date on which the Employee's employment is terminated. 4.2 Disability Termination Event. If the Employee's employment ---------------------------- hereunder is terminated prior to December 31, 1999 as a result of the occurrence of a Disability Termination Event, as of the date of the termination of the Employee's employment hereunder, the Company shall have no further obligation to pay the Employee any Base Salary or any other additional benefits pursuant to Section 5 of this Agreement other than medical insurance except to the extent the Company is required to provide fringe benefits following termination of employment to former employees of the Company generally under the terms of a specific fringe benefit plan or policy. The Employee shall be entitled to receive a portion of the Bonus for the year pro rated to the date on which the Employee's employment is terminated. If such termination occurs prior to the end of any pay period, the Employee shall be entitled to receive a portion of the Base Salary for such pay period pro rated to the date on which the Employee's employment is terminated. In addition, Employee shall be entitled to receive a payment equal to the sum of (i) the product of 12 and the amount of the monthly premium that Employee would be charged to continue his or her medical coverage pursuant to the continuation requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and (ii) 46% of the amount determined under (i) to assist Employee in paying his income taxes on such amount. 4.3 Termination As Result Of No Cause Termination Event. If the --------------------------------------------------- Employee's employment hereunder is terminated prior to December 31, 1999 as a result of the occurrence of a No Cause Termination Event, the Company shall pay to the Employee as severance pay and in lieu of any other payments under this Agreement other than as contemplated by Section 2.3 3 hereof, (i) in six equal monthly installments commencing 10 days after such termination, an amount equal to the aggregate Base Salary then in effect that would have been payable to the Employee pursuant to this Agreement if the Employee had remained employed by the Company for the six consecutive months immediately following the termination of his employment and (ii) in a lump sum payment, an amount equal to the Bonus for the year (when finally determined) pro rated to the date on which the Employee's employment is terminated. If such termination occurs prior to the end of any pay period, the Employee also shall be entitled to receive a portion of the Base Salary for such pay period pro rated to the date on which the Employee's employment is terminated. If, at the end of the six month period referenced in clause (i) above, the Employee has not obtained employment and is diligently searching for such employment, then the Employee shall be entitled to receive additional monthly installments (the "Salary Continuation Payments") in an amount equal to the aggregate monthly Base Salary that would have been payable to the Employee if the Employee had remained employed by the Company. Such Salary Continuation Payments shall be payable until the earlier of (i) the date the Employee obtains other employment (any partial month to be pro rated) or (ii) such time as Employee has received Salary Continuation Payments for a period of six months. As of the date of the termination of the Employee's employment, the Company shall have no further obligation to pay any of the additional employment benefits pursuant to Section 5 of this Agreement except to the extent the Company is required to provide fringe benefits following termination of employment to former employees of the Company generally under the terms of a specific fringe benefit plan or policy. In addition, Employee shall be entitled to receive a payment equal to the sum of (i) the product of 12 and the amount of the monthly premium that Employee would be charged to continue his or her medical coverage pursuant to the continuation requirements of COBRA and (ii) 46% of the amount determined under (i) to assist Employee in paying his income taxes on such amount. Section 5. Additional Employment Benefits ------------------------------ The Company shall provide the Employee with the following fringe benefits: 5.1 Fringe Benefits. The Company shall provide the Employee with --------------- medical, dental, life insurance, disability, retirement and other fringe benefits as the Board of Directors of the Company shall authorize from time to time for the benefit of employees of the Company generally. 5.2 Automobile. The Company shall pay to the Employee a monthly ---------- allowance to reimburse the cost of leasing an automobile for use by the Employee. The monthly allowance for leasing an automobile shall be $650. 5.3 Vacation. The Employee shall be entitled to receive vacation in -------- accordance with the vacation policies of the Company. Section 6. Confidential Information, Trade Secrets and Noncompetition ---------------------------------------------------------- Covenant - -------- 4 6.1 Confidential Information. The Employee hereby agrees that, ------------------------ except as otherwise required in the course of his performance of any duties he may have as an employee of the Company, during the period commencing on the date hereof and ending on the second anniversary of the date on which the Employee's employment is terminated: (a) Neither the Employee nor any company or organization in which the Employee has a direct or indirect financial interest will directly or indirectly own, manage, operate, join, control or participate in the ownership, management, operation or control of or be connected in any manner with, any business conducted under any corporate or trade name of the Company or name similar thereto without the prior written consent of the Company; and (b) The Employee shall hold in confidence and not directly or indirectly disclose to anyone or use or otherwise appropriate for the Employee's own benefit (i) any pricing information, marketing information or sales technique of the Company, or any subsidiary of the Company, or (ii) any other of the following confidential information or documents of or relating to the Company or any subsidiary of the Company: confidential records, computer software programs, client and customer lists, terms of license or franchise agreements, terms of contracts with clients and customers, and planning and financial information of the Company or any subsidiary of the Company (collectively, the "Confidential Data"). Notwithstanding the foregoing, Confidential Data shall not include any information of the type specified above to the extent that such materials or information have become generally available to the public by the act of one who has the right to disclose such information without violating any right of the Company to which such information pertains. The Employee hereby acknowledges and agrees that the prohibitions against disclosure of Confidential Data recited herein are in addition to, and not in lieu of, any rights or remedies that the Company or any subsidiary of the Company may have pursuant to the laws of any jurisdiction or at common law to prevent the disclosure of trade secrets, and the enforcement by any such corporation of its rights and remedies pursuant to this Agreement shall not be construed as a waiver of any other rights or available remedies that it may possess in law or equity in the absence of this Agreement. 6.2 Use of Confidential Information. The Employee represents and ------------------------------- warrants to the Company that he has not knowingly or wrongfully utilized any trade secrets or confidential information proprietary to any former employer or other party, including, but not limited to, confidential business information of such former employer or other party. The Employee covenants that during the term of this Agreement he will not induce the Company to use any confidential information that belongs to a former employer or other party. 6.3 Noncompetition -------------- 5 (a) Coverage. The Company is engaged in the business of developing, -------- marketing and selling (i) computer hardware, software, support services, pay- per-view ordering services and outsourced telephony, internet and faxed-based transactions and services for the purpose of automating certain customer service functions, and (ii) computerized outbound telephone dialing hardware, software and support services (these businesses, and any other businesses in which the Company competes during the term hereof are hereafter referred to as the "Company Business") in the United States and throughout the world addressing a variety of vertical markets, including the financial institutions, education, cable television, health care, newspaper, utilities and telecommunications industries. The Employee acknowledges that the goodwill of the Company and the business activities of the Company extend throughout the areas in which it conducts business. (b) Covenants. In consideration of the Company's continued employment --------- of the Employee pursuant to the terms of this Agreement, the Employee hereby agrees that the Employee will not, during the period commencing on the date hereof and ending on the first anniversary of the date on which the Employee's employment is terminated, provided that if the Employee's employment is terminated as a result of the occurrence of a No Cause Termination Event, such period shall end on the first anniversary of the date on which the Employee receives his last severance payment pursuant to Section 4.3 hereof (in either case, the "Noncompete Period") (other than as an employee of or a consultant to the Company), directly or indirectly: (i) engage in, for the purpose of competing with the Company Business in any state(s) in which the Employee anticipated working for the Company when he entered into this Agreement and worked for the Company at any time during the twelve (12) months prior to the termination of Employee's employment (the "Pre-Termination Period"), any activities or services identical or similar to any of the Employee's principal responsibilities with the Company at any time during the Pre-Termination Period; (ii) call on or solicit, or attempt to call on or solicit, for the purpose of competing with the Company Business, any client or customer, or actively sought prospective client or customer, of the Company with whom or which the Employee had material contact at any time during the Pre- Termination Period; and/or (iii) solicit or attempt to solicit, for the purpose of enticing or encouraging the employee to leave the Company, any employee of the Company with whom the Employee had material contact at any time during the Pre-Termination Period. The Employee agrees that the restrictions contained herein are reasonable and designed to protect only the legitimate business interests of the Company. Employee further agrees that during the course of his employment, he will receive training from the Company and be exposed to its 6 proprietary information so that the Employee would be uniquely qualified to compete against the Company. Accordingly, the Employee acknowledges that he could cause irreparable injury to the Company by violating these covenants. 6.4 Severability. If a judicial determination is made that any of ------------ the provisions of this Section 6 constitutes an unreasonable or otherwise unenforceable restriction against the Employee, the provisions of this Section 6 shall be rendered void only to the extent that such judicial determination finds such provisions to be unreasonable or otherwise unenforceable. In this regard, the Company and the Employee hereby agree that any judicial authority construing this Agreement shall be empowered to sever or modify any portion of any geographic restriction, any prohibited business activity or any time period from the coverage of this Section 6 and to apply the provisions of this Section 6 to the remaining portion of the geographic restriction, the remaining business activities or the remaining time period not so severed or modified by such judicial authority. 6.5 Equitable Relief. The Employee acknowledges that the services to ---------------- be rendered by the Employee hereunder are of a special character, the loss of which cannot be compensated adequately in damages in an action at law. By reason thereof, the Employee agrees that the Company shall be entitled, in addition to any other remedies it may have under this Agreement or otherwise, to injunctive and other equitable relief to prevent or curtail any breach of this Agreement by the Employee. Section 7. Miscellaneous ------------- 7.1 Binding Effect. This Agreement shall inure to the benefit of and -------------- shall be binding upon the Employee and his executor, administrator, heirs, personal representative and assigns, and the Company and its successors and assigns; provided, however, that the Employee shall not be entitled to assign or delegate any of his rights or obligations hereunder without the prior written consent of the Company. 7.2 Governing Law. This Agreement shall be deemed to be made in, and ------------- in all respects shall be interpreted, construed and governed by and in accordance with, the laws of the State of Georgia. No provision of this Agreement or any related document shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or drafted such provision. 7.3 Headings. The section and paragraph headings contained in this -------- Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 7.4 Notices. Unless otherwise agreed to in writing by the parties ------- hereto, all communications provided for hereunder shall be in writing and shall be deemed to be given when 7 delivered in person or five (5) business days after being sent by first class mail and addressed as follows: (a) If to the Employee: W. Scott Coleman 8710 N. 80th Place Scottsdale, Arizona 85258 (b) If to the Company, addressed to: Syntellect Inc. 1000 Holcomb Woods Parkway Suite 410A Roswell, Georgia 30076 Attention: Chief Executive Officer 7.5 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 7.6 Entire Agreement. This Agreement is intended by the parties ---------------- hereto to be the final expression of their agreement with respect to the subject matter hereof and is the complete and exclusive statement of the terms thereof, notwithstanding any representations, statements or agreements to the contrary heretofore made. This Agreement may be modified only by a written instrument signed by each of the parties hereto. 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. SYNTELLECT INC. By: /s/ Larry Bradner ---------------------------------------- Name: Larry Bradner Title: Chairman and CEO EMPLOYEE /s/ W. Scott Coleman ------------------------------------------- Name: W. Scott Coleman Title: President, Call Center Systems 9 EX-10.18 5 EMPLOYMENT AGREEMENT EXHIBIT 10.18 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (this "Agreement"), is made and entered into on this 1st day of November, 1998, by and between J. Lawrence Bradner, an individual resident of the State of Georgia (the "Employee"), and SYNTELLECT INC., a Delaware corporation (the "Company"); W I T N E S S E T H: -------------------- WHEREAS, the Company desires to continue to employ the Employee, and the Employee desires to continue to be employed by the Company on the terms and conditions contained herein; NOW, THEREFORE, in consideration of the mutual promises and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: Section 1. Employment ---------- The Employee shall continue to serve as Chief Executive Officer of the Company and shall devote his full business time, skills and best efforts to rendering services on behalf of the Company. In addition, the Employee shall use his best efforts in the performance of any other reasonable duties relating to the operation of the business of the Company as may be assigned to him from time to time by the Board of Directors of the Company. In the performance of such duties, the Employee shall exercise such care as is customarily required by employees undertaking similar duties for companies similar to the Company. Section 2. Compensation; Expenses ---------------------- 2.1 Salary. During the term of his employment hereunder, the ------ Employee shall be paid a Base Salary by the Company for the period commencing (i) on the date hereof and ending December 31, 1998 ("Year One") in an amount on an annual basis equal to $252,000, and (ii) on January 1, 1999 and ending December 31, 1999 ("Year Two") and on January 1, 2000 and ending December 31, 2000 ("Year Three") in an amount to be approved by the Board of Directors, but in any case not to be an amount less than the Base Salary in Year One (in any such case, the "Base Salary"). The Base Salary shall be paid to the Employee in equal monthly installments (or more frequently if in accordance with the Company's payment policies of general application), less all applicable withholding taxes. 2.2 Bonus. ----- (a) Amount of Bonus. In addition to the Base Salary payable to the --------------- Employee in each of Years One, Two, and Three, the Employee shall be entitled to receive a bonus for each such year as the Board of Directors shall determine in its sole and absolute discretion. (b) Payment of Bonus. The Employee's Bonus, if any, for any of Years ---------------- One, Two or Three shall be payable by the Company to the Employee within 30 days after the end of such year, but subject to adjustment after completion of the Company's annual audit for that year. 2.3 Stock Options. The Company hereby acknowledges the assumption of ------------- grants to the Employee of stock options from his former employer. Specifically, the Company hereby acknowledges that Employee holds options to purchase up to 282,852 shares of Common Stock of the Company (the "Option") at a purchase price of $.87 per share. The Option shall be exercisable at any time, in whole or in part, and the Option shall terminate on August 24, 2005. Employee's rights under the Option are fully vested, and the termination of the Employee's employment hereunder or the termination of this Agreement shall have no effect on the term of the Option, except as provided therein. 2.4 Expenses. The Employee shall be reimbursed for all reasonable -------- expenses incurred by the Employee at the request and on behalf of the Company. Section 3. Term; Termination of Agreement. The employment of the ------------------------------ Employee hereunder shall commence as of the date hereof and shall continue until the earlier of (i) December 31, 2000, or (ii) the occurrence of any of the following events: (a) the death or total disability of the Employee (total disability meaning the failure of the Employee to perform his normal required services hereunder for a period of six consecutive months during the term hereof by reason of the Employee's mental or physical disability) (a "Disability Termination Event"); (b) termination by the Company of the Employee's employment hereunder, upon 10 days prior written notice to the Employee, for "Good Cause," which shall exist upon the occurrence of any of the following: (i) the Employee is convicted of, pleads guilty to, or confesses to any felony or any act of fraud, misappropriation or embezzlement, (ii) the Employee has engaged in a fraudulent act to the material damage or prejudice of the Company or any affiliate of the Company, (iii) the Employee illegally used controlled substances, (iv) any material act or omission by the Employee involving malfeasance or negligence in the performance of the Employee's duties to the Company to the material detriment of the Company and, within thirty (30) days after written notice from the Company of any such act or omission, the Employee has not corrected such 2 act or omission, (v) the entry of an order of a court that remains in effect and is not discharged for a period of at least sixty (60) days, which enjoins or otherwise limits or restricts the performance by the Employee in any material way of any of his duties to the Company under this Agreement, that relates to any contract, agreement or commitment made by or applicable to the Employee in favor of any former employer or any other person, or (vi) the Employee otherwise fails to comply with the terms of this Agreement or deviates from any written policies or directives of the Board of Directors, in either such case to the material detriment of the Company, and, within thirty (30) days after written notice from the Company of such failure or deviation, the Employee has not corrected such failure (in any such case, a "Good Cause Termination Event"); (c) termination by the Company of the Employee's employment hereunder, upon ten (10) days prior written notice to the Employee, for any reason other than as a result of a Good Cause Termination Event or Disability Termination Event (a "No Cause Termination Event"); or (d) voluntary termination by the Employee of the Employee's employment hereunder (a "Voluntary Termination Event"). Section 4. Result of Termination. --------------------- 4.1 Termination As Result Of Voluntary Or Good Cause Termination ------------------------------------------------------------ Events. If the Employee's employment hereunder is terminated prior to December - ------ 31, 2000 as a result of the occurrence of a Voluntary Termination Event or a Good Cause Termination Event, as of the date of the termination of the Employee's employment, the Company shall have no further obligation to pay to the Employee any Base Salary, Bonus or any other additional benefits pursuant to Section 5 of this Agreement except to the extent the Company is required to provide fringe benefits following termination of employment to former employees of the Company generally under the terms of a specific fringe benefit plan or policy. If such termination occurs prior to the end of any pay period, the Employee shall be entitled to receive a portion of the Base Salary for such pay period pro rated to the date on which the Employee's employment is terminated. 4.2 Disability Termination Event. If the Employee's employment ---------------------------- hereunder is terminated prior to December 31, 2000 as a result of the occurrence of a Disability Termination Event, as of the date of the termination of the Employee's employment hereunder, the Company shall have no further obligation to pay the Employee any Base Salary or any other additional benefits pursuant to Section 5 of this Agreement other than medical insurance except to the extent the Company is required to provide fringe benefits following termination of employment to former employees of the Company generally under the terms of a specific fringe benefit plan or policy. The Company shall provide medical insurance substantially similar to the medical insurance provided to the Employee prior to the termination of his employment for the thirty-six 3 consecutive months immediately following such termination. The Employee shall be entitled to receive a portion of the Bonus for the year pro rated to the date on which the Employee's employment is terminated. If such termination occurs prior to the end of any pay period, the Employee shall be entitled to receive a portion of the Base Salary for such pay period pro rated to the date on which the Employee's employment is terminated. Notwithstanding the foregoing, the Employee shall be entitled to whatever benefits are available pursuant to the disability insurance contemplated by Section 5.2 hereof. 4.3 Termination As Result Of No Cause Termination Event. If the --------------------------------------------------- Employee's employment hereunder is terminated prior to December 31, 2000 as a result of the occurrence of a No Cause Termination Event, the Company shall pay to the Employee as severance pay and in lieu of any other payments under this Agreement other than as contemplated by Sections 2.3 and 2.4 hereof, (i) in twelve equal monthly installments commencing 10 days after such termination, an amount equal to the aggregate Base Salary then in effect that would have been payable to the Employee pursuant to this Agreement if the Employee had remained employed by the Company for the twelve consecutive months immediately following the termination of his employment and (ii) in a lump sum payment, an amount equal to the Bonus for the year (when finally determined) pro rated to the date on which the Employee's employment is terminated. If such termination occurs prior to the end of any pay period, the Employee also shall be entitled to receive a portion of the Base Salary for such pay period pro rated to the date on which the Employee's employment is terminated. As of the date of the termination of the Employee's employment, the Company shall have no further obligation to pay any of the additional employment benefits pursuant to Section 5 of this Agreement except to the extent the Company is required to provide fringe benefits following termination of employment to former employees of the Company generally under the terms of a specific fringe benefit plan or policy. The Company shall provide medical insurance substantially similar to the medical insurance provided to the Employee prior to the termination of his employment for the twelve consecutive months immediately following such termination. Section 5. Additional Employment Benefits ------------------------------ The Company shall provide the Employee with the following fringe benefits: 5.1 Fringe Benefits. The Company shall provide the Employee with --------------- medical, dental, life insurance, disability, retirement and other fringe benefits as the Board of Directors of the Company shall authorize from time to time for the benefit of employees of the Company generally. 5.2 Disability Insurance. The Company shall provide the Employee -------------------- with disability insurance in the amount equal to sixty (60) percent on an annualized basis of Base Salary at no cost to the Employee. 5.3 Automobile. The Company shall pay to the Employee a monthly ---------- allowance to reimburse (i) the cost of leasing an automobile for use by the Employee, and (ii) the operating 4 expenses including the costs of gasoline and in the course of the Company's business. The monthly allowance for leasing an automobile shall be $800 and the operating expense allowed shall be $45 a month. 5.4 Vacation. The Employee shall be entitled to receive vacation in -------- accordance with the vacation policies of the Company. Section 6. Confidential Information, Trade Secrets and Noncompetition ---------------------------------------------------------- Covenant - -------- 6.1 Confidential Information. The Employee hereby agrees that, ------------------------ except as otherwise required in the course of his performance of any duties he may have as an employee of the Company, during the period commencing on the date hereof and ending on the second anniversary of the date on which the Employee's employment is terminated: (a) Neither the Employee nor any company or organization in which the Employee has a direct or indirect financial interest will directly or indirectly own, manage, operate, join, control or participate in the ownership, management, operation or control of or be connected in any manner with, any business conducted under any corporate or trade name of the Company or name similar thereto without the prior written consent of the Company; and (b) The Employee shall hold in confidence and not directly or indirectly disclose to anyone or use or otherwise appropriate for the Employee's own benefit (i) any pricing information, marketing information or sales technique of the Company, or any subsidiary of the Company, or (ii) any other of the following confidential information or documents of or relating to the Company or any subsidiary of the Company: confidential records, computer software programs, client and customer lists, terms of license or franchise agreements, terms of contracts with clients and customers, and planning and financial information of the Company or any subsidiary of the Company (collectively, the "Confidential Data"). Notwithstanding the foregoing, Confidential Data shall not include any information of the type specified above to the extent that such materials or information have become generally available to the public by the act of one who has the right to disclose such information without violating any right of the Company to which such information pertains. The Employee hereby acknowledges and agrees that the prohibitions against disclosure of Confidential Data recited herein are in addition to, and not in lieu of, any rights or remedies that the Company or any subsidiary of the Company may have pursuant to the laws of any jurisdiction or at common law to prevent the disclosure of trade secrets, and the enforcement by any such corporation of its rights and remedies pursuant to this Agreement shall not be construed as a waiver of any other rights or available remedies that it may possess in law or equity in the absence of this Agreement. 5 6.2 Use of Confidential Information. The Employee represents and ------------------------------- warrants to the Company that he has not knowingly or wrongfully utilized any trade secrets or confidential information proprietary to any former employer or other party, including, but not limited to, confidential business information of such former employer or other party. The Employee covenants that during the term of this Agreement he will not induce the Company to use any confidential information that belongs to a former employer or other party. 6.3 Noncompetition -------------- (a) Coverage. The Company is engaged in the business of developing, -------- marketing and selling (i) computer hardware, software, support services, pay- per-view ordering services and outsourced telephony, internet and faxed-based transactions and services for the purpose of automating certain customer service functions, and (ii) computerized outbound telephone dialing hardware, software and support services (these businesses, and any other businesses in which the Company competes during the term hereof are hereafter referred to as the "Company Business") in the United States and throughout the world addressing a variety of vertical markets, including the financial institutions, education, cable television, health care, newspaper, utilities and telecommunications industries. The Employee acknowledges that the goodwill of the Company and the business activities of the Company extend throughout the areas in which it conducts business. (b) Covenants. In consideration of the Company's continued employment --------- of the Employee pursuant to the terms of this Agreement, the Employee hereby agrees that the Employee will not, during the period commencing on the date hereof and ending on the first anniversary of the date on which the Employee's employment is terminated, provided that if the Employee's employment is terminated as a result of the occurrence of a No Cause Termination Event, such period shall end on the first anniversary of the date on which the Employee receives his last severance payment pursuant to Section 4.3 hereof (in either case, the "Noncompete Period") (other than as an employee of or a consultant to the Company), directly or indirectly: (i) engage in, for the purpose of competing with the Company Business in any state(s) in which the Employee anticipated working for the Company when he entered into this Agreement and worked for the Company at any time during the twelve (12) months prior to the termination of Employee's employment (the "Pre-Termination Period"), any activities or services identical or similar to any of the Employee's principal responsibilities with the Company at any time during the Pre-Termination Period; (ii) call on or solicit, or attempt to call on or solicit, for the purpose of competing with the Company Business, any client or customer, or actively sought prospective client or customer, of the Company with whom or which the Employee had material contact at any time during the Pre- Termination Period; and/or 6 (iii) solicit or attempt to solicit, for the purpose of enticing or encouraging the employee to leave the Company, any employee of the Company with whom the Employee had material contact at any time during the Pre-Termination Period. The Employee agrees that the restrictions contained herein are reasonable and designed to protect only the legitimate business interests of the Company. Employee further agrees that during the course of his employment, he will receive training from the Company and be exposed to its proprietary information so that the Employee would be uniquely qualified to compete against the Company. Accordingly, the Employee acknowledges that he could cause irreparable injury to the Company by violating these covenants. 6.4 Severability. If a judicial determination is made that any of ------------ the provisions of this Section 6 constitutes an unreasonable or otherwise unenforceable restriction against the Employee, the provisions of this Section 6 shall be rendered void only to the extent that such judicial determination finds such provisions to be unreasonable or otherwise unenforceable. In this regard, the Company and the Employee hereby agree that any judicial authority construing this Agreement shall be empowered to sever or modify any portion of any geographic restriction, any prohibited business activity or any time period from the coverage of this Section 6 and to apply the provisions of this Section 6 to the remaining portion of the geographic restriction, the remaining business activities or the remaining time period not so severed or modified by such judicial authority. 6.5 Equitable Relief. The Employee acknowledges that the services to ---------------- be rendered by the Employee hereunder are of a special character, the loss of which cannot be compensated adequately in damages in an action at law. By reason thereof, the Employee agrees that the Company shall be entitled, in addition to any other remedies it may have under this Agreement or otherwise, to injunctive and other equitable relief to prevent or curtail any breach of this Agreement by the Employee. Section 7. Miscellaneous ------------- 7.1 Binding Effect. This Agreement shall inure to the benefit of and -------------- shall be binding upon the Employee and his executor, administrator, heirs, personal representative and assigns, and the Company and its successors and assigns; provided, however, that the Employee shall not be entitled to assign or delegate any of his rights or obligations hereunder without the prior written consent of the Company. 7.2 Governing Law. This Agreement shall be deemed to be made in, and ------------- in all respects shall be interpreted, construed and governed by and in accordance with, the laws of the State of Georgia. No provision of this Agreement or any related document shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or drafted such provision. 7 7.3 Headings. The section and paragraph headings contained in this -------- Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 7.4 Notices. Unless otherwise agreed to in writing by the parties ------- hereto, all communications provided for hereunder shall be in writing and shall be deemed to be given when delivered in person or five (5) business days after being sent by first class mail and addressed as follows: (a) If to the Employee: J. Lawrence Bradner 210 Hepplewhite Drive Alpharetta, Georgia 30202 (b) If to the Company, addressed to: Syntellect Inc. 1000 Holcomb Woods Parkway Suite 410A Roswell, Georgia 30076 Attention: Board of Directors 7.5 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 7.6 Entire Agreement. This Agreement is intended by the parties ---------------- hereto to be the final expression of their agreement with respect to the subject matter hereof and is the complete and exclusive statement of the terms thereof, notwithstanding any representations, statements or agreements to the contrary heretofore made. This Agreement may be modified only by a written instrument signed by each of the parties hereto. 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. SYNTELLECT INC. By:/s/ Jack Kelly, Jr. -------------------------------------------- Name: Jack Kelly, Jr. ------------------------------------ Title: Chairman of Compensation Committee ----------------------------------- EMPLOYEE /s/ J. Lawrence Bradner ----------------------------------------- J. Lawrence Bradner 9 EX-23 6 ACCOUNTANTS CONSENT Exhibit 23 The Board of Directors Syntellect Inc: We consent to incorporation by reference in the registration statements (No. 33-35974, 33-48637, 33-63642, 333-02362, 333-02368, 333-44587, 333-58027, 333- 58029) on Form 10-K of our report dated February 12, 1999, relating to the 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, and all related schedules, which report appears in the December 31, 1998, annual report on Form 10-K of Syntellect Inc. /s/ KPMG LLP Atlanta, Georgia March 29, 1999 EX-27.1 7 FINANCIAL DATA SCHEDULE - 1998
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF SYNTELLECT, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENT OF OPERATIONS OF SYNTELLECT, INC. AND SUBSIDIARIES FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 3,236 8,298 11,202 932 2,973 26,672 5,429 2,538 32,133 11,875 0 0 0 137 19,676 32,133 22,585 47,953 13,189 22,658 28,497 597 68 (2,618) 0 (2,618) 0 0 0 (2,618) (.19) (.19)
EX-27.2 8 FINANCIAL DATA SCHEDULE - 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF SYNTELLECT, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENT OF OPERATIONS OF SYNTELLECT, INC. AND SUBSIDIARIES FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 2,290 8,233 12,949 1,199 2,593 25,580 12,139 6,326 34,808 12,092 0 0 0 136 22,050 34,808 24,349 48,182 16,093 25,678 30,548 493 97 120 (21) 141 0 0 0 141 .01 .01
EX-27.3 9 FINANCIAL DATA SCHEDULE - 1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF SYNTELLECT, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1996 AND THE CONSOLIDATED STATEMENT OF OPERATIONS OF SYNTELLECT, INC. AND SUBSIDIARIES FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1 4,928 1,275 13,744 1,233 4,085 26,235 7,676 3,229 34,808 12,558 0 0 0 135 21,886 34,808 31,811 55,305 18,645 27,783 30,555 480 33 (2,780) 0 (2,780) 0 0 0 (2,780) (.21) (.21)
-----END PRIVACY-ENHANCED MESSAGE-----