10-Q 1 p64132e10-q.txt 10-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------------------------------- FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 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 Number: 0-18323 SYNTELLECT INC. ---------------- (Exact name of registrant as specified in its charter) Delaware 86-0486871 ------------------ ---------- (State or other jurisdiction of (IRS employer identification number) incorporation) 16610 N. Black Canyon Highway, Suite 100, Phoenix, Arizona 85053 (Address of principal executive office) (Zip Code) (602) 789-2800 (Registrant's telephone number, including area code) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 11,337,174 shares of common stock, $.01 par value per share, were outstanding on November 10, 2000. ================================================================================ 1 2 SYNTELLECT INC. AND SUBSIDIARIES INDEX
Page PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 3 Condensed Consolidated Statements of Operations - Three Months and Nine Months Ended September 30, 2000 and September 30, 1999 4 Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2000 and September 30, 1999 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 11 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 13 EXHIBITS Exhibit Index 14
2 3 ITEM 1. FINANCIAL STATEMENTS SYNTELLECT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
September 30, December 31, 2000 1999 ---- ---- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 7,139 $ 6,185 Marketable securities ($100 and $1,100 restricted in 2000 and 1999, respectively) 1,100 1,100 Trade receivables, net of allowance for doubtful accounts of $702 and $784, respectively 10,987 9,999 Other receivables 748 1,406 Inventories, net 1,085 2,041 Prepaid expenses 683 677 ------- ------- Total current assets 21,742 21,408 Property and equipment, net 4,103 4,787 Other assets 313 29 ---------- --------- Total Assets $26,158 $26,224 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $2,677 $1,873 Accrued liabilities 2,722 3,268 Customer deposits 985 3,238 Deferred revenue 3,761 2,914 Capital lease obligations 137 248 --------- --------- Total current liabilities 10,282 11,541 Capital lease obligations - less current portion 365 293 --------- --------- Total liabilities 10,647 11,834 --------- --------- Shareholders' equity: Preferred stock, $.01 par value per share. Authorized 2,500,000 shares; no shares issued or outstanding - - Common stock, $.01 par value per share. Authorized 25,000,000 shares; issued, 14,418,586 and 13,889,487, respectively 144 139 Additional paid-in capital 62,076 61,177 Accumulated deficit (38,709) (41,938) Accumulated other comprehensive loss (283) (32) --------- --------- 23,228 19,346 Treasury stock, at cost, 2,502,432 and 1,897,432 shares, respectively (7,717) (4,956) --------- --------- Total shareholders' equity 15,511 14,390 -------- -------- Total liabilities and shareholders' equity $26,158 $26,224 ======= =======
See accompanying notes to condensed consolidated financial statements. 3 4 SYNTELLECT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2000 1999 2000 1999 ---- ---- ---- ---- Net revenues: Licenses and hardware $6,125 $4,651 $17,456 $12,615 Services 4,945 7,428 15,502 17,554 Hosted services 1,354 1,978 4,245 6,149 ----- ----- ----- ----- Total net revenues 12,424 14,057 37,203 36,318 Cost of revenues: Licenses and hardware 1,443 1,608 4,445 4,256 Services 2,373 3,642 7,745 10,855 Hosted services 988 1,168 3,035 3,962 --- ----- ----- ----- Total cost of revenues 4,804 6,418 15,225 19,073 ----- ----- ------ ------ Gross margin 7,620 7,639 21,978 17,245 Operating expenses: Selling, general and administrative 5,933 4,978 16,654 16,724 Research and development 738 1,075 2,332 3,442 --- ----- ----- ----- Total operating expenses 6,671 6,053 18,986 20,166 ----- ----- ------ ------ Operating income (loss) 949 1,586 2,992 (2,921) Other income (expense), net: Interest income 70 54 245 231 Other 12 493 (8) 495 -- --- --- --- Total other income 82 547 237 726 -- --- --- --- Income (loss) before income taxes 1,031 2,133 3,229 (2,195) Income taxes - - - - ------- ------- -------- -------- Net income (loss) $ 1,031 $ 2,133 $3,229 $(2,195) ======= ======= ====== ======== Net income (loss) per common share - basic $ 0.09 $ 0.16 $ 0.27 $ (0.16) ====== ====== ====== ======== Net income (loss) per common share - diluted $ 0.08 $ 0.16 $ 0.25 $ (0.16) ====== ====== ====== ======== Weighted average shares - basic 11,894 13,170 11,845 13,373 Weighted average shares - diluted 13,047 13,550 12,856 13,373 Other comprehensive income (loss): Foreign currency translation adjustment (141) 152 (251) (14) Unrealized loss on marketable securities - - - (6) ------- ------- -------- -------- Other comprehensive income (loss) (141) 152 (251) (20) ------- ------- -------- -------- Comprehensive income (loss) $ 890 $ 2,285 $2,978 $(2,215) ===== ======= ====== ========
See accompanying notes to condensed consolidated financial statements. 4 5 SYNTELLECT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine Months Ended September 30, 2000 1999 ---- ---- Cash flows from operating activities: Net income (loss) $ 3,229 $(2,195) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,352 1,864 Provision for doubtful accounts 316 821 Decrease in provision for inventory obsolescence (117) - Increase in receivables (1,304) (2,670) Decrease in other receivables 658 - Decrease in inventories 1,073 714 Increase (decrease) in accounts payable 804 (931) Increase (decrease) in accrued liabilities (546) 827 Increase (decrease) in customer deposits (2,253) 1,510 Increase in deferred revenues 847 176 Change in other assets and liabilities (291) 199 ------ --- Net cash provided by operating activities 3,768 315 ----- --- Cash flows from investing activities: Purchase of marketable securities - (11,627) Maturities of marketable securities - 16,235 Sale of property and equipment 534 - Purchase of property and equipment (839) (1,202) ----- ------- Net cash provided (used) by investing activities (305) 3,406 ------- ------- Cash flows from financing activities: Proceeds from issuance of common stock 904 190 Purchase of treasury stock (2,761) (3,500) Principal payments on capital lease obligations (401) (198) -------- -------- Net cash used in financing activities (2,258) (3,508) --------- --------- Effect of exchange rates on cash (251) (20) --------- -------- Net increase in cash and cash equivalents 954 193 Cash and cash equivalents at beginning of period 6,185 3,236 ----- ------- Cash and cash equivalents at end of period $ 7,139 $ 3,429 ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest $ 26 $ 52 ======== ======== Non-cash Investing and Financing Activities Property and equipment acquired under capital lease $ 362 $ - ========= =======
See accompanying notes to condensed consolidated financial statements. 5 6 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (1) BASIS OF PRESENTATION The accompanying unaudited, condensed, consolidated financial statements include the accounts of Syntellect Inc. ("Syntellect" or the "Company") and its wholly-owned subsidiaries, Syntellect Canada Inc., Syntellect Europe Ltd., Syntellect Deutschland GmbH, Syntellect Technology Corporation and Syntellect Interactive Services, Inc. ("SIS"). All significant intercompany balances and transactions have been eliminated in consolidation. The financial statements have been prepared in accordance with generally accepted accounting principles, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the financial statements include all adjustments of a normal recurring nature which are necessary for a fair presentation of the results for the interim periods presented. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures are adequate to make information presented not misleading, it is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's 1999 Annual Report on Form 10-K. The results of operations for the nine months ended September 30, 2000 are not necessarily indicative of the results to be expected for the full year. 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") and Statement of Position 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. INCOME TAXES The Company has not recorded income tax expense due to the utilization of Net Operating Loss Carry-forwards against which the Company has recorded a 100% valuation allowance. (2) BUSINESS SEGMENTS 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 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 two operating segments which are organized around differences in products and services: Systems, which includes Licenses and Hardware, Services and Patents; and Hosted Services ("HS):
Quarter ended September 30, 2000 SYSTEMS HS TOTAL -------------------------------- ------- -- ----- Revenues from customers $ 11,070 $ 1,354 $ 12,424 Depreciation and amortization 247 150 397 Segment income 1,067 (36) 1,031 Expenditures for segment assets 348 - 348 As at September 30, 2000 Segment assets 22,530 3,628 26,158 Capital lease obligation 502 - 502
6 7
Quarter ended September 30, 1999 SYSTEMS HS TOTAL -------------------------------- ------- -- ----- Revenues from customers $ 12,079 $ 1,978 $ 14,057 Depreciation and amortization 524 116 640 Segment income (loss) 2,032 101 2,133 Expenditures for segment assets 243 147 390
As at September 30, 1999 Segment assets 24,265 3,848 28,113 Capital lease obligation 608 - 608
Nine months ended September 30, 2000 SYSTEMS HS TOTAL ------------------------------------ ------- -- ----- Revenues from customers $ 32,958 $ 4,245 $ 37,203 Depreciation and amortization 902 450 1,352 Segment income (loss) 3,592 (363) 3,229 Expenditures for segment assets 658 181 839
Nine months ended September 30, 1999 Revenues from customers $ 30,169 $ 6,149 $ 36,318 Depreciation and amortization 1,514 350 1,864 Segment income (loss) (2,269) 74 (2,195) Expenditures for segment assets 633 569 1,202
Net revenues, by geographic area, are as follows:
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- Geographic Area 2000 1999 2000 1999 --------------- ---- ---- ---- ---- United States 9,439 11,082 24,598 30,019 United Kingdom 2,464 2,459 11,689 5,783 Other 521 516 916 516 --- --- --- --- 12,424 14,057 37,203 36,318 ====== ====== ====== ======
No single customer accounted for more than 10% of the Company's revenues during the nine-month periods ended September 30, 2000 or 1999. Net long lived assets, by geographic area, at September 30:
Geographic Area 2000 1999 --------------- ------- -------- United States $ 3,994 $ 4,576 United Kingdom 109 211 ------- ------- $ 4,103 $ 4,787 ======= =======
(3) INVENTORIES Inventories consist of the following:
September 30, December 31, 2000 1999 ------- ------- Finished goods $ 263 $ 705 Purchased components 297 611 Repair, warranty and maintenance inventory 790 1,600 ------- ------- 1,350 2,916 Less allowances for obsolescence (265) (875) ------- ------- $ 1,085 $ 2,041 ======= =======
7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NET REVENUES Net revenues for the quarter ended September 30, 2000 were $12.4 million, a decrease of $1.6 million, or 12%, from the comparable prior quarter of 1999 when revenues benefited from a $2.4 million patent infringement lawsuit settlement. For the nine-month period ended September 30, 2000, net revenues were $37.2 million, an increase of 2% from $36.3 million for the corresponding period in 1999. Net revenues consist of Licenses and Hardware, Services, and Hosted Services, which represented 49%, 40%, and 11% of net revenues, respectively, for the quarter ended September 30, 2000, and 47%, 42%, and 11% of net revenues, respectively, for the nine-month period ended September 30, 2000. Licenses and Hardware revenue increased $1.5 million, or 32%, over the comparable quarter, and increased $4.8 million, or 38%, over the corresponding nine-month period. Primary Licenses and Hardware sales include Vista(TM), an open standards-based Interactive Communications Management ("ICM") software platform for enterprise customer call centers; VocalPoint, an open architecture Interactive Voice Response ("IVR") platform; VocalPoint Interactive Services, providing computer telephony integration ("CTI") functionality; and Interactive Web Response ("IWR"). ICM, IVR, CTI and IWR are all products designed to help organizations handle large volumes of incoming telephone, fax and internet traffic. Generally, by interfacing with the organization's computers, these products allow the originator of the call, fax, or internet transmission to help themselves without operator assistance, or to request human assistance at any time. Legacy products include the Premier and Premier 030 proprietary IVR systems. The largest contributor to the increase in Licenses and Hardware revenues for the quarter was the Company's Vista ICM product with sales of $5.4 million, or 89% of Licenses and Hardware sales. For the nine-month period ended September 30, 2000, Vista ICM product sales were $14.4 million, or 83% of Licenses and Hardware sales. Services revenues decreased $2.5 million, or 33%, from the same quarter of the prior year when such revenues were augmented by the aforementioned $2.4 million patent infringement lawsuit settlement, and decreased $2.1 million, or 12% from the comparable nine-month period. For the quarter, the Applications and Installations component of Services revenues increased $240,000 or 13% over the prior-year period, and for the nine-month period increased $1.2 million or 22% over the prior-year period. The increases in both periods were due primarily to the strength of the Vista ICM product. For the quarter, the Maintenance component of Services revenues increased $343,000, or 17% from the prior-year, and for the nine-month period decreased $920,000, or 12% from the prior year. The improvement in the current quarter's maintenance numbers was expected as extended warranties given to early Vista customers are expiring and these customers are entering into maintenance contracts. The current nine-month maintenance revenues are lower in comparison to the prior year's primarily because of the extended Vista warranties and because the Company sold its Dialer business in the third quarter of 1999 which included maintenance contracts. In addition, some maintenance contracts which were in force during 1999 were not renewed as the Company had earlier announced that certain products covered by the contracts were not Year 2000 compliant and would not be made so. For the quarter, the Other Services component of Services revenues decreased $3 million, or 89% from the prior year, and for the nine-month period the component decreased $ 2.3 million or 50% from the prior year. The difference for the quarter was due primarily to the aforementioned $2.4 million patent infringement settlement in the comparable quarter in 1999. The difference in the nine-month periods was also due primarily to patent infringement settlements; $775,000 in 2000, compared to $2.4 million in 1999. The Company does not expect any further revenue related to the Company's former patent portfolio. Hosted Services revenues decreased by $624,000, or 32%, quarter-over-quarter and $1.9 million, or 31%, from the comparable nine-month period. The primary reason for the declines rests with the Company's Home Ticket, a pay-per-view service for cable television providers which is offered through SIS. The cable television industry has been deploying new order entry technologies for consumer purchases of pay-per-view events which do not utilize toll free 800 numbers. This has resulted in a downward trend in transaction processing fees for the Company; a trend which is expected to continue. To offset the decline in pay-per-view services, the Company is offering other hosted services including benefits enrollment, broadcast faxing, call center processing, audio-text, and dealer locator 8 9 services; however, there can be no assurances as to whether, or when, such efforts will wholly supplant declining pay-per-view revenues. International revenues for the third quarter of 2000 were $3.0 million, or 24% of total revenues, compared to $3.0 million, or 21%, for the third quarter of 1999. For the current quarter, Hardware and Licenses accounted for $2.1 million of the revenue, and Services accounted for $855,000. For the prior-year quarter, Hardware and Licenses accounted for $2.4 million of the revenue, and Services accounted for $604,000. For the nine-month period ended June 30, 2000, international revenues were $12.6 million, or 34% of total revenues, as compared to $6.3 million, or 17% for the prior-year period. For the current nine-month period, Hardware and Licenses accounted for $10.5 million of the revenue, and Services accounted for $2.1 million. For the prior-year nine-month period, Hardware and Licenses accounted for $4.3 million of the revenue, and Services accounted for $2.0 million. International revenues typically consist of a small number of larger orders and are subject to quarter-to-quarter fluctuations. GROSS MARGIN The gross margin percentage for the quarter ended September 30, 2000 was 61% of net revenues, compared to 54% in the comparable prior-year quarter. The gross margin percentage for the nine months ended September 30, 2000 was 59% of net revenues as compared to 47% in the prior-year period. The gross margin percentage for Licenses and Hardware Sales in the quarter ended September 30, 2000 increased to 76% from 65% in the prior year period. For the nine-month period, the gross margin percentage on Licenses and Hardware Sales was 75% compared to 66% in the prior-year period. The improved margins for both periods were primarily due to decreases in the content of relatively lower margin third party licenses and material. The gross margin percentage on Services increased to 52% from 51% in the comparable quarter, and increased to 50% from 38% in the comparable nine-month period. Services margins, less the contributions of patent lawsuit settlements, increased to 52% from 43% in the comparable quarter, and increased to 48% from 33% in the comparable nine-month period. The increased margins were due primarily to reductions in headcount and outside contractor expense. The gross margin percentage for Hosted Services decreased to 27% from 41% in the comparable quarter, and decreased to 29% from 36% in the comparable nine-month period. Hosted Services margins for the current three and nine-month periods declined on reduced sales primarily due to the relatively fixed nature of Service Bureau costs. 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 quarterly 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 the third quarter and the first nine months of 2000 are not necessarily indicative of the results to be expected for the full year. OPERATING EXPENSES Operating expenses for the third quarter of 2000 were $6.7 million, an increase of $600,000, or 10%, from the prior year quarter. For the nine month period ended September 30, 2000, operating expenses were $19 million, a decrease of $1.2 million, or 6%, from the prior year period. Selling, general and administrative expenses increased $955,000, or 19%, from the comparable quarter and decreased $70,000, or less than one percent from the corresponding nine month period. The increase for the three-month period was due primarily to increased headcount in administration and domestic sales, employee incentives, desktop software, and occupancy costs related to the Company's move of its headquarters to a more suitable facility. Research and development expenses for the third quarter of 2000 decreased $337,000, or 31%, from the prior year quarter and decreased by $1.1 million, or 32%, from the comparable nine month period. The spending decreases are primarily the result of the Company's transformation from being a hardware and software company to being primarily a software company. However, the Company believes that R&D spending will probably increase in future periods. 9 10 OTHER INCOME Apart from the interest portion, Other Income for the current three and nine-month periods was minimal compared to the prior-year periods which benefited from a $509,000 gain from the sale of the Company's predictive dialer product line during the third quarter of 1999. NET INCOME (LOSS) Syntellect reported net income of $1.0 million, or $0.08 per diluted share, for the third quarter of 2000, compared to net income of $2.1 million, or $0.16 per diluted share, for the prior year quarter. For the nine-month period ended September 30, 2000, the Company reported net income of $3.2 million, or $0.25 per diluted share, compared to a net loss of $2.2 million, or $(0.16) per share, for the comparable prior year period. LIQUIDITY AND CAPITAL RESOURCES For the first nine months of 2000, the Company had net income of $3.2 million. After adjustment for non-cash activities and the changes in certain balance sheet items, the Company's operations provided positive cash flows of $3.8 million compared to cash flows of $315,000 in the same period of 1999. An increase in accounts receivable and decreases in customer deposits and accrued liabilities were more than offset by decreases in other receivables and inventories, and by the increases in accounts payable and deferred revenues, and the effects of the non-cash items depreciation, provision for doubtful accounts, and provision for inventory obsolescence. Investing activities used $305,000 during the period. The sale of property and equipment provided $534,000, while cash used in the acquisition of fixed assets totaled $839,000. Cash used in financing activities totaled $2.3 million for the period. Proceeds from the issuance of common stock totaled $904,000; while the purchase of treasury stock used $2.8 million, and principal payments on capital lease obligations used $401,000. Syntellect had working capital of $11.4 million at September 30, 2000, as compared to $9.9 million at December 31, 1999. The current ratio was 2.1:1 and 1.85:1 on such dates, respectively. Cash, cash equivalents and marketable securities at the end of the third quarter totaled $8.2 million as compared with $7.3 million at year end. Syntellect believes that its current cash, cash equivalents and marketable securities, combined with future cash flows from operating activities, and its borrowing capacity are sufficient to support the Company's operations for the next twelve months. On October 11, 2000 the Company entered into a one-year credit agreement with a bank for a $4 million revolving line of credit for general corporate purposes with all of the Company's assets as collateral. The loan agreement contains various restrictions on the Company, including limitations on the incurrence of additional debt, and restrictions on the Company's ability to repurchase Company stock, make acquisitions, or consolidate or merge into any other entity. In addition, the loan agreement contains certain financial covenants, including a minimum interest coverage ratio, a minimum liquidity ratio, and a maximum funded senior debt to EBITDA ratio. The Company has a $100,000 letter of credit pledged as a security deposit for the Company's facility in Chicago, Illinois. This $100,000 letter of credit is secured by a bank certificate of deposit and accordingly, this bank certificate of deposit is restricted as to disposal by the letter of credit agreement. In November, 1999, the Board of Directors approved a stock buyback plan to purchase up to one million shares of the Company's stock over a one-year period. On August 8, 2000 the Board of Directors approved the buyback of an additional 500,000 shares under the plan, and extended the buyback period to August 8, 2001. As of November 10, 2000, the Company had purchased a total of 1,415,000 shares under the plan. 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 two operating segments which are organized around differences in products and services: Systems, which includes Licenses and Hardware, and Services; and Hosted Services. (see Note 2). 10 11 Systems is the operating segment which has products and services including IVR, IWR, CTI, and maintenance. Additionally, this segment held the Company's patent portfolio. In October 1997, the Company sold the patent portfolio to a third party for $10 million. As additional consideration under the agreement, the Company retained certain economic rights, including the right to pursue certain litigation against third parties. Service revenues include payments for settlement of patent lawsuits. The Company recognized $775,000 in revenue in the nine months ended September 30, 2000 from a patent lawsuit, and had $2.4 million of such revenue in the prior-year period. The Company does not expect any further patent related revenue. Hosted Services is the operating segment which has products and services including Home Ticket Pay-Per-View, Hot Spots, Call Redirect, Cyberstats, and a variety of out-sourced electronic capabilities such as benefits enrollment and broadcast faxing. YEAR 2000 Many currently installed computer systems and software products were coded to accept only two-digit year entries in the date code field. Consequently, subsequent to December 31, 1999, many of these systems became subject to failure or malfunction. Although the Company is not aware of any material Year 2000 issues at this time, Year 2000 problems may occur or may be made known to the Company in the future. Year 2000 issues may possibly affect software solutions developed by the Company or third-party software incorporated into the Company's solutions. The Company generally does not guarantee that the software licensed from third parties by the Company's clients is Year 2000 compliant, but the Company does sometimes warrant that solutions written and developed by the Company are Year 2000 compliant. FORWARD LOOKING STATEMENTS This report on Form 10-Q contains "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. 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" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 for a discussion of important factors that could affect the validity of any such forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK FOREIGN CURRENCY EXCHANGE 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 pounds sterling. The U.K. subsidiary's financials including balance sheet, revenue, and operating expenses are transacted in pounds 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 effects of foreign exchange rate fluctuations are not material. 11 12 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 11 - - Computation of net income per share Exhibit 27.1 - - Financial Data Schedule-2000 b) Reports on Form 8-K No current reports on Form 8-K were filed during the three months ended September 30, 2000. 12 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SYNTELLECT INC. Date: November 13, 2000 By: /s/ Timothy P. Vatuone ------------------------------------- Timothy P. Vatuone Vice President, Chief Financial Officer, Secretary and Treasurer By: /s/ Keith A. Pekkala ------------------------------------- Keith A. Pekkala Vice President and Controller, Assistant Secretary (Principal Accounting Officer) 13 14 EXHIBIT INDEX Exhibit 11 - - Computation of net income per share Exhibit 27.1 - - Financial Data Schedule-2000 14