-----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, K4u8oRuJAwpu6XOpvnn83K9YZwAMDfqf7ahtoP2OYU6KYrDvQj5GT9DBzcj2jxgb ILAcvTP3do9QABKL0rA9Lw== 0000950153-02-000589.txt : 20020415 0000950153-02-000589.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950153-02-000589 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 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: 1934 Act SEC FILE NUMBER: 000-18323 FILM NUMBER: 02591900 BUSINESS ADDRESS: STREET 1: 16610 N. BLACK CANYON HIGHWAY STREET 2: SUITE 100 CITY: PHOENIX STATE: AZ ZIP: 85053 BUSINESS PHONE: 602-789-2800 MAIL ADDRESS: STREET 1: 16610 N. BLACK CANYON HIGHWAY STREET 2: SUITE 100 CITY: PHOENIX STATE: AZ ZIP: 85053 10-K 1 p66190e10-k.txt 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 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(R) INC. (Exact name of Registrant as specified in its charter) DELAWARE 86-0486871 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 16610 North Black Canyon Highway Suite 100, Phoenix, AZ 85053 (Address of principal executive offices) (Zip Code) (602) 789-2800 (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: Common Stock, $.01 par value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of common stock held by non-affiliates of the Registrant, computed by reference to the closing price at which the Common Stock was sold as of March 21, 2002, was $18,267,903. (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of the latest practicable date: 11,330,515 shares of Common Stock were outstanding as of March 21, 2002 DOCUMENTS INCORPORATED BY REFERENCE Materials from the Registrant's Proxy Statement relating to its 2002 Annual Meeting of Stockholders (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 General Historical Development of the Company Industry and Market Background Products and Business Segments Sales and Marketing Research and Development Proprietary Rights and Intellectual Property Manufacturing and Suppliers Backlog Employees Executive Officers of the Registrant ITEM 2. PROPERTIES..................................................... 11 ITEM 3. LEGAL PROCEEDINGS.............................................. 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................................ 12 ITEM 6. SELECTED FINANCIAL DATA........................................ 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................... 14 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 24 Interest Rate Risk Foreign Currency Exchange Rate Risk Additional Cautionary Factors That May Affect Future Results ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 29 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................ 53 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 53 ITEM 11. EXECUTIVE COMPENSATION......................................... 53 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................................... 54 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 54 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....................................................... 54 PART I ITEM 1 -- BUSINESS GENERAL Syntellect Inc. (together with its subsidiaries, collectively, the "Company," which may also be referred to as the "Registrant," "we," "us," or "our") develops and implements speech-enabled, self-service, Internet and call processing software and services. We market to large and mid-sized commercial, industrial and government entities through a worldwide direct and indirect distribution network. These products and services are delivered using our flagship product, Vista Interactive Media Response ("Vista IMR"). Vista IMR is a scaleable, client-server, open, standards-based, NT-Java and VoiceXML software platform on which customizable software applications including Interactive Voice Response ("IVR"), Automatic Speech Recognition ("ASR"), Interactive Web Response ("IWR"), and Computer Telephony Integration ("CTI") are developed. The Vista IMR platform gives callers self-service access to data, applications and transactions within an enterprise, leveraging the use of existing databases. Callers typically request information through natural language voice commands and receive the requested information via their choice of voice, fax, e-mail, wireless or the World Wide Web. Our technology is used in enterprise contact centers and, increasingly, in sales force automation, field force automation, supply chain management and employee benefits applications to create Enterprise Voice Portals. We also own and operate an interactive transaction-based Hosted Services center for our customers who prefer to outsource their voice processing or web transaction-based applications completely or in conjunction with their on-site application. Our Hosted Services include, for example, cable and satellite pay-per-view orders, employee benefits enrollment, and utility outage applications. This combination of hosted and on-site voice portals, built upon a single software platform, gives us a unique market position. Using Vista IMR, we provide fully managed and hosted services that mirror what customers might implement on their own premises. By using our Hosted Services center, customers will need very little of their own resources and infrastructure to support their Interactive Media Response ("IMR") platform. Alternatively, we can help design a solution that customers can use to support their own applications while continuing to locate their IMR platform within our facility. Through our Hosted Services center, we provide Service Bureau IMR services offering campaign oriented initiatives such as Lead Capture, Site Locator and disaster mitigation. We also provide a combination of on-site and hosted services with similar value-added options including, for example, electronic payment processing, disaster mitigation and disaster recovery. In addition, we provide a single source for system implementation and on-going system lifecycle support through our professional services organization which provides consulting services for speech recognition application design, and custom application development, installation and integration, as well as after-sale support. HISTORICAL DEVELOPMENT OF THE COMPANY We were founded in 1984 and became an early pioneer in the Interactive Voice Response industry. By 1995, we had become the fourth largest provider of IVR technologies in North America and the largest IVR provider in Europe. Virtually all of our growth during this period was attributable to our proprietary IVR systems (known as Infobot(R) 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 linked to the Internet, faxes, pagers and mobile phones. In 1993, we introduced our first open architecture product, the VocalPoint(R) IVR, and announced the phase-out of our older proprietary systems. On March 14, 1996, we acquired Pinnacle Investment Associates Inc. ("Pinnacle") in a business combination accounted for as a pooling of interests transaction. 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 healthcare industries. Telecorp also 1 operated a transaction-based hosted application center designed primarily to process pay-per-view orders for the cable television industry. Subsequent to the merger, we assumed all of Telecorp's systems functions in Syntellect Inc. and consolidated all hosted application center functions into Syntellect Interactive Services, Inc. ("SIS"), Telecorp's wholly owned subsidiary. Telecorp was dissolved as of December 27, 2000, and SIS became Syntellect Inc.'s wholly owned subsidiary. In 1998, we introduced "Vista", our VocalPoint Interactive Services Transaction Architecture. Vista combines contact 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, efficiency, redundancy, and excellent processing performance. With the introduction of Vista, we began to transition our business from a hardware-based company to a software-based company. In 1999, we sold our Predictive Dialer product line to Noble Systems Corporation. In 1999 and 2000, we significantly enhanced our Vista product line by adding new functionality to the core product and integrating advanced, natural language speech recognition and text-to-speech capabilities. In 2001, we introduced Phase I, an enhanced version of our flagship IMR product, and continued to expand the Java application framework and its application development and management tools. In addition, we added new telephony protocols and languages for international markets. We also launched a solutions consulting group to help customers design and initiate self-service strategies for their customers. We formed a business alliance with Siebel Systems, Inc., a leading enterprise software provider, to speech-enable Siebel eBusiness applications. We continued our expansion into Europe and added additional distribution channels in Taiwan, China, Singapore, India, UAE, Lebanon and Greece. We also commenced offering our customers an education services program with a choice between Web-based or on-site training in the use of our products. In early January 2002, we licensed VoiceXML browser source code version 2.0 from Motorola. That code will be embedded into Vista IMR to give us an industry-leading role as the first company to offer a distributed software platform supporting both Java and VoiceXML version-2.0-compliant, enterprise-level, interactive speech applications. We also entered into a strategic business alliance with Philips Speech Processing, a global leader of speech recognition technology. This alliance allows Syntellect to integrate Philip's SpeechPearl(R) core speech recognition engine into Vista IMR and engage in joint marketing with Philips Speech Processing on a global basis. INDUSTRY AND MARKET BACKGROUND IVR VALUE PROPOSITION STRONG AND GROWING Since its introduction in the 1980's, Interactive Voice Response ("IVR") has gained wide acceptance among the general public and has fulfilled essentially two functions. First, IVR has enabled customer self-service by allowing the use of a touch-tone phone to access a company's database. Second, IVR has enabled a company, through its automated contact center, to obtain sufficient information about a caller to send the caller to an appropriate live agent. According to the Gartner Group, an industry analyst, IVR is significantly less expensive than a live agent. The average cost per call for self-service IVR is $0.45, versus $5.50 for live assistance. As a result of the significant cost savings and rapid return on investment, the market for IVR has continued to grow. Companies strive to achieve the most cost-effective service levels by optimizing their mix of live and self-service call handling using IVR. Datamonitor, another industry analyst, estimates the size of the IVR market (systems and services, but excluding revenue received by third parties such as systems integrators or value-added resellers) at $841 million worldwide for the year 2000, the latest year for which data is available. Despite the current economic slowdown, Datamonitor expects the IVR market to grow at an average annual rate of 11% over the next three years, reaching $1.3 billion in 2004. IVR systems first gained market acceptance through improved customer satisfaction from newly available 24/7 self-service, reduced call hold times, reduced call lengths, and improved call routing as well as consistent, accurate service treatment. Companies enjoy the cost savings resulting from automating low value-added customer interactions which, in turn, frees contact center agents to concentrate on high value-added customer interactions and lowers telephone network charges. Much of the value of IVRs comes from the facilitation of the computer telephony integration ("CTI") of customers' systems and back-offices. For example, information about a caller or 2 customer can be retrieved from a company's Private Automatic Branch Exchange ("PABX") or Automatic Call Distributor ("ACD"), or from a caller entering personal account information. In either case, the information is immediately available on an agent's screen. According to Datamonitor, CTI-enabled IVR systems decrease the length of a call by 18%, on average. SPEECH RECOGNITION WILL ENABLE IVR GROWTH AND MARKET EXPANSION Automatic Speech Recognition ("ASR") and Text-to-Speech ("TTS") applications are replacing touch-tone input and pre-recorded speech output for IVR applications. As existing IVR customers replace older systems, they are increasingly opting for systems utilizing natural language speech recognition. Speech-enabled IVRs provide the same benefits to callers and companies as touch-tone IVR but with significantly improved results. Callers prefer speech recognition to touch-tone as a user interface and therefore use automated systems more frequently. Studies from Giga Information Group, an industry analyst, have shown that caller satisfaction and IVR usage increases from 20% to 60% when speech recognition is used instead of touch-tone. Also, speech recognition saves money by reducing the length of the average call by 30% to 50% compared to menu driven touch-tone IVR-based systems. As reported in a recent study by Frost & Sullivan, another industry analyst, shorter calls mean decreased costs because more customers can be served with the existing agent staff and toll charges decrease by 15% to 50%. Also, valuable agent time is reserved for callers truly needing their assistance. Agents then have more time to engage in additional up-selling and cross-selling activities, which can generate incremental revenue. Datamonitor expects telephony-based speech recognition revenue to grow rapidly at a projected compounded annual rate of 58%, reaching $1.9 billion by the end of 2004. This growth is in addition to the average annual growth rate of 11% expected in the IVR market over the next three years. SPEECH RECOGNITION CREATES A NEW CLASS OF VOICE PORTAL PRODUCTS AND SERVICES Studies from the Kelsey Group, another industry analyst, have shown that the economic benefit of touch-tone IVR is capped at five or six menu options since callers typically abandon self-service and opt for live assistance beyond that point. Those studies further conclude that a speech-enabled IVR user interface is required to enjoy the economic benefits of self-service voice automation. A speech recognition interface overcomes many of the limitations of a touch-tone user interface. Complex menus with numerous prompts can be simplified and reduced or eliminated completely using natural language commands. Entire new classes of applications, such as those involving alphanumeric input of part numbers, addresses or shipment status, are possible using speech recognition. Within contact center applications, the percent of calls automated through self-service increases with speech recognition, and new, more complicated transactions are now possible. The previous examples have focused on traditional contact center applications in which speech recognition has replaced touch-tone as the preferred user interface. New applications are now being extended in entirely new ways across sales, service and marketing outside of typical contact center use. Initially, web-enabled to provide remote, networked access from a PC, these new applications are now being voice-enabled to provide voice access to the same data, applications, and transactions via a telephone. Applications within sales force automation, such as opportunity management, configuration and quote management, partner relationship management, and incentive compensation, readily lend themselves to voice communication by mobile and remote employees and other members of a company's distribution chain. Field force automation applications including field service forecasting, scheduling and dispatch, contract management, warranties, repairs, and parts availability, tracking, and management are also being speech-enabled to provide mobile voice access. Marketing departments are deploying speech-enabled campaign management systems to track the effectiveness of multi-channel marketing programs. Speech recognition is being used in supply chain and order processing applications. Each of these applications has a strong stand-alone business case. As they proliferate within an enterprise, the payback improves because of the economies of scale offered in an enterprise voice portal. We define an Enterprise Voice Portal ("EVP") as a single, distributed software platform shared across multiple applications requiring voice access to data. An EVP utilizes single text-to-speech and advanced speech recognition techniques, leverages and re-uses common words and phrases, and provides a recognizable enterprise voice identity. This platform and associated applications enable real-time, personalized, self-service access to data, applications and transactions. In addition, the user interface tends to be natural language spoken commands, and the output may be any media type including spoken data, fax, e-mail, or wireless text. Creating an enterprise voice 3 portal is the end goal of progressive enterprises striving to better serve their customers, partners, suppliers, and employees in the most cost-effective manner. We believe the scaleable, distributed, standards-based, client-server architecture of our Vista IMR platform provides us with a strong foundation to succeed in the market by delivering user-pleasing, cost-compelling EVP solutions. COMPETITION IS CHANGING The IVR market is changing due to the increased market acceptance of natural language speech recognition. Traditional hardware-based, closed, proprietary architecture IVR platforms designed in the early 1990's sold by historical IVR vendors like Nortel, Avaya and IntervoiceBrite do not readily lend themselves to simple, cost-effective upgrading. As a result, enterprises require whole platform trade-outs which provides an improved market opportunity for Syntellect. While many IVR vendors have not clearly articulated their plans to compete in an increasingly software and open standards, internet-based environment, Syntellect continues to demonstrate leadership in vision and competes effectively for these whole platform trade-outs. Vista IMR represents a clear, cost effective bridge from the old proprietary systems to the new standards based systems. Gartner places enterprise IVR vendors into three different groups: traditional IVR vendors, enterprise voice portal challengers, and vendors that include IVR as part of a broader set of products or functions (for instance, as part of a bundled suite). Traditional IVR leaders, such as Syntellect, continue to dominate the IVR market. Network-based enterprise voice portals, although still an emerging technology, continue to be offered as an alternative to an on-site IVR by companies like Qwest Communications, who acquired the Telera customer base in 2001, and Tellme Networks. Since these companies initially entered the market as consumer portal providers, the market is still evaluating whether they can offer the enterprise-level IT architecture integration and vertical market expertise needed to succeed in enterprise implementations. Vendors that include IVR as part of a broader offering, such as interactive intelligence, provide bundled suites that allow enterprises to implement IVR either as a standalone function or as part of a communication suite. This approach has not yet attained significant market share and remains a niche solution best suited to smaller contact centers, not the market segment targeted by Syntellect. As these platforms become increasingly capable, bundled suite competitors may play a larger role. We are confident that our strong Vista IMR platform and substantial speech recognition voice dialogue design expertise position us favorably to compete in this expanding market. PRODUCTS AND BUSINESS SEGMENTS We have three operating business segments in 2001, 2000, and 1999 which are organized around differences in products and services: Licenses, Services, and Hosted Services. Licenses is our operating business segment that includes our contact center software platform Vista IMR. Vista IMR consists of a broad suite of communications features. Some of the components of Vista IMR include Interactive Voice Response, Interactive Web Response, and Speed Enabled Directory. This business segment also includes all revenue and costs related to hardware sales. Services is our operating business segment that includes customer support in the areas of consulting, project management, application development, installation, functional specifications, training and maintenance services. We generally sell these services as part of the initial sale or, in some cases, as post implementation add-ons. Hosted Services is our operating business segment which provides Service Bureau IMR services offering campaign oriented initiatives such as Lead Capture, Site Locator and disaster mitigation or a combined on-site and hosted services with similar value-added options attached. 4 See Item 8 -- Financial Statements and Supplementary Data, "Notes to Consolidated Financial Statements", Note 15 in this Annual Report to the Securities and Exchange Commission ("Annual Report") for more information on our business segments. LICENSES Vista IMR is built on an open, scalable, standards-based framework forming an integrated foundation for various customer transactions. It allows our customers to use their existing telecommunications and information technology infrastructure to deliver powerful new capabilities to their contact centers and other enterprise level applications such as sales force automation, field force automation, supply chain management and employee benefits administration. Vista IMR supports inbound and outbound telephone (whether touch-tone, voice, or fax), hosted, and web transactions. It also interfaces with other technologies, supports a range of reporting options, and incorporates a standard set of application development, administration and management tools. Vista IMR accommodates an extensive range of object-oriented applications for specific business needs related to multimedia contact centers. The standards used in the Vista IMR framework include: Windows operating system, Java application development language, Motorola powered VoiceXML browser technology, Intel Dialogic voice boards, Sybase relational database, and Intel-based computer hardware. The software for Vista IMR systems is licensed in a typical client server fashion based upon our customers' representations of the number of simultaneous calls the platform is configured to support. System wide software options are also licensed and carry a discrete end user price. Our Advanced Speech Recognition ("ASR") from Nuance or Philips Speech Processing and speaker authentication components from Nuance provide the speech recognition accuracy, scalability, and robustness required to make successful natural language and large vocabulary speech applications available. We have partnered with Nuance Communications to create those applications by utilizing Nuance's SpeechObjects along with Vista IMR's Java application framework. In January 2002, we entered into a global strategic business alliance with Philips Speech Processing to integrate Philip's SpeechPearl core speech recognition engine into Vista IMR commencing in the second quarter of 2002. This alliance will allow our customers to choose from a selection of ASR subsystems based on the feature and pricing value that best fits their needs. Our Vista IMR proactive outbound notification component is used to create, configure, and manage completely automated outbound calling campaigns and generate operational progress reports. Proactive outbound notification applications can range from simple campaigns that deliver straightforward messages to more complex, self-service applications that involve questions to and answers from respondents. Examples of proactive outbound notification are schools reminding parents of days off or utility companies informing customers of power outages. In January 2000, we announced Speech Enabled Directory ("SPEED"), a self-service, call routing system that empowers callers by allowing them to speak the name of a specific individual or department they wish to reach, rather than speaking to an operator or entering an extension number through a touch-tone keypad. SPEED relies on advanced speech recognition algorithms to recognize a spoken name as well as advanced voice-processing capabilities to transfer the call appropriately. When multiple employees have the same name, SPEED prompts the caller for additional information, such as the individual's department, and then makes the appropriate routing decision. SPEED can be configured as a stand-alone product residing on the Vista IMR platform, or it can be configured as part of an enterprise voice portal application. Our Vista IMR fax server component processes fax requests. Customers are able to use our fax server to obtain a facsimile of the information they want using a Vista IMR system. Data from a host screen or database that callers access during a transaction can be programmed to merge with forms, graphics, or logos stored on the system before being faxed to the caller. Callers can then efficiently retrieve pre-defined documents such as product brochures, catalog information, or stock reports. Our Vista IMR Computer Telephony Integration ("CTI") component optimizes contact center agents' productivity by allowing them to handle telephone calls more intelligently and efficiently. For example, by using CTI technology, customer data collected by the system at the initiation of a customer contact session can be delivered to an agent's workstation at the same time as the telephone connection is transferred to that agent's 5 telephone. The simultaneous transfer of a caller's voice and account data results in increased agent productivity, greater effectiveness in resolving customer inquiries, and efficiencies in providing what consumers perceive to be personalized, integrated support. The Vista IMR tools component includes both our VistaView(TM) and VistaGen(R) application generator. VistaView allows users to monitor their Vista servers and applications. Using VistaView, system administrators can examine all aspects of their functioning system, whether the data resides on a single platform or at numerous locations. VistaView can also act as a single point of access for both consolidated and itemized system information. VistaView also supports all Vista IMR system components. VistaGen application generator is an object-oriented application development tool that simplifies the customer's process of building applications. We believe Vista IMR is the technology necessary to support the successful deployment of enterprise voice portals. The cornerstones of our IMR functionality include the ability to: 1. Separate the request media type from the response media; in other words, create a true media exchange. Using the Vista IMR platform, an application may be written that offers callers options as to how they would like to receive the information they have requested. For example, a caller requesting an account statement may be prompted to request that it be delivered by fax or e-mail. Being able to independently structure the front-end (request) media from the back-end (response) media is critical to the flexibly required to meet users' demands. 2. Write applications, integrate third-party components, call third-party services, and absorb third-party software objects using standard, cross-platform development languages. With the continued migration of data to the Internet and the increased demand for voice applications, it is imperative to write applications using standard languages that facilitate the convergence of natural language voice commands and the Web. Natively supporting Java and VoiceXML in a single platform allows the enterprise to develop applications using standard tools and techniques. The use of such a single platform enables the enterprise to select the language best suited to the demands of the application and provides a bridge to the speech interface framework. 3. Enable customers and stakeholders to access the data, application, or transaction service from wherever it resides. Even though Web-based data is exploding in size, existing non-Web systems still house a large percentage of corporate data. Nevertheless, specialty SQL servers, transaction servers, departmental databases, and non Web-enabled applications all contain data that companies may choose to voice-enable. Our Vista IMR platform is designed to make that possible. 4. Provide callers with the ability to quickly connect, at any time, with live assistance during a telephone call or while on the Web. The experience of early e-commerce sites established the absolute necessity of live agent access during a telephone call or Web interaction. Studies show that 26% of the time when Web shopping carts are abandoned, a purchase is in fact made from a competitor. Intelligently moving the user from unassisted interactions to a live agent can be complex. Our Vista IMR platform can connect a caller to a live agent who has already been informed of the caller's identity, what the caller has done or was attempting to do, and who has the appropriate application screen open to provide immediate assistance. We believe our Vista IMR platform is beneficial to more than the contact center. It also serves as a powerful tool for supporting other users such as business prospects, employees, suppliers, partners and investors. Our platform is designed to help our customers be responsive to their customers, and does this by providing access to the information and services they want, when and how they want it, whether the platform is located on the customer's premises or at our Hosted Services center. SERVICES We support our customers with consulting, education, help-line, warranty, and maintenance services in addition to providing programming adjustments to their systems such as for moves, adds, changes, scripting and 6 voice files, and database maintenance services. We focus particularly on developing targeted consulting services in the areas of design analysis, specification development, project management, application development, installation and integration, as each is related to natural language speech recognition. Our services are generally sold as part of the initial sale. In some cases, however, our services are added at a later date or sold as a stand-alone service. Creating a robust, yet user-friendly, speech recognition application requires experience in software design, telephony, networking, client-server systems, databases, linguistics, human response factors, and speech recognition technology. We have years of experience in designing voice user interfaces from dialog design to grammar development and the intricacies of data base access. We have assembled and continue to expand a dedicated speech recognition implementation team to address this significant opportunity. The individuals comprising that team have been specifically trained and have experience from many successful speech recognition implementations of varying degrees of complexity. We believe our speech recognition expertise, built on our IVR history, is critical for bringing effective speech-enabled IMR, voice portal and voice-enabled websites to market. We also believe our experience and skills are highly valued in the market and provide us with a competitive advantage. We provide a standard 30-day warranty on our products, commencing with the installation of each system. After the initial warranty period ends, our hardware and software maintenance services are available on a contract basis. HOSTED SERVICES Our wholly owned subsidiary, Syntellect Interactive Services, Inc. ("SIS"), operates our Hosted Services transaction center in Roswell, outside of Atlanta, Georgia. Our Hosted Services center has IMR, database, and Web server capacity to handle over 5,000 telephone and Internet transactions simultaneously. It offers contract-based telephony and Internet automated transaction services and is designed with full system redundancy and fault-tolerant power protection for 24-hours a day, 7-days a week operation. We believe we are the only provider of speech-enabled technology that offers its customers both on-site capability and outsourced hosted services using a consistent, internally-developed software platform. Companies focusing on their core business, rather than on managing their infrastructures, capitalize on hosted service offerings. Hosted Services offers benefits such as reduced time to market, limited capital expenditure, and less exposure to technology obsolescence. Hosted Services is also ideal for enterprises having limited IT or inadequate in-house expertise to handle complex applications. We utilize our own Vista IMR platform for speech recognition and voice portal applications in our Hosted Services transaction center. As a result, our customers may select the option best suited to their needs. We provide them with the ability to seamlessly move an application between their on-site IMR system and our Hosted Services facility. We offer hosted services, campaign-oriented service bureau services, or a combination of an on-site IMR and hosted service. Service Bureau IMR Services With the Service Bureau IMR services, we utilize our experience and capacity to offer quick, cost-effective, campaign oriented and single or multiple use IMR initiatives. By offering discrete Service Bureau IMR services, we help customers overcome staffing shortages and sporadic campaign requirements that do not justify a permanent investment in infrastructure. We allow customers to minimize capital expense and better utilize departmental operating budgets. The Service Bureau IMR services include Lead Capture, Site Locator and disaster mitigation. LEAD CAPTURE is an automated, telephone-delivered, custom questionnaire initiated and completed by our customer's callers. This service captures the information left by the caller, and allows our customer to build a database of critical sales leads. Lead Capture gives our customer the edge in maximizing its inbound, direct-to-consumer capabilities. 7 SITE LOCATOR is a locate-by-phone service that helps potential customers find an enterprise's nearest location or distributor. This feature-rich product is an extremely cost-effective tool for building store traffic, determining market segmentation and measuring marketing media effectiveness. DISASTER MITIGATION is a service that utilizes our lead capture capabilities in order to avoid the complete loss of communication with our customer's end-users during or after a disaster. In the event of an on-site system outage or disaster, customers can simply redirect their calls to the disaster mitigation service located in a secure, fail-safe environment. Calls are answered, end-users are informed of the outage or disaster, and appropriate information for our customer is recorded. Combined On-Site IMR and Hosted Services We offer value-added options to the core Vista IMR platform (location independent) including, for example, electronic payment processing, disaster mitigation, and disaster recovery. ELECTRONIC PAYMENT PROCESSING performs electronic payment services (electronic check writing and credit card authorization with next day settlement) via IMR. Authorizations and settlement transactions are completed by means of our hosted service facility's connectivity to various payment processors. This option is designed to provide customers with an easy and convenient payment method by 1) eliminating live agent intervention, 2) ending manual processing of mailed credit card and check payments, 3) providing automatic next-day settlement and 4) expediting the entire payment and collection process. The efficient transfer of funds through these electronic payments also can enhance a customer's cash flow position. DISASTER MITIGATION provides assistance in the event of an outage at our customer's site by allowing an on-site IMR customer to re-route calls to our Hosted Services facility, thereby minimizing the potentially costly results of losing contact with its customers. Our disaster mitigation service can take the call, notify the end-user of the outage and capture required data, which data can then be presented back to our customer for follow-up. By utilizing our transcription services or voice forms capability, we can provide our customer with the captured information in a variety of formats. Non-Vista IMR customers can also utilize this option. Essentially, any organization that wishes to capture information from its callers during a disaster or temporary outage can utilize this service. DISASTER RECOVERY provides a range of services from dedicated, fully redundant disaster recovery solutions to shared disaster recovery solutions. Through our dedicated disaster recovery service, we completely mirror the customer's on-site application and perform pre-established synchronizations and testing to ensure the availability of such services in the event of an outage or disaster. Alternately, our Hosted Service facility offers customers a means of reducing downtime risk by storing a complete image of their platform. This image can be brought up in our shared server farm as needed on a first-come first-serve basis. Calls can then be re-routed on an interim basis. This option allows a customer to have a greater degree of comfort associated with unexpected downtime while not incurring the cost associated with a fully dedicated, redundant platform. Disaster recovery continues to be an important concern of customers and a growing service offering for us. SALES AND MARKETING GENERAL We provide technological products and services to companies in a variety of industries, including banking, insurance, financial services, media, public utilities, healthcare, service providers, transportation, telecommunications, retailing, government agencies, oil and gas, manufacturing, education and newspaper publishing. Our customer base includes some of the largest international banking firms and insurance companies, as well as numerous Fortune 500 companies. We have sold over 6,000 systems to customers in 55 countries. Our products are sold through a direct sales force, domestic and international distributors, and value added resellers. We will continue to rely on direct distribution because of the increasing complexity of our applications, which is largely due to the requirements of natural language speech recognition technology. We will continue with this strategy until industry open standards are fully implemented and speech recognition development tools are improved. 8 Even though direct distribution may be mandated by the complexity of applications, customers prefer to purchase contact center technologies as part of a total system. Automated call handling technologies, however, appear to be sold increasingly as one element of a contact center portfolio by system integrators, telecommunications companies and switch vendors. As a result, we believe we must develop strong distribution relationships to ensure that our products are represented in the appropriate markets. Consequently, we are actively adding and soliciting distribution partners in a number of important regions. As of December 31, 2001, we maintained five sales offices in the United States as well as one in each of London, Amsterdam and Stockholm. Since then, we have closed our sales offices in Amsterdam and Stockholm. DOMESTIC SALES The percentage of our total revenue represented by domestic sales, including maintenance fees, for the last three fiscal years is as follows: 75% in 2001, 69% in 2000, and 81% in 1999. Our direct sales force booked more than 88% of our domestic sales (excluding maintenance, patents, and Hosted Services) in 2001 and 94% in 2000. The remaining 12% of our orders were booked through indirect channels, including resellers. INTERNATIONAL SALES The percentage of our total revenue represented by international sales, including maintenance fees, for the last three fiscal years is as follows: 25% in 2001, 31% in 2000, and 19% in 1999. See Item 8 -- Financial Statements and Supplementary Data, "Notes to Consolidated Financial Statements", Note 17, in this Annual Report for additional information regarding revenue by geographic area. All of our product lines and services are sold worldwide and are offered in 20 different languages. Sales in the United Kingdom are denominated in pounds sterling and are subject to foreign currency adjustments. Sales in all other foreign countries are denominated in United States dollars. We attempt to conduct business in international markets in compliance with each country's applicable laws and regulations, including safety and telecommunication laws, import duties and quotas. We have experienced no difficulty in obtaining export licenses for foreign sales from the United States Department of Commerce. MARKETING ORGANIZATION AND VERTICAL MARKET FOCUS Our marketing organization is charged with (i) enhancing our corporate image; (ii) increasing demand for our 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 marketing communications materials, advertising and public relations campaigns; and maintains relationships with key industry analysts and media contacts. We market our products to industry leaders within vertical markets as we believe industry leaders have the greatest need for self-service and transaction processing technologies, are most likely to require system expansion and additional services, and serve as an important source of customer referrals. RESEARCH AND DEVELOPMENT Our product development consists of system and software specification, software design and coding, and third party software integration. Employees of, and outside contractors working with, our research and development department perform all product development. We continually strive to identify and develop new products and new features for existing products to expand our market. Furthermore, we perform rigorous testing prior to releasing new products and features to ensure the highest quality. PROPRIETARY RIGHTS AND INTELLECTUAL PROPERTY We establish and protect our proprietary rights in our products and technologies through a combination of trademark, service mark, and trade secret laws. We also enter into confidentiality agreements with our employees, distributors and customers, and seek to limit access to the distribution of our software, documentation and other proprietary information. We currently hold 66 registered trademarks and service marks in 17 countries and a total of 9 two pending trademarks. We also hold 7 copyrights. We believe, however, that technological innovation, expertise, and market responsiveness can be as important to us as those legal protections. VocalPoint is a registered trademark, the rights to which we sold in the third quarter of 2000. As part of the agreement for that sale, we maintain the unrestricted right to full use of the trademark until such time as the product enters "end-of life" and service commitments have expired. Syntellect, Infobot, VocalPoint Interactive Web Response, VistaGen, VistaView, and Home Ticket are some of our current or pending trademarks and service marks. All other products mentioned in this Annual Report are trademarks or pending trademarks of their respective owners. Our Vista product line uses software licensed from a third party, which provides a portion of the architectural foundation for our product. We have secured a permanent, perpetual, world-wide, non-exclusive, non-revocable license to this software which allows us to use, copy, modify, distribute, and license the source code in connection with our Vista product. MANUFACTURING AND SUPPLIERS Our manufacturing operation consists of limited in-house configuration, product testing and quality and revision control of our products. We may obtain hardware components from third parties for our products, including telephony interface and voice recognition boards. We do not believe we are dependent on a single source to supply the components we use in our products. We are also currently able to obtain key components in a timely manner from a variety of sources. BACKLOG Our year-end 2001 backlog was approximately $6.4 million, and $9.9 million for year-ended 2000. We believe that all orders in backlog at December 31, 2001 are firm and will be delivered within the next fiscal year. Because the possibility exists for customers to make changes to their original orders, to alter or significantly delay delivery schedules or to cancel their orders, the backlog total as of any particular date may not be indicative of actual revenue for any future period. EMPLOYEES As of December 31, 2001, we employed a total of 246 individuals, 240 on a full-time basis and 6 on a part-time basis. Of those employees, 45 are in sales, 11 in marketing, 39 in customer support, 59 in application services, 6 in education services, 39 in product development, 17 in Hosted Services and 30 in administration. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is information with respect to our officers including such information as their names, ages, positions and offices held with us as of March 21, 2002. Anthony V. Carollo, Jr., 60, became our Chairman and Chief Executive Officer ("CEO") on November 4, 1999 after serving as Chairman and interim CEO since May 14, 1999. He has served as a director since August 1998. Mr. Carollo was the President of Xantel Corporation from April 1998 to November 1999. Previously, Mr. Carollo was the President and Chief Operating Officer of Fujitsu Business Communication Systems and a former Vice President and General Manager of ROLM Corporation. Mr. Carollo currently also serves as a director of Marshall & Ilsley Trust Company of Arizona and Spectralink Corporation. Mr. Carollo holds a BS degree from the University of Santa Clara and an MBA degree from UCLA. Timothy P. Vatuone, 52, became our Vice President and Chief Financial Officer on February 14, 2000. Before working with us, he served as Vice President and Chief Financial Officer of Vivid Semiconductor, Inc., a 10 venture backed, LCD panel technology start-up, where he raised over $70 million in equity, lease and bank financing. Previously, Mr. Vatuone was Vice President and Chief Financial Officer of Capetronic International Holdings, Ltd., an Asian-based manufacturer of computer CRT displays. He has also held numerous other financial management positions in technology companies such as Hewlett-Packard, Convergent Technologies and Roche. Mr. Vatuone received a BS degree in economics and an MBA degree from the University of Santa Clara. Charles F. Sonneborn, 41, became our Vice President and Controller on February 13, 2001. Previously, Mr. Sonneborn was our Controller, Financial Operations from June 13, 2000. Prior to joining us, he served as the Controller for Xantel Corporation, a computer telephone software developer. Previously, he was General Manager and Chief Financial Officer for Prochem, a Phoenix based manufacturer of cleaning equipment and chemicals. He has held other financial and operational management positions in privately held direct marketing and manufacturing companies such as The Eastwood Company and Group Dekko Companies. Mr. Sonneborn received a BS degree in accounting from Indiana University and an MBA degree from Indiana Wesleyan University. Steve Dodenhoff, 38, joined our company as Vice President of Worldwide Operations in June 2001. Mr. Dodenhoff previously served as Senior Vice President for the Technology Services Division of MicroAge. Most recently, he was general manager for Integrated Information Systems, an Internet professional services and application outsourcing company focused on digital enterprise transformation Mr. Dodenhoff holds a Bachelor of Science in Finance from the University of Colorado at Boulder. Carol E. Reid, 50, became our Vice President of Marketing on June 12, 2000. Prior to joining us, she was the Chief Executive Officer and the Vice President of Sales and Marketing for Xantel Corporation, a computer telephone software developer. Earlier, she served as Global Account Manager for Calico Commerce, Region Manager for Chordiant, and Eastern Region Sales Manager for Aspect Telecommunications where she built their initial sales teams from Boston to Washington D. C. Jim Scharpf, 46, joined Syntellect as our Vice President of Sales, Americas in April 2001. Mr. Scharpf has served as a Group Vice President responsible for the Infosystems Services division of MicroAge. Recently he helped launch a startup, Kamoon, which focuses on CRM tools for financial services companies. Mr. Scharpf has held many senior level positions at both Extex and Eleris. Mr. Scharpf holds a Bachelor of Science in Business Administration from the University of Wisconsin. ITEM 2 -- PROPERTIES Our corporate headquarters is located in a 42,922 square foot facility in Phoenix, Arizona. Our lease for this facility commenced in July 2000 and continues through October 2005. The facility houses our core business and includes space for customer support, research and development, sales, marketing, production, training and administrative functions. We also lease a 9,885 square foot facility in Roswell, Georgia and a 1,619 square foot facility in Atlanta, Georgia. These facilities house our hosted services, including our Home Ticket pay-per-view service and other applications offered through our Hosted Services Group. As of December 31, 2001, we leased five sales and support offices in the United States and one in London. As of that date, the aggregate monthly rental payment for our office facilities was approximately $0.1 million. We leased two additional offices, one in Amsterdam and one in Stockholm, in January 2001. Since December 31, 2001, we have closed these two offices. ITEM 3 -- LEGAL PROCEEDINGS From time to time we are involved in legal proceedings incident to our normal business operations. We are not currently a party to any pending legal proceedings, however. 11 ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our stockholders, through the solicitation of proxies or otherwise, during the fourth quarter of 2001. PART II ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our 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.
YEAR ENDED 2001 HIGH LOW --------------- ---- --- 1st Quarter.... $5.1875 $1.4375 2nd Quarter.... 3.1000 1.1875 3rd Quarter.... 2.7900 0.9500 4th Quarter.... 1.9800 0.9200
YEAR ENDED 2000 HIGH LOW --------------- ---- --- 1st Quarter.... $7.0625 $2.9375 2nd Quarter.... 6.6875 3.0000 3rd Quarter.... 9.1875 5.6875 4th Quarter.... 8.1875 3.2500
On March 21, 2002, the closing sale price for our common stock was $1.90 per share. On that date there were 175 holders of record of our common stock. This figure does not reflect beneficial ownership of shares held in nominee names. We have never declared or paid a cash dividend on our common stock. We presently intend to retain earnings for use in our business and do not anticipate paying cash dividends on outstanding shares in the foreseeable future. 12 ITEM 6 -- SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report. The selected consolidated financial data presented below under the captions "Statement of Operations Data" and "Balance Sheet Data" as of and for each of the years ended December 31, 2001, 2000, 1999, 1998 and 1997 is derived from our consolidated financial statements, which have been audited by KPMG LLP, independent certified public accountants. The consolidated financial statements as of December 31, 2001 and 2000 and for each of the years in the three-year period ended December 31, 2001 and the report thereon, are included elsewhere in this Annual Report. STATEMENT OF OPERATIONS DATA (in thousands, except per share amounts)
YEARS ENDED DECEMBER 31, ------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Net revenue $36,588 $48,032 $47,831 $47,953 $48,182 ======= ======= ======= ======= ======= Net income (loss).......................... $(7,925) $ 2,242 $(1,866) $(2,618) $ 141 ======= ======= ======= ======= ======= Earnings (loss) per share - basic.......... $ (0.70) $ 0.19 $ (0.14) $ (0.19) $ 0.01 ======= ======= ======= ======= ======= Earnings (loss) per share - diluted........ $ (0.70) $ 0.18 $ (0.14) $ (0.19) $ 0.01 ======= ======= ======= ======= =======
BALANCE SHEET DATA AS OF DECEMBER 31, ------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Total assets .............................. $18,199 $27,101 $26,224 $32,133 $34,808 ======= ======= ======= ======= ======= Long-term debt............................. $ 786 $ 467 $ 541 $ 685 $ 713 ======= ======= ======= ======= ======= Dividend declared per common share......... $ 0 $ 0 $ 0 $ 0 $ 0 ======= ======= ======= ======= =======
13 ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY FOR 2001 Our Licenses revenue for the year declined substantially. We began to experience this decline in the first quarter of 2001 and attributed it to the general economic slowdown. We analyzed our expenses, resources and liquidity and took steps to mitigate the effects of this slowdown by substantially reducing quarterly operating expenses. By re-deploying resources throughout the Company and realigning our sales force, we cut administrative expenses and improved the efficiency of our service delivery. These steps yielded growth in Licenses revenue in the second half of the year, improved quarterly gross margins in Services, produced significant quarterly reductions in selling, general and administrative expenses, and provided a fourth quarter positive cash-flow. Consequently, we believe continued growth in Licenses revenue, alone, should be sufficient to improve our operating performance in the coming year and minimize our liquidity concerns. RESULTS OF OPERATIONS NET REVENUE The following table summarizes our net revenue performance (in thousands) for fiscal years 2001, 2000 and 1999.
% of total % of total % of total CURRENT RESULTS 2001 revenue 2000 revenue 1999 revenue ---- ------- ---- ------- ---- ------- Licenses $11,290 31% $20,906 43% $17,092 36% - -------- Services - -------- Application development 6,464 18% 6,804 14% 6,022 13% Project management 1,294 3% 1,594 3% 936 2% Maintenance 9,548 26% 8,891 19% 9,836 20% Installation 1,062 3% 1,107 3% 1,776 4% Other services 2,302 6% 3,016 6% 4,437 9% ------- ------- ------- Total Services 20,670 56% 21,412 45% 23,007 48% Hosted Services - --------------- Home Ticket 1,807 5% 3,386 7% 6,399 13% Voice services 576 2% 432 1% 522 1% Other hosted services 2,245 6% 1,896 4% 811 2% ------- ------- ------- Total Hosted Services 4,628 13% 5,714 12% 7,732 16% ------- ------- ------- Total net revenue 36,588 100% 48,032 100% 47,831 100% ======= ======= =======
14 Our backlog represents the amounts of unfilled, but firm, orders received prior to year-end. We expect to earn the majority of the backlog in the next operating cycle. The following table summarizes our revenue backlog by business segment for the years ended December 31, 2001 and 2000.
(in thousands) 2001 2000 ---- ---- Licenses backlog.......................... $1,591 $2,842 Services backlog.......................... 4,681 7,084 Hosted Services backlog................... 121 -- ------ ------ $6,392 $9,926 ====== ======
BACKLOG FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Our backlog of Licenses decreased by $1.2 million from year-end 2000 to year-end 2001. However, at December 31, 2000, approximately $1.6 million of Licenses revenue originally shipped and invoiced in the fourth quarter of 2000 was deferred in compliance with our revenue recognition policy regarding clear evidence of an arrangement, thereby increasing backlog as of December 31, 2000. Those orders were subsequently recognized as revenue in the first quarter of 2001. Adjusting for that one time event, backlog of Licenses increased year-over-year by approximately $0.3 million. During the year just ended, we experienced a decrease in total orders and in the associated Licenses revenue. Our orders generally include a Licenses component of equal or greater magnitude in comparison to a Services component. Although Licenses revenue and the associated orders increased in the second half of 2001, the 15 associated Services orders, while additive to backlog, would not have returned it to the level of 2000. However, our current Services backlog equates to an amount approximately equal to two quarters of revenue at current Services capacity and is sufficient for us to attain our planned revenue for the first half of 2002. Services backlog at the end of 2000 equated to an amount approximately equal to three quarters of revenue. Revenue generated from Hosted Services is generally transaction based. Although most of our contracts provide for guaranteed monthly transaction amounts, we do not include those guaranteed amounts in the backlog figure for Hosted Services. The $121,000 noted in the above table is related to the application development and set-up fees for our Service Bureau IMR services, which is included in other hosted services. NET REVENUE FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Net revenue decreased $11.4 million, down 24% for the year ended December 31, 2001, compared to the year ended December 31, 2000. Set forth below is an analysis of the net revenue for each of our operating business segments, Licenses, Services, and Hosted Services, for the year ended December 31, 2001 compared to the year ended December 31, 2000. Licenses revenue decreased by $9.6 million, down 46% year-over-year due to the general business climate and its impact on the software industry. Because of the uncertainty created by the economy, customers interested in our products delayed or cancelled the decision to make capital purchases, such as our software, thereby elongating our sales cycles. However, the realignment of our sales force and redeployment of other resources enabled us to increase Licenses revenue in the second half of 2001, resulting in a $0.7 million or 33% sequential increase in Licenses revenue in Q4 over Q3 of 2001. We believe that the continued effects of the realignment and redeployment actions along with an anticipated recovery in general economic activity should result in continued Licenses revenue growth. Services revenue for the year ended December 31, 2001 decreased 3%, or $0.7 million, primarily as a result of the reduction in the total value of the orders we received in the first half of the year. This decrease originated chiefly with application development and project management, each decreasing approximately $0.3 million. An increase in maintenance revenue of $0.7 million helped offset these declines. Other services revenue decreased $0.7 million in 2001 compared to 2000. We expect an upward trend of Services revenue in 2002 because of our 2001 year-end Services backlog of $4.7 million and the anticipated increase of Services orders that occur as a result of the projected increase in Licenses orders and associated revenue. We expect to realize maintenance revenue of $5.5 million in 2002 from the deferred revenue on our December 31, 2001 balance sheet. Maintenance revenue streams from new orders will add to 2002 revenue at an accelerated pace due to the shortened warranty period. We also anticipate additional Services revenue from our expanded product line of natural speech services and from the expansion of our consulting services within application development. Hosted Services revenue declined $1.1 million down to $4.6 million in 2001 mainly due to a reduction of $1.6 million in Home Ticket revenue. Home Ticket is a pay-per-view service we make available for cable television providers. The cable television industry has been deploying new order entry technologies for consumer purchases of pay-per-view service that do not utilize our services. These new technologies have resulted in a downward trend in our transaction processing fees. We will have a Home Ticket revenue stream in 2002; however, we do not expect the same rate of decline in this service offering because larger customers who have converted to digital pay-per-view processing made this transition prior to 2002. Our increased revenue of $0.5 million or 21% from other Hosted Services such as voice services, DialExpress (message delivery), Lead Capture, Speech Enabled Directory, Site Locator, disaster recovery, broadcast faxing, contact center processing and audiotext helped offset the decline in the Home Ticket revenue in 2001. We continue to offer and promote these other hosted services with good success and we anticipate that this trend will continue and expand. NET REVENUE FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Net revenue for 2000 was $48.0 million compared to $47.8 million for 1999. Annual revenue for years 2000 and 1999 was derived from our three operating business segments of Licenses, Services and Hosted Services which represented 43%, 45% and 12% of net revenue, respectively, for 2000, and 36%, 48% and 16% of net revenue, respectively, for 1999. 16 In late 1998, we began the transition of becoming a software-based company from a hardware/software-based company. In 2000, we began to change the reporting of business segments to Licenses, Services, and Hosted Services from the previous structure of Systems, Hosted Services (SIS), and Patents. System sales and Maintenance and other services as reported in the 1999 Annual Report have been reclassified as Licenses and Services for the 2000 and 2001 Annual Reports. Licenses revenue for 2000 was $20.9 million, an increase of $3.8 million, or 22%, as compared to $17.1 million for 1999. The increase in 2000 was due to the strength of the Vista product line, which has shown increased sales in every quarter since revenue commenced in the third quarter of 1998. In 2000, the Vista product line accounted for 84% of Licenses sales. VocalPoint systems sales declined 41% in 2000 as the Vista product line more than replaced the declining sales. Services revenue for 2000 was $21.4 million, as compared to $23.0 million for 1999, a decrease of $1.6 million, or 7%. Services revenue consisted of patent infringement lawsuits, $1.6 million decrease; maintenance revenue, $0.9 million decrease, but showed an upward trend in the second half of 2000 due to the increased number of installations in late 1999 and early 2000; application services revenue, $0.8 million increase; project management revenue, $0.6 million increase; installation revenue, $0.7 million decrease; and other services revenue, $0.2 million increase. Hosted Services revenue for 2000 was $5.7 million compared to $7.7 million for 1999, a decrease of $2.0 million, or 26%. The primary reason for the decline was due to Home Ticket, a pay-per-view service for cable television providers which is offered through our SIS subsidiary. The cable TV industry has been deploying new order entry technologies for consumer purchases of pay-per-view events that do not utilize toll free 800 numbers. This has resulted in a downward trend in transaction processing fees; a trend which is expected to continue. To offset the decline in pay-per-view services, Hosted Services has offered other outsourced electronic capabilities including DialExpress (message delivery), Lead Capture, Speech Enabled Directory, Site Locators, broadcast faxing, call center processing, and audiotext. GROSS MARGIN The following table summarizes our gross margin performance (in thousands) for fiscal years 2001, 2000 and 1999.
% of revenue % of revenue % of revenue CURRENT RESULTS 2001 category 2000 category 1999 category ---- -------- ---- -------- ---- -------- Licenses $ 8,358 74% $15,397 74% $10,904 64% Services 9,518 46% 11,186 52% 9,566 42% Hosted Services 429 9% 1,399 24% 2,430 31% ------- ------- ------- Total gross margin 18,305 50% 27,982 58% 22,900 48% ======= ======= =======
GROSS MARGIN FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Gross margin decreased in 2001 by 35%, or $9.7 million, when compared to 2000. The Licenses revenue decrease of $9.6 million was the primary contributor affecting gross margin dollars by $7.0 million, down 46% from 2000. As shown by the stable gross margin percentage of 74% in 2001 and 2000, the decrease of $7.0 million in gross margin dollars was a direct result of the decline in the volume of licenses sold for the year ended December 31, 2001. We expect Licenses margin percentage will at least remain stable, if not improve, and with the anticipated increase in Licenses revenue, we anticipate Licenses gross margin dollars to increase. Services gross margin decreased $1.7 million, a 15% decline from 2000. The primary factors affecting this decrease were related to a higher cost of labor and the use of third party service providers in the first half of the year and employee separation costs in the second half of the year. During the first half of the year, we initiated programs to improve the Services margin. The Services margin began at 41% of revenue in the first quarter of 17 2001 and improved to 50% of revenue in the fourth quarter of 2001. The improvement in gross margin percentage through the year resulted from increased labor efficiencies and cost controls, including the reduced use of third party professional services. Services gross margin should continue to improve as the effects of these efficiencies and cost controls continue. In addition, our new natural speech and consulting services offerings allow for an increased utilization of our current resources at higher billing rates. We plan and anticipate that our Services margin can return to the 52% margin we realized in 2000. Hosted Services gross margin for 2001 decreased by $1.0 million, or 69%, as a result of the decrease in Home Ticket revenue. The $1.6 million decrease in 2001 revenue negatively impacted our gross margin due to the high fixed cost structure associated with a hosted operating environment. To help mitigate the impact of the loss of revenue, we reduced the application development and facility costs associated with this business segment. Also, an increase in other hosted services revenue streams helped us to further offset the negative effect of the loss of Home Ticket revenue. We expect the gross margin for our Hosted Services to improve in 2002 due to a reduced number of employees, decreased telecommunication costs, decreased costs from third party maintenance contracts, and increased revenue. The direct costs associated with our new hosted service offerings are significantly lower than those associated with the labor-intensive pay-per-view service. Telecommunications costs are expected to decrease as the new hosted services offerings can share telephone lines while the pay-per-view product utilizes dedicated circuits. We expect the costs associated with third party maintenance contracts to decrease as a result of a reduction in the number of servers required to support the pay-per-view customers and the lower costs associated with the maintenance of the new hosted services platforms. Because our current Hosted Services center operates at significantly less than full capacity and Hosted Services overhead is fixed by nature, any increases in Hosted Services revenue will more efficiently utilize the existing infrastructure while adding little incremental cost. As a result, the anticipated revenue increase in 2002 should positively impact our gross margin. Our gross margin will fluctuate on a year-to-year basis as a result of changes in competitive pressures, sales volume, product mix, period cost policy, variations in the ratio of domestic versus international sales, or changes in the mix of direct and indirect sales activity. Accordingly, the gross margin we report for 2001 is not necessarily indicative of the results you should expect for future periods. GROSS MARGIN FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 The gross margin percentage for the year ended December 31, 2000 was 58% of net revenue, as compared with 48% for the year ended December 31, 1999. Gross margin on Licenses revenue in 2000 was $15.4 million compared to $10.9 million in 1999, representing a 41% increase in margin. Margin percentages were 74% and 64% of sales for 2000 and 1999, respectively. This increase is primarily due to our ongoing transition from a hardware/software-based company to a software-based company. Additionally, gross margin was positively affected by decreases in the inventory reserve of $0.7 million and $1.4 million in the years 2000 and 1999, respectively, due to a higher than expected usage of inventory from discontinued product lines. Gross margin on Services revenue in 2000 was $11.2 million, or 52%, compared to $9.6 million, or 42%, in 1999, an increase of $1.6 million primarily due to a reduction in third party contractor expense. Gross margin on Hosted Services decreased by $1.0 million from $2.4 million, or 42%, to $1.4 million, or 24%, in 2000 as compared to 1999 primarily caused by the relatively fixed nature of Hosted Services costs. We include those costs directly associated with the generation of revenue in the computation of gross margin, including direct labor, application development, travel, maintenance, customer support, supplies, depreciation, and miscellaneous hardware. 18 OPERATING EXPENSES The following table summarizes our operating expenses experience (in thousands) for fiscal years 2001, 2000 and 1999.
% of total % of total % of total CURRENT RESULTS 2001 revenue 2000 revenue 1999 revenue ---- ------- ---- ------- ---- ------- Sales, marketing, and administrative $21,948 60% $22,511 47% $21,124 44% Research and development 4,412 12% 3,230 7% 4,448 9% ------- ------- ------- Total operating expenses 26,360 72% 25,741 54% 25,572 53% ======= ======= =======
OPERATING EXPENSES FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Our operating expenses increased 2%, or $0.6 million, in 2001. Sales, marketing, and administrative costs decreased $0.6 million, or 3%, compared to 2000. Research and development costs were up 37%, or $1.2 million, becoming the driver of the operating cost increase. Sales, marketing and administrative costs decreased 3%, or $0.6 million, as a result of cost cutting measures, the effects were noticeable in the second half of 2001. We restructured our sales force, allocating more dollars into direct sales personnel in comparison to the direct sales dollars spent in our 2000 organizational sales. We reduced occupancy expense and initiated a change in the Paid Time Off ("PTO") policy to limit the maximum number of days allowed for carryover from the annual accumulated PTO to five days, thereby reducing administrative costs by $0.6 million in 2001. Research and development funds were used to transition our Vista product line to the current Vista IMR platform, which included improvements for natural speech recognition and speech portal interfaces as well as enhancements to the Vista IVR platform. We accounted for research and development outlays on a period cost basis, which impacts current period operating expenses. OPERATING EXPENSES FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Operating expenses for 2000 were $25.7 million, an increase of $0.2 million from the $25.5 million reported for 1999. Selling, marketing, and administrative expenses increased $1.4 million, or 7%, primarily due to an increase in the number of employees in domestic sales and administration, employee incentives, desktop software, and occupancy costs related to the move of our headquarters to a new facility. Helping to offset the negative impact of those changes, administrative expenses decreased due to reductions of the accounts receivable reserve by $0.6 million and $0.1 million in the years 2000 and 1999, respectively. The change in 2000 was primarily due to an increased effort to control the collections of our aged accounts receivables. In 2000, research and development costs decreased $1.2 million or 27%. The spending decreases were primarily the result of our transition from a hardware/software-based company to a software-based company. However, we anticipate that research and development spending will increase in future years. 19 LIQUIDITY AND CAPITAL RESOURCES The following table summarizes our cash position, current assets and liabilities, working capital position and current ratio (in thousands, except current ratio) as of December 31, 2001 and 2000.
BALANCE AS OF DECEMBER 31, 2001 2000 Change ---- ---- ------ Cash and cash equivalents $ 3,997 $ 7,334 $(3,337) ======= ======= ======= Current assets 13,409 21,949 (8,540) Current liabilities 14,127 15,608 (1,481) ======= ======= ======= Working capital (deficit) (718) 6,341 (7,059) ======= ======= ======= Current ratio 0.95 1.41
Cash and cash equivalents at December 31, 2001 were $4.0 million and at December 31, 2000 were $7.3 million, a decrease of $3.3 million. Our working capital decreased from $6.3 million at December 31, 2000 to a deficit of $0.7 million at December 31, 2001. The ratio of our current assets to current liabilities decreased from 1.4 to 0.95. Our net loss of $7.9 million was the dominant factor affecting our cash position and negative change in working capital. Cash used in operations was $3.8 million in 2001. To help offset the impact of our net loss of $7.9 million, we added $6.7 million to our operating cash through a change in specific balance sheet accounts, primarily accounts receivable collections, a decrease in inventory, and an increase in deferred revenue. At the same time, a reduction in accounts payable, accrued liabilities, customer deposits and other liabilities used $4.9 million in operating cash. Non-cash expenses, such as depreciation and provisions for doubtful accounts, added an additional $2.3 million in operating cash resulting in $4.1 million of additional cash for operations from these changes. Cash used for investing activities was $1.1 million in 2001. The primary use of these funds was to acquire property and equipment in the amount of $1.2 million in 2001. Cash provided by financing activities was $1.5 million. The net borrowings on our line of credit of $1.4 million and $0.3 million from the issuance of common stock were offset in part by $0.2 million in principal payments on our capital lease obligations. We terminated our $4.0 million line of credit on June 26, 2001. In place of that line of credit, we executed a one-year, $3.0 million, asset-based operating line of credit on June 14, 2001 with another financial institution. On October 1, 2001, we executed an amendment to this line of credit agreement, reducing the available limit from $3.0 million to $2.0 million, and increasing the interest rate from the prime rate plus 4.5% to prime plus 8.5%, but not less than 15% per annum. On January 16, 2002, we executed a second amendment to this line of credit agreement, increasing the available limit from $2.0 million to $2.5 million. This line of credit required a non-refundable, one-time, commitment fee of $45,000. The minimum interest payment due each month is $7,500. We may borrow according to a formula based on 65% of eligible domestic accounts receivable less than 90 days old, excluding maintenance receivables and customer deposits. Domestic accounts receivable and inventory serve as collateral for this line of credit. At December 31, 2001 we had $1.4 million outstanding on the line of credit and based on the borrowing formula, we had an additional $0.2 million in available funds. As of March 21, 2002, our cash balance was $2.5 million; we had no outstanding balance on the line of credit; we did, however have $0.8 million available to borrow. The line of credit agreement contains certain financial covenants. At December 31, 2001, we were in violation of the minimum working capital (current ratio) and the minimum net equity covenants of the line of credit agreement; however, the financial institution waived these terms for the period ended December 31, 2001. There can be no assurance that the financial institution will be willing to renew the line of credit agreement at the June 13, 2002 expiration date. The Board of Directors approved certain stock buy-back plans under which we are authorized to repurchase our shares of common stock. As of March 21, 2002, we had repurchased a total of 3,332,432 shares under these 20 plans since November 13, 1998 at an average share price of $3.43 and are authorized to repurchase 365,000 additional shares. We made no stock repurchases in 2001. As of December 31, 2001, we had made no commitments to purchase capital assets. We anticipate the need to purchase approximately $0.5 million in capital assets in 2002, which we plan to fund in part by using cash provided by operations. Alternative sources of funding, such as operating leases, will also be considered. The table below represents contractual obligations due for the time periods listed.
PAYMENTS DUE BY PERIOD ---------------------- LESS THAN 1 1 - 3 4 - 5 AFTER 5 CONTRACTUAL OBLIGATIONS YEAR YEARS YEARS YEARS - ----------------------- ---- ----- ----- ----- Capital lease obligations $ 249 $ 537 $-- $ -- Operating leases 1,282 3,228 62 Debt (line of credit) 1,449 -- -- -- Unconditional purchase obligations 42 -- -- -- Other commitments 780 2,275 -- -- ------ ------ --- ---- Total contractual cash obligations $3,802 $6,040 $62 $ -- ====== ====== === ====
INTERNAL SOURCES OF LIQUIDITY During the year ended December 31, 2001, we began several initiatives to address our sales efforts, our cost structures, our cash management and our Services delivery efficiencies in light of the changing economic environment. In the second half of 2001, we began to see favorable results from these efforts. We believe the continued benefits of these measures will allow us to generate sufficient operating funds from internal sources to successfully run our business in the year ahead. The table below sets forth our analysis of operating requirements for 2002 assuming that we can generate the same performance as we achieved in 2001, with some improvements.
CASH NEEDED IN 2002 (IN MILLIONS): CASH SOURCES IN 2002: Net loss at 12/31/2001 $(7.9) Cash balance at 12/31/2001 $ 4.0 Add back non-cash items: Add back: Depreciation & amortization 1.8 Loan balance at 12/31/2001 (1.4) Reserves 0.5 ----- ----- Sub-total 2.3 Net cash on-hand for 2002 2.6 ----- ----- Operating cash needed for 2002 (5.6) Capital lease obligations (0.2) Capital acquisitions, net in 2002 (0.3) Operating cost reductions 5.0 ----- ----- TOTAL CASH NEEDED IN 2002 $(6.1) TOTAL CASH SOURCES IN 2002 $ 7.6 ----- -----
We generated a net loss of $7.9 million in 2001. Starting from that base and adding back the non-cash items of depreciation, amortization and reserves of $2.3 million, we expect to consume $5.6 million in operating cash for 2002. Additionally, we plan to use cash of $0.8 million for capital assets and capital lease obligations, which will be offset by $0.3 million in new capital lease funding. Therefore, we anticipate the 2002 total cash consumption to be $6.1 million. We begin with a cash balance of $4.0 million offset by the $1.4 million loan outstanding at year-end 2001, which nets to cash on-hand of $2.6 million. We plan to improve operating expenses during 2002 by $5.0 million better than the $26.4 million reported at year-end 2001. We project cost savings of $3.9 million as a result of a reduction in the number of employees made in 2001, including salaries, payroll taxes, benefits, recruiting, and travel 21 expenses. We further expect to decrease expenses by an additional $1.1 million by reducing use of third party service providers, reducing use of professional consultants, and reducing telecommunications costs through a new agreement with our telephony transport provider for the Hosted Services center. Those cost reductions and the net cash on-hand brings the total cash sources to $7.6 million, exceeding total cash needed by $1.5 million for 2002. We have only considered net cash on-hand and cost reductions in providing for our cash requirements. Other initiatives, such as increases in revenue, increases in our gross margin, and increases in collection activities related to our accounts receivable can further strengthen our projected result. A moderate growth in Licenses revenue of 10% or $1.1 million over the $11.2 million achieved in 2001 would provide an additional $0.9 million in cash, based on the 74% gross margin that we believe we can sustain in 2002. During 2001, we improved Services gross margin percentages from 41% in Q1 to 51% in Q4. A modest increase of Services gross margin percentage to 50% for the year 2002 would yield additional operating cash of approximately $0.8 million with no increase in Services revenue. At December 31, 2001, the average time required to collect an accounts receivable, or "days sales outstanding" ("DSO"), was 58 days, compared to 60 days at December 31, 2000. We continue to intensify our collection efforts with the purpose of further decreasing the DSO to 55 days. We expect these improved collection efforts could provide additional operating cash of approximately $0.3 million in 2002. An increase in Licenses revenue, the management of our accounts receivable DSO, and the continued improvement in Services gross margin could favorably affect cash provided in the year to come. Additionally, we expect to reduce inventory and inventory purchases in 2002 by outsourcing the inventory for our Vista product line and using current inventory to support our maintenance contracts. In doing so, we will moderately, but positively affect operating cash. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Quantitative and Qualitative Disclosure about Market Risk contained in Item 7A of this Annual Report and particularly in conjunction with the section entitled "Additional Cautionary Factors That May Affect Future Results" included in that Item. EXTERNAL SOURCES OF LIQUIDITY We maintain a $2.5 million line of credit with a commercial lending institution. We can borrow according to an asset-based formula. We will utilize the line, if necessary, for operational cash needs, but do not expect to borrow on the line of credit due to our efforts to generate cash from internal activities, a lower cost structure and increased management efforts to control spending. As of December 31, 2001, we had an outstanding balance of $1.4 million. Subsequent to year-end, we have paid all amounts owed to the lending institution thereby increasing our available to borrow funds. We plan to renew this line of credit, however, there can be no assurance that the financial institution will be willing to renew the line of credit agreement at the June 13, 2002 expiration date. We have entertained offers from third party entities to provide warrant backed debt financing should we need funding beyond our ability to generate cash internally and borrow on the line of credit. We do not expect to execute this financing option in 2002. CRITICAL ACCOUNTING POLICIES See Item 8 -- Financial Statements and Supplementary Data, "Notes to Consolidated Financial Statements" in this Annual Report for a further discussion on our significant accounting policies and their impact on the financial statements. Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, warranty obligations, contingencies, and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, 22 the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. REVENUE RECOGNITION POLICY Our revenue is derived from three business segments: Licenses, Services and Hosted Services. Revenue derived from Licenses and from Services is recognized pursuant to Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"); Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" ("SOP 98-9"); and Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). Revenue derived from Hosted Services is recognized pursuant to the provisions of SAB No. 101. We strictly adhere to the revenue recognition criteria under the guidance previously discussed and, based on the nature of the Licenses and Services transactions, there are no significant estimates or judgements necessary to apply the revenue recognition policy. See Item 8 -- Financial Statements and Supplementary Data, "Notes to Consolidated Financial Statements" in this Annual Report for detailed description of our revenue recognition policy. PERIOD COST POLICY We period cost our labor and overhead expenses. This policy can result in quarterly gross margin swings based on volume and mix of business. This method tends to be consistent on a year-over-year basis given that we turn most services to revenue within 90 to 120 days of receipt of orders. It is important to understand this policy when comparing quarterly results of gross margin performance because of the gross margin swings. CUSTOMER ACCOUNT RECEIVABLE We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Our standard payment terms are net 30 days with collections averaging around 58 days. We believe the accounts presented in the Balance Sheets to be representative of our collectable position. See Item 7 -- Management Discussion and Analysis in this Annual Report for a further discussion on liquidity and cash sources. Also see Item 8 -- Financial Statements and Supplementary Data, "Notes to Consolidated Financial Statements", Note 16 in this Annual Report more information regarding our allowance for doubtful accounts. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the weighted-average method. We monitor usage reports to determine if the carrying value of any items should be adjusted due to lack of demand for the items. If we determine that the carrying value requires adjustment, we establish a new cost basis. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than we project, additional inventory write-downs may be required and are taken. ACCRUED ROYALTY, WARRANTY, AND OTHER EXPENSES We accrue for royalties due to third party licensors upon delivery of software to our customers. As of December 31, 2001 we accrued for royalties due to these licensors in the amount of $50,000. 23 We provide for the estimated cost of warranties at the time revenue is recognized. In 2001, we changed the warranty on our products and services from a standard 6-month warranty to a 30-day warranty, significantly lowering the amount of warranty claims and support. Should actual warranty claim rates or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. We contract with third party service providers to assist with application development. Expenses related to those contracts are recorded upon delivery of the application development product. As of December 31, 2001, we accrued for $0.4 million in professional services due to third party service providers. We accrue bonuses based on a formula approved by the Compensation Committee of our Board of Directors in the period in which the operational results that determine the bonuses are made. As of December 31, 2001, we accrued bonuses in the amount of $0.1 million affecting the period ending December 31, 2001. Commissions are prepaid and accrued based on a formula specified in our sales compensation plans. Commissions are recognized as expense in the period in which the revenue is recognized. We accrued for commissions for the year ending December 31, 2001. DEFERRED TAX ASSETS We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") recently issued pronouncements titled SFAS No. 141, "Business Combinations" ("SFAS No. 141"), SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"), and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). As of December 31, 2001 we had no financial impact from the recent accounting pronouncements. However, there can be no assurances that the adoption and application of SFAS No. 144 will not have a material affect on future earnings. See Item 8 -- Financial Statements and Supplementary Data, "Notes to Consolidated Financial Statements", Note 1, in this Annual Report for more information regarding the effects of the recent accounting pronouncements. ITEM 7A. -- QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK INTEREST RATE RISK Our exposure to market risk in connection with interest rate changes relates to our cash investment portfolio. Our general policy is to limit the risk of principal loss and to ensure the safety of invested funds by limiting market and interest rate risk. We place our investments in instruments with highly rated issuers. We classify all liquid investments with a maturity date of three months or less as cash equivalents. As of December 31, 2001, our earned interest rate on our cash equivalents was 1.61%, down from 2.35% at the end of the third quarter of 2001 and 4.65% at December 31, 2000. We do not expect any material loss with respect to our cash investment portfolio since marketable securities have generally been held until maturity and unrealized gains and losses are negligible. Our only long-term liabilities are capital lease obligations at a fixed rate. Therefore, we do not believe there is any material exposure to market risk changes in interest rates as it relates to our current or long-term liabilities. Our asset-based operating line of credit bears interest at prime plus 8.5%, with a minimum interest rate of 15%. During 2001, the prime rate ranged between 9.5% at January 1, 2001 and 4.75% at December 31, 2001. At 24 December 31, 2001, we had approximately $1.4 million outstanding under this line of credit, all of which is classified as current and is to be paid from receipts of customer receivables. Due to the current nature of this debt, the requirement to make payments on the outstanding balance as receivables are collected and the currently low prime rate, we do not believe that market risk related to this line of credit is significant. For example, an increase in the interest rate on our line of credit of ten basis points would result in an increase in interest expense of $10,352, on an annualized basis. We anticipate no material exposure to market risk in connection with interest rate changes, as they relate to our current or long-term liabilities. See Item 8 -- Financial Statements and Supplementary Data, "Notes to Consolidated Financial Statements", Note 8, in this Annual Report for more information regarding this line of credit. FOREIGN CURRENCY EXCHANGE RATE RISK We invoice all international customers in U.S. dollars except the customers of our United Kingdom ("U.K.") subsidiary, which are invoiced in pounds sterling. Our U.K. subsidiary's financials, including balance sheet, revenue, and operating expenses, are recorded in pounds sterling. Therefore, our exposure to foreign currency exchange rate risk occurs when we translate the financial results of that subsidiary into U.S. dollars in the course of consolidating our financial statements. At this time, we do not use instruments to hedge our foreign exchange exposure in the U.K. because the effects of foreign exchange rate fluctuations do not materially affect us. ADDITIONAL CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS Our disclosure and analysis in this Annual Report contain some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify such statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "anticipate," "likely," "expect," "intend," "believe," and other words and phrases of similar meaning in connection with any discussion of future operating or financial performance. In particular, these forward-looking statements include, for example, statements relating to future actions, prospective products, future performance, results of current and anticipated products, sales efforts, and operating expenses. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. We reasonably believe that any or all of our forward-looking statements in this Annual Report and in any other public statements we make are true at the time they are made. However, such statements may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed, and actual future results may vary materially. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to review any and all further disclosures we make on related subjects in our 10-Q and 8-K filings with the SEC and in other materials we publicly release. Also note that a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our business follows. These consist of some factors that we think could cause our actual results to differ materially from expected and historical results. Other factors besides those discussed below and throughout this Annual Report could also adversely affect us. This discussion is provided as permitted by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. OUR MARKETS ARE CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGES, WHICH MAY CAUSE US TO INCUR SIGNIFICANT DEVELOPMENT COSTS AND PREVENT US FROM ATTRACTING NEW CUSTOMERS. The market for our products is characterized by rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles and changing end-user customer demands. The introduction of products embodying new technologies and the emergence of new industry standards could render existing products and services obsolete or unmarketable and cause us to incur significant costs to develop new or enhanced products to meet the competition from such new technologies or industry standards. If we are unable to develop new products and services or if we are unable to develop such products fast enough to meet this competition, we could be prevented from attracting new customers and from retaining the installed base of 25 customers we currently have. Such events could have a material adverse effect on our business, financial or market performance. OUR FUTURE BUSINESS PROSPECTS DEPEND IN PART ON OUR ABILITY TO MAINTAIN AND IMPROVE OUR CURRENT PRODUCTS AND SERVICES AND DEVELOP NEW ONES. We believe that our future business prospects depend in large part on our ability to maintain and improve our current products and services and to develop new products and services on a timely basis. Our products must achieve market acceptance, maintain technological competitiveness and meet an expanding range of end-user customer requirements. As a result of the complexities inherent in our products, major new products and product enhancements require long development and testing periods. We may not be successful in developing and marketing, on a timely and cost effective basis, product enhancements or new products that respond to technological change, evolving industry standards or end-user customer requirements. We may also experience difficulties that could delay or prevent a successful development, introduction or marketing of product enhancements, and our new products and product enhancements may not achieve market acceptance. Significant delays in the general availability of new releases of our products or significant problems in the installation or implementation of new releases of our products could have a material adverse effect on our business, financial or market performance. In addition, we cannot assure you that any new product or feature we introduce will receive market acceptance. Future announcements we make of new products may cause customers to defer purchases of our existing products, which could also adversely affect our business, financial or market performance. GENERAL ECONOMIC, POLITICAL AND OTHER CONDITIONS AND UNCERTAINTIES MAY AFFECT OUR RESULTS OF OPERATIONS. Our business may be adversely affected by changes in general economic, business and international conditions, prices and costs, as well as by other factors of a general nature. The general economic conditions that existed during 2001 had such an adverse impact on our business. Our susceptibility to these changes and the susceptibility of the computer telephony software industry, together with our customers' uncertainty about the extent of the general economic slowdown, could result in continued lower demand for our products and services. Our business is dependent on booking sufficient orders to maintain our current Licenses and Services backlog and to keep our revenue stable and growing. If we are unable to book sufficient orders, our revenue and gross margin could deteriorate which, in turn, could potentially reduce our liquidity. Worsening economic conditions or other factors which adversely impact our ability to obtain financing or renew our line of credit on reasonable terms could also reduce our liquidity. The actions of terrorist groups have created worldwide economic and political uncertainties. The potential for future attacks, the national and international responses to such actions, and other acts of war or hostility could adversely affect our business, revenue, and gross margin in the short or long-term in ways that cannot presently be predicted. IF THE TECHNOLOGY WE LICENSE OR THE HARDWARE COMPONENTS WE UTILIZE IN OUR PRODUCTS DOES NOT CONTINUE TO BE AVAILABLE, WE COULD BE FORCED TO MODIFY OUR PRODUCTS OR ELIMINATE FUNCTIONS. We license technology from others, which we embed in some of our products. If one or more of these licenses terminates or cannot be renewed on satisfactory terms, we could be forced to modify the affected products to use alternative technology or we may be required to eliminate the affected product function, either of which alternatives could have a material adverse effect on us. In addition, should the licensors of our embedded technology cease operations or should their technology contain defects or be subject to adverse intellectual property claims, we could be adversely and materially affected. To the extent we need to license third-party technologies, we may be unable to do so on commercially reasonable terms or at all. In addition, we may fail to successfully integrate licensed technology into our products or services. Third-party licenses may expose us to increased risks, including risks associated with the integration of new technology, the diversion of resources from the development of our own proprietary technology, and our inability to generate revenue from new technology sufficient to offset associated acquisition, development and maintenance costs. Our inability to obtain any of such licenses could delay our product and service development 26 until equivalent technology can be identified, licensed and integrated. As a result, our business, financial and market performance could be adversely affected. We obtain hardware components from third parties for our products, including, without limitation, telephony interface and voice recognition boards. We do not believe that we are dependent on a single source to supply the components we use in our products. We are currently able to obtain key components in a timely manner from a variety of sources. However, if we are unable to secure alternate suppliers of key components or alternate assembly sources in a timely manner when we need them, our results of operations could be affected adversely. WE DEPEND ON KEY PERSONNEL AND ON OUR ABILITY TO RECRUIT ADDITIONAL SKILLED PERSONNEL, IN A VERY COMPETITIVE RECRUITING ENVIRONMENT, TO CONDUCT AND GROW OUR BUSINESS EFFECTIVELY. Our future success also depends on our ability to attract, train, assimilate and retain qualified personnel. Competition for individuals with skills in the computer telephony software industry is intense, particularly for those with relevant technical and/or sales experience. We cannot assure you that we will be able to retain our key employees or that we can attract, train, assimilate or retain other qualified personnel in the future in the numbers we will require. Our inability to attract and retain qualified personnel in the future could have material adverse effects on our business, financial or market performance. We have never had a work stoppage and none of our employees are represented by labor unions. However, a limited number of sales representatives are responsible for a substantial portion of our direct sales. The loss of these representatives could adversely affect our future operating results. WE FACE COMPETITIVE PRESSURES THAT MAY HAVE A MATERIALLY ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS. The market for our computer telephony software products is highly competitive and, because there are relatively low barriers to entry in certain parts of this market, we expect competition to increase in the future. In addition, because our industry is relatively new and evolving and characterized by rapid technological change, it is difficult for us to predict whether, when and by whom new competing technologies or new competitors may be introduced into our markets. Currently, our competition comes from several different market segments, including computer telephony platform developers, computer telephony applications software developers, telecommunications equipment vendors, and network based enterprise voice portal suppliers. We cannot assure you that we will be able to compete effectively against current and future competitors. In addition, increased competition or other competitive pressures may result in price reductions, reduced margins or loss of market share, any of which could have material adverse effects on our business, financial condition or results of operations. Many of our current and potential competitors have longer operating histories; significantly greater financial, technical, marketing, customer service and other resources; greater name recognition; and a larger installed base of customers than we do. As a result, these competitors may be able to respond to new or emerging technologies and changes in customer requirements faster and more effectively than we can, or to devote greater resources to the development, promotion and sale of products than we can. Current and potential competitors have established, and may in the future establish, cooperative relationships among themselves or with third parties, including mergers or acquisitions, to increase the ability of their products to address the needs of our current or prospective end-user customers. Some of these competitors also currently have a larger market share than we do and, were they to increase their market share through such cooperative relationships, mergers or acquisitions or through product development, promotion and sale, such developments could have material adverse effects on our business, financial or market performance. BECAUSE OF THE COMPETITIVE, RAPIDLY CHANGING NATURE OF THE COMPUTER TELEPHONY SOFTWARE INDUSTRY, WE MUST CONTINUALLY IDENTIFY THE MOST EFFECTIVE MEANS FOR SELLING AND MARKETING OUR PRODUCTS. The computer telephony software industry is very competitive and rapidly changing. Information technology purchasers can be reluctant to believe that new technology is ready for mass implementation. As a result, we must continually identify markets for our products and services and apply the most effective means for addressing those markets, both internationally and domestically. We are required to have a thorough understanding of the industry's 27 direction and an appreciation for the end-user's demands for functionality. We are also required to effectively balance both direct and indirect sales channels and to train our sales force to find new customers and further develop our installed customer base while keeping thoroughly familiar with our products and product mix. If we are unable to generate increasing revenue through focused attention on these sales and marketing elements, we could cause material adverse effects on our business, financial or market performance. WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS ADEQUATELY, WHICH COULD ALLOW THIRD PARTIES TO COPY OR OTHERWISE OBTAIN AND USE OUR TECHNOLOGY WITHOUT AUTHORIZATION. We consider our computer telephony software products to be proprietary. In an effort to protect our proprietary rights, we rely primarily on a combination of trademark, service mark and trade secret laws, as well as licensing and other agreements with others including our end-user customers, consultants, suppliers, and resellers and on employee and third-party non-disclosure agreements. These laws and agreements provide only limited protection of our proprietary rights, and the protection they do provide varies and may not be adequate in all circumstances. We hold 65 registered trademarks and service marks in 17 countries and 2 pending registrations. Because our means of protecting our proprietary rights may not be adequate, it may be possible for a third party to copy or otherwise obtain and use our technology without authorization. A third party could also develop similar technology independently. Also, even though we have proprietary rights in our products, the development and sale of our products could violate the proprietary rights of others, including the patent rights of others. Should this be or become the case, we could be required to redesign our products to avoid violating such proprietary rights, or we could be forced to acquire or license those proprietary rights. Any of such alternatives could materially increase the cost of our products and, consequently, their attractiveness to our customers. We know of no such violations of the proprietary rights of others however. In addition, the laws of some countries in which we sell our products do not protect our software and intellectual property rights to the same extent as the laws of the United States. Unauthorized copying, use or reverse engineering of our products or the redesign of our products to avoid proprietary rights held by others or the cost of obtaining necessary technology rights could all materially adversely affect our business, financial or market performance. COMPARISONS OF OUR PERIOD-TO-PERIOD OPERATING RESULTS ARE NOT NECESSARILY MEANINGFUL. We believe that period-to-period comparisons of our operating results are not necessarily meaningful, and you should not rely on them as an indication of our future performance. In addition, our operating results in a future quarter or quarters may fall below expectations of securities analysts or investors and, as a result, the price of our common stock may fluctuate. Because we cannot predict when our potential end-user customers will place orders and finalize contracts, we cannot accurately forecast our revenue and operating results for future quarters. We recognize revenue upon satisfaction of the requirements of AICPA Statement of Position 97-2, a portion of which generally occurs in the same quarter that the order is received and upon the acceptance of application development by our customers. As a result, our quarterly revenue and operating results depend primarily on the size, quantity and timing of orders received for our products during each quarter. If a large number of orders or several large orders do not occur or are deferred or delayed, our revenue in a quarter could be substantially reduced. In addition, we period cost our labor and overhead expenses. This policy can result in quarterly gross margin swings based on volume and mix of business. This method tends to be consistent on a year-over-year basis given that we turn most services to revenue within 90 to 120 days of receipt of orders. It is important to understand this policy when comparing quarterly results of gross margin performance because of the gross margin swings. BACKLOG TOTALS AS OF A CERTAIN DATE MAY NOT BE INDICATIVE OF FUTURE REVENUE. We can give no assurance that our existing customers will continue their current buying patterns or that changes within their industries will not adversely affect our ability to retain or attract new customers. In addition, although we believe that all orders in our backlog at December 31, 2001 are firm and will be delivered within the fiscal year, customers can make changes in their orders, or they may alter or significantly delay their delivery schedules or they may even cancel their orders. Therefore, our total backlog as of any particular date may not be indicative of actual revenue for any future period. IF OUR END-USER CUSTOMERS DO NOT PERCEIVE OUR PRODUCTS TO BE EFFECTIVE OR OF HIGH QUALITY, OUR BRAND AND NAME RECOGNITION WILL SUFFER. We believe that establishing and maintaining brand and name recognition is critical for attracting, retaining and expanding end-user customers in our target markets. We also believe that the importance of reputation and 28 name recognition will increase as competition in our market increases. Promotion and enhancement of our name will depend on the effectiveness of our marketing and advertising efforts and on our success in providing high-quality products and related services and on the performance of our resellers, none of which can be assured. If our end-user customers do not perceive our product or related services or those of our resellers to be effective or of high quality, our brand and name recognition would suffer which could have a material adverse effect on our business, financial or market performance. OUR PRODUCTS COULD HAVE DEFECTS FOR WHICH WE ARE POTENTIALLY LIABLE AND WHICH COULD RESULT IN LOSS OF REVENUE, INCREASED COSTS OR LOSS OF CREDIBILITY OR SUCH DEFECTS COULD DELAY ACCEPTANCE OF OUR PRODUCTS IN THE MARKET. Our products, including components supplied by others, may contain errors or defects, especially when first introduced or when new versions are released. Despite internal product testing, errors in our new products or releases could be found after commencement of commercial shipments. This could result in additional development costs, diversion of technical and other resources from our other development efforts, or the loss of credibility with current or future end-user customers. This could also result in a loss of revenue or a delay in market acceptance of our products, which, in turn, could have a material adverse effect on our business, financial, or market performance. Our license agreements with our end-user customers typically contain provisions designed to limit our exposure to potential product liability and some contract claims. However, not all of these agreements contain these types of provisions, but even when they do, these provisions vary as to their terms and may not be effective under the laws of some jurisdictions. A product liability, warranty, or other claim brought against us could have a material effect on our business, financial, or market performance. PAY-PER-VIEW REVENUE HAS DECLINED AND OUR OTHER OUTSOURCED ELECTRONIC CAPABILITIES MAY NOT SUPPLANT THAT LOST REVENUE. The cable TV industry continues to introduce and implement new ordering technologies for consumer purchases of pay-per-view events that do not utilize toll free 800 numbers. Consequently, we are experiencing a downward trend in transaction processing fees, a trend, which we expect to continue. To offset this decline in pay-per-view services, Hosted Services offers other outsourced electronic capabilities through our Service Bureau IMR Services including, for example, Lead Capture, disaster mitigation, electronic payment processing, Speech Enabled Directory, DialExpress, and Site Locator as well as benefits enrollment, broadcast faxing, and contact center processing. We cannot give any assurance, however, as to when, if ever, our efforts will completely supplant the declining pay-per-view revenue. OUR STOCK PRICE HAS BEEN AND COULD CONTINUE TO BE VOLATILE. Our stock price has been and could continue to be volatile due to a number of factors including, without limitation: actual or anticipated fluctuations in our operating results; announcements by us, our competitors or our end-user customers; liquidity limitations and our ability to generate outside funding; changes in financial estimates of securities analysts or investors regarding us, our industry, our competitors or our end-user customers; technological innovations or the introduction of new products by us or others; the operating and stock price performance of other comparable companies or of our competitors or end-user customers; revenue or earnings in any quarter fail to meet expectations of the investment community; the volume of our shares typically traded in any trading session; our purchases in the market of our own shares; purchases and sales of our shares by our officers, directors, employees and affiliates; and general market or economic conditions. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Independent Auditors' Report of KPMG LLP and the Consolidated Financial Statements of Syntellect Inc. and subsidiaries as of December 31, 2001 and 2000, and for each of the years in the three-year period ended December 31, 2001, follow. 29 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, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that Syntellect Inc. and its subsidiaries will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered losses from operations, a working capital deficit and an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /S/ KPMG LLP Phoenix, Arizona February 5, 2002 30 SYNTELLECT INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2001 2000 ---- ---- ASSETS Current assets: Cash and cash equivalents ........................................................ $ 3,997 $ 7,334 Trade receivables, net of allowance for doubtful accounts of $416 and $225 at December 31, 2001 and 2000, respectively (note 16) ............................ 7,617 12,423 Note receivable (note 2) ......................................................... 84 57 Other receivables ................................................................ 5 9 Inventories, net (note 3) ........................................................ 634 1,415 Prepaid expenses (note 4) ........................................................ 1,072 711 -------- -------- Total current assets ................................................... 13,409 21,949 -------- -------- Property and equipment, net (note 5) ................................................. 3,772 3,814 Note receivable, non-current portion (note 2) ........................................ 202 270 Short-term investments ($75 restricted at December 31, 2000) ......................... -- 75 Other assets ......................................................................... 816 993 -------- -------- Total assets .......................................................... $ 18,199 $ 27,101 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ................................................................. $ 2,145 $ 2,934 Accrued liabilities (note 6) ..................................................... 1,923 3,186 Customer deposits ................................................................ 232 2,916 Deferred revenue (note 7) ........................................................ 8,129 6,421 Line of credit (note 8) .......................................................... 1,449 -- Capital lease obligations (note 9) ............................................... 249 151 -------- -------- Total current liabilities .............................................. 14,127 15,608 -------- -------- Capital lease obligations, less current portion (note 9) ............................. 537 316 -------- -------- Total liabilities ...................................................... 14,664 15,924 -------- -------- Shareholders' equity: Preferred stock, $0.01 par value. Authorized 2,500,000 shares; no shares issued or outstanding ................................................................... -- -- Common stock, $0.01 par value. Authorized 25,000,000 shares; issued 14,660,485 and 14,505,298, respectively; outstanding 11,328,059 and 11,172,866, respectively . 147 145 Additional paid-in capital ....................................................... 62,628 62,311 Accumulated deficit .............................................................. (47,621) (39,696) Accumulated other comprehensive loss ............................................. (205) (169) -------- -------- 14,949 22,591 Treasury stock, at cost, 3,332,432 shares ............................................ (11,414) (11,414) -------- -------- Total shareholders' equity ............................................. 3,535 11,177 -------- -------- Commitments and contingencies (notes 8, 9, & 12) Total liabilities and shareholders' equity ........................................... $ 18,199 $ 27,101 ======== ========
See accompanying notes to consolidated financial statements. 31 SYNTELLECT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000 1999 ---- ---- ---- Net revenue: Licenses ...................................... $ 11,290 $ 20,906 $ 17,092 Services ...................................... 20,670 21,412 23,007 Hosted services ............................... 4,628 5,714 7,732 -------- -------- -------- Total net revenue ................... 36,588 48,032 47,831 -------- -------- -------- Cost of revenue: Licenses ...................................... 2,932 5,509 6,188 Services ...................................... 11,152 10,226 13,441 Hosted services ............................... 4,199 4,315 5,302 -------- -------- -------- Total cost of revenue ............... 18,283 20,050 24,931 -------- -------- -------- Gross margin ...................................... 18,305 27,982 22,900 -------- -------- -------- Operating expenses: Selling, marketing and administrative ......... 21,948 22,511 21,124 Research and development ...................... 4,412 3,230 4,448 -------- -------- -------- Total operating expenses ............ 26,360 25,741 25,572 -------- -------- -------- Operating income (loss) ............. (8,055) 2,241 (2,672) -------- -------- -------- Other income (expense), net: Interest income (expense), net ................ (88) 278 264 Gain on sale of Dialer product line (note 15) . -- -- 509 Loss on disposal of assets .................... (13) (49) -- Other income (expense), net ................... (3) 27 33 -------- -------- -------- Total other income (expense), net ... (104) 256 806 -------- -------- -------- Income (loss) before income taxes ... (8,159) 2,497 (1,866) Income tax expense (benefit) (note 11) ............ (234) 255 -- -------- -------- -------- Net income (loss) ................... $ (7,925) $ 2,242 $ (1,866) ======== ======== ======== Earnings (loss) per common share -- basic (note 10) $ (0.70) $ 0.19 $ (0.14) ======== ======== ======== Earnings (loss) per common share -- diluted ....... $ (0.70) $ 0.18 $ (0.14) ======== ======== ======== Weighted average shares outstanding -- basic ...... 11,251 11,742 13,034 ======== ======== ======== Weighted average shares outstanding -- diluted .... 11,251 12,699 13,034 ======== ======== ======== Net income (loss) ................................. $ (7,925) $ 2,242 $ (1,866) -------- -------- -------- Other comprehensive (loss), net of tax: Foreign currency translation adjustment ....... (36) (137) (5) Unrealized loss on marketable securities ...... -- -- (6) -------- -------- -------- Other comprehensive (loss) ........................ (36) (137) (11) -------- -------- -------- Comprehensive income (loss) ....................... $ (7,961) $ 2,105 $ (1,877) ======== ======== ========
See accompanying notes to consolidated financial statements. 32 SYNTELLECT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK ADDITIONAL ACCUMULATED TOTAL $.01 PAR PAID-IN ACCUMULATED COMPREHENSIVE TREASURY SHAREHOLDERS' SHARES VALUE CAPITAL DEFICIT LOSS STOCK EQUITY ------ ----- ------- ------- ---- ----- ------ Balance at January 1, 1999 .......... 13,699,095 $137 $60,917 $(40,072) $ (21) $ (1,148) $ 19,813 Issuance of common stock upon exercise of stock options ............ 97,825 1 158 -- -- -- 159 Issuance of common stock under employee stock purchase plan (note 13) .. 102,567 1 102 -- -- -- 103 Net loss .................... -- -- -- (1,866) -- -- (1,866) Foreign currency translation adjustment ..... -- -- -- -- (5) -- (5) Net unrealized holding loss on marketable securities ..... -- -- -- -- (6) -- (6) Purchase of 1,706,500 shares of treasury stock ............ -- -- -- -- -- (3,808) (3,808) ---------- ---- ------- -------- ----- -------- -------- Balance at December 31, 1999 ....... 13,899,487 $139 $61,177 $(41,938) $ (32) $ (4,956) $ 14,390 Issuance of common stock upon exercise of stock options ............ 494,942 5 820 -- -- -- 825 Issuance of common stock under employee stock purchase plan (note 13) 110,869 1 314 -- -- -- 315 Net income .................. -- -- -- 2,242 -- -- 2,242 Foreign currency translation adjustment ..... -- -- -- -- (137) -- (137) Purchase of 1,425,000 shares of treasury stock ............ -- -- -- -- -- (6,458) (6,458) ---------- ---- ------- -------- ----- -------- -------- Balance at December 31, 2000 ..... 14,505,298 $145 $62,311 $(39,696) $(169) $(11,414) $ 11,177 Issuance of common stock upon exercise of stock options ................ 53,130 1 104 -- -- -- 105 Issuance of common stock under employee stock purchase plan (note 13) 102,057 1 203 -- -- -- 204 Compensation for modified stock options .............. -- -- 10 -- -- -- 10 Net loss .................... -- -- -- (7,925) -- -- (7,925) Foreign currency translation adjustment ................ -- -- -- -- (36) -- (36) ---------- ---- ------- -------- ----- -------- -------- Balance at December 31, 2001 ....... 14,660,485 $147 $62,628 $(47,621) $(205) $(11,414) $ 3,535 ========== ==== ======= ========= ===== ======== ========
See accompanying notes to consolidated financial statements. 33 SYNTELLECT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (IN THOUSANDS)
2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income (loss) ................................................ $ (7,925) $ 2,242 $ (1,866) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Loss on sale of property, plant, and equipment ............. 13 49 -- Depreciation and amortization .............................. 1,764 1,817 2,489 Provision for doubtful accounts ............................ 529 318 1,806 Stock option compensation expense .......................... 10 -- -- (Increase) decrease in accounts receivable ................. 4,277 (1,847) (2,009) Decrease in inventories .................................... 781 626 932 Increase (decrease) in accounts payable .................... (789) 1,061 (687) Decrease in accrued liabilities ............................ (1,263) (82) (10) Increase in deferred revenue ............................... 1,708 3,507 197 (Increase) decrease in customer deposits ................... (2,684) (322) 158 (Increase) decrease in prepaid expenses, other receivables, and other assets ....................................... (180) (594) 289 -------- ------- -------- Net cash provided by (used in) operating activities ........ (3,759) 6,775 1,299 -------- ------- -------- Cash flows from investing activities: Purchase of marketable securities ................................ -- -- (14,190) Maturities of marketable securities .............................. 75 1,026 21,381 Purchase of property and equipment ............................... (1,216) (1,015) (1,713) Proceeds from notes receivable ................................... 41 -- -- Proceeds from sale of property and equipment ..................... 10 254 -- -------- ------- -------- Net cash provided by (used in) investing activities ........ (1,090) 265 5,478 -------- ------- -------- Cash flows from financing activities: Borrowings on line of credit ..................................... 17,421 -- -- Payments to line of credit ....................................... (15,972) -- -- Proceeds from sale of common stock ............................... 309 1,140 262 Purchase of treasury stock ....................................... -- (6,458) (3,808) Payments on capital lease obligations ............................ (210) (435) (278) -------- ------- -------- Net cash provided by (used in) financing activities ........ 1,548 (5,753) (3,824) -------- ------- -------- Effect of exchange rates on cash ..................................... (36) (137) (5) Net increase (decrease) in cash and cash equivalents ................. (3,337) 1,150 2,948 Cash and cash equivalents at beginning of year ....................... 7,334 6,184 3,236 -------- ------- -------- Cash and cash equivalents at end of year ............................. $ 3,997 $ 7,334 $ 6,184 ======== ======= ======== Supplemental disclosure of cash flow information: Cash paid for interest ..................................... $ 154 $ 57 $ 47 ======== ======= ======== Cash paid for income taxes ................................. $ 37 $ 20 $ 29 ======== ======= ======== Non-cash Investing and Financing Activities: Property and equipment acquired under capital leases ....... $ 529 $ 362 $ 134 ======== ======= ========
See accompanying notes to consolidated financial statements. 34 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business Syntellect Inc. and its wholly owned subsidiaries ("Syntellect", the "Company", "us", "we", "our") develop, market, and integrate voice and information processing software and application software worldwide. We offer an inbound voice processing product line, a worldwide distribution network, and a vertical market focus in the financial services, media, telecommunications, public utility, and healthcare industries. We also provide interactive transaction-based Hosted Services for those customers who prefer to outsource their voice processing applications, including cable and satellite pay-per-view orders, DialExpress, Site Locator, call redirect, and Lead Capture. Basis of Presentation Our consolidated financial statements have been presented on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have an accumulated deficit from operations of $47.6 million and a working capital deficit of $0.7 million, as of December 31, 2001, and have incurred a net loss of $7.9 million for the year ended December 31, 2001. During the year ended December 31, 2001, we began several initiatives to address our sales efforts, our cost structure, our cash management and our Services delivery efficiencies in light of the changing economic environment. In the second half of 2001, we began to see favorable results from these efforts. We believe the continued benefits of these measures will allow us to generate sufficient operating funds from internal sources to satisfy our liquidity requirements through December 31, 2002. However, there is no certainty that our plans will be successfully implemented. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The consolidated financial statements include the accounts of Syntellect Inc. and its wholly owned subsidiaries. All significant inter-company 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, revenue, 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. 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 carrying amount of accounts receivable, accounts payable, accrued liabilities, and borrowings on the line of credit approximate fair value as they are expected to be collected or paid within 90 days of year-end. Cash Equivalents Cash equivalents consist of money market accounts and overnight deposits with original maturities of three months or less. 35 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 Short-term Investments Short-term investments are comprised of certificates of deposit with maturity dates between three and twelve months. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the weighted-average method. We monitor usage reports to determine if the carrying value of any items should be adjusted due to lack of demand for the items. If it is determined that the carrying value requires adjustment, a new cost basis is established. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required and are taken. Property and Equipment Property and equipment are stated at cost. Equipment held under capital lease 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 seven years. Equipment held under capital lease 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. Depreciation related to revenue-generating assets is included in the cost of revenue. The total depreciation expense for each of the years ended December 31, 2001, 2000, and 1999 was $1.8 million, $1.8 million, and $2.5 million, respectively, of which $0.4 million, $0.3 million, and $0.2 million were related to cost of revenue and $1.4 million, $1.5 million, and $2.3 millions were included with general operating expenses. During 2001 and 2000, the Company wrote off certain fully depreciated property and equipment. Revenue Recognition Our revenue is derived from three business segments: Licenses, Services and Hosted Services. Revenue derived from Licenses and from Services is recognized pursuant to Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"); Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" ("SOP 98-9"); and Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). Revenue derived from Hosted Services is recognized pursuant to the provisions of SAB No. 101. Our revenue recognition policy for each of our business segments is described in the following paragraphs. LICENSES - We sell our standard Vista Interactive Media Response ("Vista IMR") software product, which uses a Windows operating system and Java programming language, for customer application development. Vista IMR consists of a broad suite of communication features designed for automating customer transactions. Some of Vista IMR's components include Interactive Voice Response ("IVR"), Interactive Web Response ("IWR"), and Speed Enabled Directory ("SPEED"). Vista IVR automates customer self-service inquiries and is sometimes considered the "voice" of an automated customer contact center. Vista IWR allows companies to take advantage of the Internet with self-service options designed exclusively for the World Wide Web. SPEED automates call routing tasks by allowing callers to speak the name of a specific individual or department they wish to reach rather than requiring them to speak to an operator or enter an extension number via the touch-tone keypad. 36 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 Customers purchasing our licenses sign a VISTA Product Agreement. We use the term "Products" to refer collectively to all hardware, software, and any product documentation which we provide to a customer with our standard Vista IMR software product. Our standard Vista contract provides for product shipment in accordance with the terms of the contract, typically FOB Syntellect. Revenue is recognized in accordance with the guidance of SOP 97-2, as amended by SOP 98-9, and SAB No. 101, after each of the following four criteria is established: 1) Persuasive evidence of an arrangement exists - We and our customers sign a Product agreement. 2) Delivery has occurred or services have been rendered - Title or licensing rights transfer to the customer upon shipment in accordance with the terms of the contract, typically FOB Syntellect. 3) The seller's price to the buyer is fixed or determinable - The price is defined or specified in the contract. 4) Collectibility is reasonably assured - We have established credit and collection policies, which provide for reasonable assurance of collectibility. Our standard Vista IMR software product is capable of functioning on a stand-alone basis as delivered. No other services or products are required to be provided for our standard Vista IMR software product to function. SERVICES - We may provide various professional services to customers. Customers may individually contract with us to provide one or more of these additional services, or customers may contract with other vendors or perform these services themselves. Our Services are accounted for as a multiple element arrangement. Multiple Element Arrangement - SOP 97-2 provides as follows: "If an arrangement includes multiple elements, the fee should be allocated to the various elements based on Vendor Specific Objective Evidence ("VSOE") of fair value, regardless of any separate prices stated within the contract for each element. VSOE of fair value is limited to the following: 1) the price charged when the same element is sold separately, or 2) for an element not yet being sold separately, the price established by management having the relevant authority; it must be probable that the price, once established, will not change before introduction of the element into the marketplace." In addition to selling various combinations of our products and services to customers in multiple-element arrangements, we also sell each of our products and services separately. Accordingly, we have established VSOE of fair value for each of the components of our multiple-element arrangements through the prices charged when each of the elements are sold separately. For our standard Vista IMR software product, VSOE of fair value is established by the price charged when the software license is sold separately. For services that may be provided at the request of customers, VSOE of fair value is established by the standard rates charged for each service when sold separately. Services which we provide may include one or more of the following: Application Development and Project Management - Upon request, we write, develop and test JAVA application programs in accordance with a functional specification. These additional programs are developed by the customer and our Professional Services group, and are not required to ensure the functionality of our standard Vista IMR software product. Revenue related to application development and project management services is recognized upon customer acceptance in accordance with the terms of our contract. Functional Specification - We may be requested by the customer to provide a functional specification. This deliverable depicts, in written format, the specific activities necessary for customization of our standard Vista IMR software product to the customer's specific application development needs. The customer can write its own functional specification, or it can outsource this service to a third party. Revenue related to functional specification services is recognized upon acceptance of the functional specification by the customer. Functional specification revenue are based on hours worked at standard rates in accordance with the terms of the contract. 37 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 Installation - We may be requested to provide installation services to customers purchasing our standard Vista IMR software product, or a similar product from another provider. Installation may be performed by our customers, or it may be outsourced to a third party. Upon acceptance of the installation by the customer, the revenue applicable to the installation is recognized. Installation revenue are based on hours quoted at standard rates in accordance with the terms of the contract. Training - We may be requested to provide training on the use and function of our Vista IMR software product to our customers' users. Training may be performed by the customer or outsourced to a third party provider. Revenue derived from training services are billed at standard contractual rates, and are recognized at the time the training is provided in accordance with the terms of the contract. Consulting - We may be requested to provide consulting services to assist customers with their in-house application development or other application needs. Revenue associated with consulting services is recognized at the time of service. Maintenance - We may be requested to provide maintenance services to customers related to our standard Vista IMR software product, customized Vista IMR applications, or operational support. Our customers may alternatively purchase maintenance services from third party providers, or they may provide such services themselves. Maintenance revenue is recognized on a straight-line basis over the life of the maintenance contract. HOSTED SERVICES - We may provide hosted or outsourced services to companies, including contract-based telephony and Internet automated transaction services. Hosted Services revenue are recognized in accordance with SAB No. 101 when each of the following four conditions has been met: 1) Persuasive evidence of an arrangement exists - We execute a Hosted Services agreement. 2) Delivery has occurred or services have been rendered - Services are provided to the customer in accordance with the terms of the contract. 3) The seller's price is fixed or determinable - The price is defined or specified in the contract. 4) Collectibility is reasonably assured - We have established credit and collection policies, which provide for reasonable assurance of collectibility. Period Cost Policy We period cost our labor and overhead expenses. This policy can result in quarterly gross margin swings based on volume and mix of business. This method tends to be consistent on a year-over-year basis given that we turn most services to revenue within 90 to 120 days of receipt of orders. It is important to understand this policy when comparing quarterly results of gross margin performance because of the gross margin swings. Contingent Liabilities All contingent liabilities, which are more likely than not to occur are accrued in our financial statements. Any contingent liabilities that are probable are disclosed in the notes to the financial statements. We incur two contingent liabilities in the regular course of business, which we account for through the use of reserve accounts. 38 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. From time to time, we review our customer's financial stability to evaluate whether foreseeable risks have been adequately accrued. We provide for the estimated cost of warranties at the time revenue is recognized. In 2001, we changed the warranty on our products and services from a standard 6-month warranty to a 30-day warranty, significantly lowering the amount of warranty claims and support. Should actual warranty claim rates or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. At December 31, 2001, the accrued liability associated with this warranty reserve was $10,000. Product Development The costs associated with the 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, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Because we believe our current process for developing software is essentially completed concurrent with the establishment of technological feasibility, we have not capitalized any costs 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 carry-forwards. 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. Stock Based Compensation We apply the intrinsic value-based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related interpretations including FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB No. 25" ("FIN 44") issued in March 2000, to account for our fixed plan stock options granted to employees. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, we have elected to continue to apply the intrinsic value-based method of accounting described above, and have adopted the disclosure requirements of SFAS No. 123. We apply fair value based method of accounting prescribed by SFAS No. 123 and related guidance including Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring or in conjunction with Selling Goods and Services" ("EITF No. 96-18") to account for stock options granted to non-employees. 39 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 Derivative Instruments and Hedging Activities In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138 require that all derivative instruments be recorded on the balance sheet at their respective fair values. We adopted the provisions of both SFAS No. 133 and No. 138 as of January 1, 2001. That adoption did not have any effect on our consolidated financial statements. Recent Accounting Pronouncements In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS No. 141"), and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations. SFAS No. 141 specifies the criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and the carrying value of such intangible assets be reviewed for impairment in accordance with SFAS No. 121 and subsequently, SFAS No. 144 after its adoption. We adopted the provisions of SFAS No. 141 on July 1, 2001 and SFAS No. 142 is effective on January 1, 2002. Goodwill and intangible assets determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001, but before SFAS No. 142 is adopted in full, are not amortized. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized and tested for impairment prior to the full adoption of SFAS No. 142. We do not anticipate a material impact to our results of operations due to this change. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 requires us to record the fair value of an asset retirement obligation as a liability in the period in which we incur a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. We also record a corresponding asset which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. We are required to adopt SFAS No. 143 on January 1, 2003. We do not anticipate the adoption of SFAS No. 143 to have a material impact on the results of our operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement requires that long-lived assets 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 undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value reduced by the costs to sell the asset. SFAS No. 144 is effective on January 1, 2002. At this time, we are unable to determine the impact that will result from our adoption of SFAS No. 144. 40 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 Earnings (Loss) Per Common Share Basic earnings per common share excludes dilution and is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares or resulted in the issuance of common shares that then shared in the earnings of the Company. During a period with net loss, dilutive securities would have an anti-dilutive effect on the loss per share. Accordingly, the dilutive shares are not presented in the calculation of diluted earnings per share. Reclassifications Certain 1999 and 2000 balances have been reclassified to conform to 2001 presentations. (2) NOTE RECEIVABLE The note receivable is due from one party in connection with the sale of office furniture. The note provides for 60 monthly payments on an original principal amount of $0.4 million and accrues interest at an annual rate of 9.5%. The last payment was received in August 2001, however we expect to collect the full amount. (3) INVENTORIES Inventories consist of the following:
(in thousands) December 31, 2001 2000 ---- ---- Finished goods.................................... $168 $ 507 Purchased components.............................. 236 460 Repair, warranty and maintenance inventories...... 230 448 ---- ------ $634 $1,415 ==== ======
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. (4) PREPAID EXPENSES Prepaid expenses consist of the following:
(in thousands) December 31, 2001 2000 ---- ---- Prepaid royalties................ $ 239 $ 18 Prepaid rent..................... 130 33 Prepaid insurance................ 120 46 Prepaid commissions.............. 213 290 Other prepaid expenses........... 370 324 ------ ---- $1,072 $711 ====== ====
41 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (5) PROPERTY AND EQUIPMENT Property and equipment consist of the following:
(in thousands) December 31, 2001 2000 ---- ---- Furniture, fixtures and computer equipment.......... $ 6,751 $ 6,184 Hosted Services equipment........................... 6,734 6,430 Leasehold improvements.............................. 628 475 ------- ------- 14,113 13,089 Less accumulated depreciation and amortization...... (10,341) (9,275) ------- ------- $ 3,772 $ 3,814 ======= =======
(6) ACCRUED LIABILITIES Accrued liabilities consist of the following:
(in thousands) December 31, 2001 2000 ---- ---- Accrued compensations and benefits................ $1,035 $1,914 Accrued legal and accounting...................... 86 154 Accrued royalties................................. 50 120 Other accrued liabilities......................... 752 998 ------ ------ $1,923 $3,186 ====== ======
(7) DEFERRED REVENUE Deferred revenue consists of the following:
(in thousands) December 31, 2001 2000 ---- ---- Deferred Licenses and Services revenue.............. $1,770 $2,950 Deferred maintenance revenue........................ 6,359 3,471 ------ ------ $8,129 $6,421 ====== ======
42 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (8) CREDIT FACILITIES On October 11, 2000, the Company entered into a $4.0 million revolving line of credit agreement with a financial institution, which was terminated by us on June 26, 2001. On June 14, 2001, we executed a $3.0 million, asset-based operating line of credit agreement with another financial institution that expires on June 13, 2002. On October 1, 2001, we executed an amendment to this line of credit agreement, reducing the available limit from $3.0 million to $2.0 million, and increasing the interest rate from the prime rate plus 4.5% to the prime rate plus 8.5% (at December 31, 2001 it would have calculated to be 13.25%), but not to be less than 15% per annum. As of December 31, 2001, the prime interest rate was 4.75%. This line of credit required a non-refundable, one-time, commitment fee of $45,000. The minimum interest due each month is $7,500. We may borrow according to a formula based on 65% of eligible domestic accounts receivable less than 90 days old, excluding maintenance receivables and customer deposits. Domestic accounts receivable and inventory serve as collateral for this line of credit. Based on this borrowing formula, we had an additional $0.2 million in available funds under the line of credit and an outstanding balance of $1.4 million at December 31, 2001. At December 31, 2001, we were in violation of the minimum working capital (current ratio) and minimum net equity covenants of the line of credit agreement, however the financial institution waived these terms. On January 18, 2002, we executed a second amendment to this line of credit agreement, increasing the maximum limit from $2.0 million to $2.5 million, limited by the asset borrowing base described above. (9) LEASE COMMITMENTS AND CONTINGENT LIABILITIES Capital leases We have several capital lease agreements executed for the purpose of capital equipment purchases. All of the capital lease obligations bear interest at rates ranging from 9% to 24% and are collateralized by equipment. Capital leases consist of the following:
(in thousands) December 31, 2001 2000 ---- ---- Capital lease obligations............................ $ 786 $ 467 Less current portion................................. (249) (151) ----- ----- $ 537 $ 316 ===== =====
Equipment held under capital lease and included in property and equipment is as follows: (in thousands) December 31, 2001 2000 ---- ---- Furniture, fixtures and computer equipment........... $1,193 $ 664 Less accumulated amortization........................ (400) (183) ----- ----- $ 793 $ 481 ===== =====
Operating leases The Company leases office facilities, business vehicles, and various equipment under non-cancelable operating leases that expire at various dates through 2006. Rental expense under operating leases was $1.3 million in 2001, $1.2 million in 2000, and $1.6 million in 1999. 43 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 Future minimum lease payments under non-cancelable 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, 2001 are referenced in the table below.
(in thousands) YEAR CAPITAL LEASES OPERATING LEASES 2002 ..................................... $ 345 $1,282 2003 ..................................... 300 1,158 2004 ..................................... 220 1,146 2005 ..................................... 94 924 2006 ..................................... 0 62 ------ ------ Total minimum lease payments ............. $ 959 $4,572 ====== Less amounts representing interest ....... $ (173) ------ Net minimum lease payments ............... $ 786 ======
Other commitments We have a non-cancelable agreement with a certain service provider under which we guarantee a minimum purchase of $65,000 each month in exchange for favorable rates for our Hosted Services operating segment. This agreement expires in October 2005. (10) EARNINGS (LOSS) PER SHARE COMPUTATION
(in thousands, except per share amounts) For the years ended December 31, 2001 2000 1999 ---------- -------- -------- Net income (loss) ........................... $ (7,925) $ 2,242 $ (1,866) ========== ======== ======== Weighted average shares outstanding - basic . 11,251 11,742 13,034 ========== ======== ======== Earnings (loss) per share - basic ........... $ (0.70) $ 0.19 $ (0.14) ========== ======== ======== Weighted average shares outstanding - basic . 11,251 11,742 13,034 Effect of dilutive securities - stock options -- 957 -- ---------- -------- -------- Weighted average shares outstanding - diluted 11,251 12,699 13,034 ========== ======== ======== Earnings (loss) per share - diluted ......... $ (0.70) $ 0.18 $ (0.14) ========== ======== ========
The computation of diluted loss per share for the years ended December 31, 2001 and 1999 excluded the effect of incremental common shares of 316,693 and 565,400, respectively, attributable to the assumed exercise of common stock options because their effect would be anti-dilutive. 44 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (11) 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 for the years ended December 31, 2001, 2000, and 1999 consists of the following:
(in thousands) 2001 2000 1999 ------- ------- ------- U.S. operations ............. $(7,652) $ 1,340 $(2,938) International operations ..... (507) 1,157 1,072 ------- ------- ------- $(8,159) $ 2,497 $(1,866) ======= ======= =======
The components of income tax expense (benefit) are as follows:
(in thousands) 2001 2000 1999 ----- ----- -------- Federal ............. $ (49) $ 69 $ -- Foreign ............. (185) 186 -- ----- ----- -------- $(234) $ 255 $ -- ===== ===== ======== Current .............. $(234) $ 255 $ -- Deferred ............. -- -- -- ----- ----- -------- $(234) $ 255 $ -- ===== ===== ========
Income tax expense 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) 2001 2000 1999 ------- ------- ------- Computed "expected" income tax expense (benefit) ........................ $(2,774) $ 849 $ (634) Increase (decrease) in income tax expense resulting from: State income tax benefit net of federal income tax effect ........... (2,303) -- -- Increase (decrease) in valuation allowance .......................... 4,931 (669) 916 Utilization of foreign net operating losses not previously recognized (185) -- (364) Other, net .......................................................... 97 75 82 ------- ------- ------- Total income tax expense ....................................... $ (234) $ 255 $ -- ======= ======= =======
45 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 The income tax effects of temporary differences that give rise to the Company's deferred income tax assets are as follows:
(in thousands) 2001 2000 1999 -------- -------- -------- Deferred income tax assets: Net operating loss and tax credit carry-forwards ........ $ 19,406 $ 13,863 $ 13,402 Warranty and inventory allowances ....................... 102 104 1,086 Accrued expenses ........................................ 149 810 747 Allowance for doubtful accounts ......................... 161 82 321 Property and equipment due to differences in depreciation -- 28 -- -------- -------- -------- Gross deferred income tax assets ........................ 19,818 14,887 15,556 -------- -------- -------- Less valuation allowance ................................ (19,818) (14,887) (15,556) -------- -------- -------- Net deferred income tax asset ........................... $ -- $ -- $ -- ======== ======== ========
The increase and decrease in the valuation allowance for the net deferred income tax asset for the years ended December 31, 2001 and 2000 were $4.9 million and $0.7 million, 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 carry-forwards. 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 carry-forwards depends on having sufficient taxable income within the carry-back and carry-forward 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 carry-back, (2) future taxable income that will result from the reversal of existing taxable temporary differences, and (3) future taxable income generated by future operations. As of December 31, 2001, the Company had net operating loss, investment tax credit, alternative minimum tax credit and research and development tax credit carry-forwards of approximately $40.6 million, $0.2 million, $15,000, and $1.1 million, respectively, which expire at various dates through the year 2020. (12) LITIGATION AND CONTINGENT LIABILITY From time to time, we have been involved in various legal proceedings and claims arising in the ordinary course of business. We are, however, not currently a party to any pending legal proceedings. On July 31, 2000, we entered into a license agreement with a software licensor ("Licensor"). The license agreement provides us the right to use, market, and resell software programs owned by Licensor. We experienced certain software performance issues and discussed with Licensor adjustments in the terms of the license agreement. On May 31, 2001, Licensor sent us a demand letter seeking $300,000 and our compliance with certain other specific terms of the license agreement. On June 6, 2001, we informed Licensor of our position with regard to the license agreement and our intention, due to multiple defects in Licensor's software, to recover $339,850 in license and development fees previously paid it under the license agreement. No further action has been taken by either party in this matter. 46 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (13) SHAREHOLDERS' EQUITY Treasury Stock As of December 31, 2001, we had repurchased a total of 3,332,432 shares of our common stock at an average purchase price of $3.43 and are authorized to repurchase 365,000 additional shares. We made no stock repurchases in 2001. 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 non-statutory 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. Non-statutory stock options may be granted with an exercise 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 ten years from the date of grant. As of December 31, 2001, there are no remaining options authorized for grant under this plan. Syntellect adopted a non-employee director stock plan in 1995, which has been amended through May 17, 2001. The plan, as amended, provides for the issuance of up to 150,000 shares of common stock to eligible participants under non-qualified stock option grants. Under the plan, non-employee directors are granted a one-time option to purchase 10,000 shares upon election or appointment to the Board of Directors and an annual option to purchase 5,000 additional shares. Options may be granted with an exercise price not less than the fair market value on the date of grant. As of May 17, 2001, the Board of Directors amended the plan to change the vesting period to one year for all options granted, extend the expiration date of the annual grant of options from six to ten years, and clarified the meaning of "Grant Date". For the year ended December 31, 2001, we recognized $10,000 of expense resulting from the modification of the options in accordance with FASB Interpretation No. 44. The plan has no scheduled termination date. As of December 31, 2001, 34,000 options remain authorized for grant under the plan. Syntellect adopted a long-term incentive plan, effective February 1, 1995, which has been amended through June 14, 2001. The plan, as amended, provides for the issuance of up to 2,400,000 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. The number of shares authorized for issuance under this plan increased from 2,100,000 to 2,400,000. Incentive stock options may be granted with an exercise price to be determined by the Board of Directors that is not less than the fair market value of the common stock at the date of grant, and their terms may not exceed ten years from the date of grant. Options generally become exercisable over a 50-month period commencing at the date of grant and expire ten years from the date of the grant. As of December 31, 2001, 251,352 options remain authorized for grant under the plan. The plan terminates in February 2005. As required by SFAS 123, we disclose information regarding grants of options to non-employees other than directors. In April 2000, options to purchase 20,000 shares of our common stock at an exercise price of $4.125 per share were granted to our financial press relations firm. In June 2000, options to purchase 10,000 shares of our common stock at an exercise price of $5.25 were granted to a recruiting consultant. All of those options are included in the summary table of options granted and outstanding. The expense related to these options is $52,000, $27,000 and $25,000 in 2000 and 2001, respectively, and is being amortized over the remaining life of the contract. 47 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 At December 31, 2001, 1,152,680 options with a weighted average exercise price of $2.83 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, 2001 is as follows:
2001 2000 1999 ---- ---- ---- Options exercisable at year-end (in thousands).................... 1,153 902 1,135 Weighted average fair value of options granted during the year.... $ 2.83 $ 2.45 $ 1.21 Low exercise price....................................... $ 0.87 $ 0.87 $ 0.87 High exercise price...................................... $ 7.00 $ 7.00 $ 7.00
OPTIONS ---------------------------------------------- WEIGHTED AVERAGE AVAILABLE EXERCISE PRICE FOR OUTSTANDING PER GRANT OPTIONS OPTION ---------- ---------- ----- Balance, January 1, 1999 ....... 447,678 2,038,472 $2.42 Granted ................... (740,500) 740,500 1.95 Canceled .................. 656,733 (656,733) 3.01 Exercised ................. -- (97,825) 1.63 Plan shares expired ....... (4,420) -- -- ---------- ---------- Balance, December 31, 1999 ..... 359,491 2,024,414 $2.09 Increase in reserved shares 600,000 -- -- Granted ................... (804,400) 804,400 4.95 Canceled .................. 221,475 (221,475) 2.99 Exercised ................. -- (494,942) 1.67 Plan shares expired ....... (92,986) -- -- ---------- ---------- Balance, December 31, 2000 ..... 283,580 2,112,397 $3.19 Increase in reserved shares 300,000 -- -- Granted ................... (644,000) 644,000 2.08 Canceled .................. 360,887 (360,887) 3.68 Exercised ................. -- (53,130) 1.97 Plan shares expired ....... (15,115) -- -- ---------- ---------- Balance, December 31, 2001 ..... 285,352 2,342,280 $2.83 ========== ==========
The following table summarizes information about stock options outstanding at December 31, 2001:
Weighted Average Remaining Weighted Weighted Range of Exercise Options Contractual Life Average Options Average Prices Outstanding in Years Exercise Price Exercisable Exercise Price ------ ----------- -------- -------------- ----------- -------------- $ 0.87 -- $ 1.81 1,187,442 7.2 $ 1.46 598,022 $ 1.30 $ 2.03 -- $ 3.75 451,528 7.4 $ 2.86 183,680 $ 3.04 $ 4.13 -- $ 5.63 571,820 8.0 $ 4.86 272,168 $ 4.81 $ 5.88 -- $ 7.00 131,490 5.2 $ 6.14 98,810 $ 6.22 --------- --- ------ --------- ------ $ 0.87 -- $ 7.00 2,342,280 7.3 $ 2.83 1,152,680 $ 2.83 ========= === ====== ========= ======
48 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 Syntellect has adopted the disclosure-only provisions of SFAS No. 123. Had compensation cost for Syntellect's stock option grants and stock purchase plan discussed below 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 earnings (loss) per common share would have been:
(in thousands except per share amounts) 2001 2000 1999 ---- ---- ---- Net income (loss) -- as reported ..................... $ (7,925) $ 2,242 $ (1,866) ======== ======== ======== Net income (loss) -- pro forma ....................... $ (9,086) $ 970 $ (2,092) ======== ======== ======== Earnings (loss) per common share -- basic as reported $ (0.70) $ 0.19 $ (0.14) ======== ======== ======== Earnings (loss) per common share -- basic pro forma .. $ (0.81) $ 0.08 $ (0.16) ======== ======== ========
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% 0% 0% Expected stock price volatility....................... 100% 95% 87% Risk-free interest rate............................... 4.56% 6.17% 5.98% Expected life of options.............................. 5 years 5 years 5 years
Employee Stock Purchase Plan Syntellect adopted an employee stock purchase plan that, as amended, provides for the purchase of up to 1,000,000 shares of common stock. The number of shares authorized for issuance under the plan increased from 800,000 to 1,000,000 on June 14, 2001. Under the plan, eligible participants may purchase common stock semi-annually at 85% of the fair market value on either the first day or last day of the offering period, whichever day reflects the lower fair market value. At December 31, 2001, 778,697 shares had been purchased and 221,303 shares of common stock remained available for purchase under this plan. The number of shares purchased and the purchase price per share for the six-month periods ended December 31, 2001, 2000 and 1999 and June 30, 2001, 2000 and 1999 are listed on the table below Amounts that would be expensed under SFAS No. 123 are included in pro forma net income (loss) above.
PERIOD NO. OF SHARES PURCHASE PRICE ------ ------------- -------------- July 1 - December 31, 2001 42,163 1.62 January 1 - June 30, 2001 59,894 2.34 July 1 - December 31, 2000 58,782 2.55 January 1 - June 30, 2000 52,087 3.08 July 1 - December 31, 1999 57,101 0.96 January 1 - June 30, 1999 45,466 1.06
49 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (14) EMPLOYEE BENEFIT PLANS Effective January 1, 1997, Syntellect adopted a 401(k) plan covering all eligible employees of the Company. Under the plan, participants may contribute up to 15% of their total compensation, subject to certain limitations. For the year ended December 31, 1999, the Company provided matching contributions equal to one third of employee contributions, up to a maximum of 7% of an employee's total compensation. In November 1999, the Board of Directors resolved to amend the plan so as to qualify it as a 401(k) Safe Harbor Plan, effective January 1, 2000. In accordance with the amendment, commencing with the year ended December 31, 2000, the Company has matched and will continue to match each employee's elective deferral, up to 4% of compensation, subject to Internal Revenue Service limitations. All such qualified matchings are immediately 100% vested. We made matching contributions to the 401(k) plan of $0.5 million in 2001; $0.5 million in 2000; and $0.3 million in 1999. 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. On December 26, 2000, we adopted an executive 401(K) plan in which any employee with a Vice President or higher rank and reports directly to the President is entitled to participate. Participants may defer any amount they choose. We will match between 2% and 3.5% depending on employee's deferral election. The employer matching contributions vest 33-1/3% at December 31st of the first year of participation in the plan, 33-1/3% at the end of the second year, and 33-1/3% at the end of the third year. Any amounts not vested will be forfeited upon termination of employment. The matching contribution was $37,000 for the year ended December 31, 2001. (15) BUSINESS SEGMENTS Syntellect develops, markets, and integrates voice and information processing systems and application software. We offer a diversified product line, which includes inbound voice processing, a worldwide distribution network, and a vertical market focus on the financial services, media, telecommunications, public utility, and healthcare industries. We also provide Hosted Services for those customers who prefer to outsource their voice processing applications. As of December 31, 2001, in addition to our primary office facility in Phoenix, we also maintained five sales offices in the United States and one sales office in each of London, Amsterdam and Stockholm. We subsequently closed our offices in Amsterdam and Stockholm. 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 business segments. The Company evaluates its business and allocates resources based on revenue and income (loss) by segment. An operating business segment is defined as a component of an enterprise that engages in business activities which may earn revenue and incur expenses, whose results are regularly reviewed by a chief operating decision maker, and for which discrete financial information is available. 50 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 The Company has three operating business segments in 2001, 2000, and 1999 which are organized around differences in products and services: Licenses, Services, and Hosted Services.
(in thousands) HOSTED YEAR ENDED DECEMBER 31, 2001 LICENSES SERVICES SERVICES TOTAL - ---------------------------- -------- -------- -------- --------- Revenue from customers ............ $ 11,290 $ 20,670 $ 4,628 $ 36,588 Depreciation and amortization ..... 939 469 356 1,764 Segment income (loss) before taxes (4,422) (3,236) (501) (8,159) Expenditures for segment assets ... 368 411 437 1,216 AS OF DECEMBER 31, 2001 Segment assets .................... $ 10,001 $ 5,349 $ 2,849 $ 18,199 Capital lease obligation .......... 374 404 8 786 YEAR ENDED DECEMBER 31, 2000 Revenue from customers ............ $ 20,906 $ 21,412 $ 5,714 $ 48,032 Depreciation and amortization ..... 811 406 600 1,817 Segment income (loss) before taxes 2,343 742 (588) 2,497 Expenditures for segment assets ... 557 274 184 1,015 AS OF DECEMBER 31, 2000 Segment assets .................... $ 13,566 $ 10,316 $ 3,219 $ 27,101 Capital lease obligation .......... 312 155 -- 467 YEAR ENDED DECEMBER 31, 1999 Revenue from customers ............ $ 17,092 $ 23,007 $ 7,732 $ 47,831 Depreciation and amortization ..... 1,311 656 522 2,489 Segment loss before taxes ......... (1,540) (42) (284) (1,866) Expenditures for segment assets ... 561 276 876 1,713 AS OF DECEMBER 31, 1999 Segment assets .................... $ 11,956 $ 10,542 $ 3,726 $ 26,224 Capital lease obligation .......... 362 179 -- 541
On September 15, 1999, we entered into an agreement with Noble Systems Corporation ("Noble"), whereby we sold the selected assets of our Predictive Dialer product line. This sale was not considered to be the disposal of a business segment. The sales price was approximately $924,000. The following is a reconciliation between the sales price and the gain recorded on the sale: (in thousands) Sales Price ........................ $ 924 Less costs associated with the sale: Legal fees ..................... (45) Broker fees .................... (150) Write off of inventory not sold (186) Other expenses related to sale . (34) ----- Total costs ........................ (415) ----- Net gain on sale of product line ... $ 509 =====
51 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (16) SUPPLEMENTAL FINANCIAL INFORMATION A summary of additions and deductions related to the allowances for accounts receivable for the years ended December 31, 2001, 2000 and 1999 follows:
(in thousands) Allowance for doubtful accounts: 2001 2000 1999 ------- ------- ------- Beginning balance ........... $ 225 $ 784 $ 932 Amounts charged to expense 529 318 1,806 Write offs ............... (338) (877) (1,954) ------- ------- ------- Ending balance ........... $ 416 $ 225 $ 784 ======= ======= =======
(17) MAJOR CUSTOMERS AND GEOGRAPHIC DATA No single customer accounted for more than 10% of the Company's revenue in 2001, 2000, or 1999. Net revenue, by geographic area, for the three years ended December 31, 2001, 2000, and 1999 are as follows:
(in thousands) Geographic Area 2001 2000 1999 ------------------ ----------------- ------------------ United States ...................... $27,306 75% $33,257 69% $38,885 81% United Kingdom ..................... 7,997 22% 13,901 29% 8,335 18% Other .............................. 1,285 3% 874 2% 611 1% ------- ------- ------- $36,588 100% $48,032 100% $47,831 100% ======= ======= =======
Long-lived assets, by geographic area, for the three years ended December 31, 2001, 2000, and 1999 are as follows:
(in thousands) Geographic Area 2001 2000 1999 --------------- -------------- --------------- United States $3,437 91% $3,692 97% $4,579 96% United Kingdom 335 9% 122 3% 208 4% ------ ------ ------ $3,772 100% $3,814 100% $4,787 100% ====== ====== ======
52 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (18) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Year ended December 31, 2001
(in thousands, except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- Net revenue........................ $ 10,346 $ 8,489 $ 8,467 $ 9,286 Gross margin....................... 5,034 4,077 4,010 5,184 Operating (loss)................... (2,237) (2,481) (2,227) (1,110) Net (loss)......................... (2,209) (2,481) (2,279) (956) (Loss) per share - basic........... (.20) (.22) (.20) (.08) (Loss) per share - diluted......... (.20) (.22) (.20) (.08)
Year ended December 31, 2000
(in thousands, except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- Net revenue........................ $12,718 $ 12,061 $ 11,695 $ 11,558 Gross margin....................... 6,788 7,411 6,986 6,797 Operating income (loss)............ 1,210 833 394 (196) Net income (loss).................. 1,197 1,001 476 (432) Earnings (loss) per share - basic.. .10 .08 .04 (.04) Earnings (loss) per share - diluted .09 .08 .04 (.04)
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants requiring disclosure under applicable rules and regulations. PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding our continuing directors and nominees is set forth under the caption "Information Concerning Directors and Nominees" in our Proxy Statement for our 2002 Annual Meeting of Stockholders (the "2002 Proxy Statement"), which we are incorporating by reference into this Annual Report. Information concerning our executive officers is set forth under the caption "Executive Officers of the Registrant" in Part I of this Annual Report. Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in our 2002 Proxy Statement, which Section we are incorporating by reference into this Annual Report. With the exception of the foregoing information and other information specifically incorporated by reference into this Annual Report, we are not filing the 2002 Proxy Statement as a part of this Annual Report. ITEM 11 -- EXECUTIVE COMPENSATION We are incorporating by reference in this Annual Report the information furnished under the caption "Executive Compensation" in our 2002 Proxy Statement. We are not incorporating by reference, however, the 53 information set forth under the captions "Board Compensation Committee Report on Executive Compensation" and "Stock Price Performance Graph" in our 2002 Proxy Statement. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT We are incorporating by reference in this Annual Report the information regarding security ownership of certain of our beneficial owners and management furnished under the caption "Security Ownership of Certain Beneficial Owners and Management" in our 2002 Proxy Statement. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There were no relationships or related transactions requiring disclosure under applicable rules and regulations. PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS - INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following Consolidated Financial Statements of Syntellect Inc. and subsidiaries, related notes, and independent auditor's report are filed as part of this Annual Report: Independent Auditors' Report -- KPMG LLP 30 Consolidated Balance Sheets -- December 31, 2001 and 2000 31 Consolidated Statements of Operations and Comprehensive Income -- Years ended December 31, 2001, 2000 and 1999 32 Consolidated Statements of Shareholders' Equity -- Years ended December 31, 2001, 2000 and 1999 33 Consolidated Statements of Cash Flows -- Years ended December 31, 2001, 2000 and 1999 34 Notes to Consolidated Financial Statements 35
(a) 2. FINANCIAL STATEMENT 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. (a) 3. EXHIBITS
EXHIBIT PAGE NUMBERS IN OUR ANNUAL REPORT NO. DESCRIPTION OR METHOD OF FILING --- ----------- ------------------- (2)(i) Agreement and Plan of Reorganization as of Incorporated by reference to Exhibit No. 2 to December 6, 1995, between Syntellect Inc., Syntellect's Registration Statement on Syntellect Acquisition Co., and Pinnacle Form S-4 dated February 9, 1996 (the "S-4") Investment Associates Inc. (2)(ii) Form of Affiliate Agreement between Syntellect Incorporated by reference to Exhibit No.10.10 Inc. and affiliates of Pinnacle Investment to Syntellect's S-4 Associates Inc.
54 (3)(i)(a) Restated Certificate of Incorporation of Incorporated by reference to Exhibit No. 3-A Registrant, filed with the Delaware Secretary of to Syntellect's Registration Statement on State on April 2, 1990 Form S-1 dated February 23, 1995 (the "S-1") (3)(i)(b) Certificate of Amendment to Restated Certificate Incorporated by reference to Exhibit of Incorporation of Registrant, filed with the No. 3.1(b) to Syntellect's S-4 Delaware Secretary of State on May 18, 1993 (3)(i)(c) Certificate of Amendment to Restated Certificate Incorporated by reference to Exhibit 3.1(c) to of Incorporation of Registrant filed with the Syntellect's 1995 Form 10-K Delaware Secretary of State on March 14, 1996 (3)(ii) By-laws of Syntellect Inc. as Amended and Incorporated by reference to Exhibit (10) to Restated Through August 9, 2001 Syntellect's Third Quarter 2001 Form 10-Q (4) Specimen Certificate representing Common Stock Incorporated by reference to Exhibit No. 4 to Amendment No. 1 of Syntellect's S-1 (10)(i) Syntellect Inc. Restated Stock Option Plan (as Incorporated by reference to Exhibit 10 (i) to amended through February 17, 1998) Syntellect's 2000 Form 10-K (10)(ii) Syntellect Inc. 1990 Employee Stock Purchase Filed herewith Plan (as amended through June 14, 2001) (10)(iii) Syntellect Inc. Long-term Incentive Plan (as Filed herewith amended through June 14, 2001) (10)(iv) Syntellect Inc. Executive 401(K) Plan Incorporated by reference to Exhibit 10(iv) to Syntellect's 2000 Form 10-K (10)(v) Syntellect Inc. Nonemployee Director Stock Plan Incorporated by reference to Exhibit (10) to (as amended through May 17, 2001) Syntellect's Second Quarter 2001 Form 10-Q (10)(vi) Lease Agreement dated March 6, 2000 between Incorporated by reference to Exhibit 10(vi) to Denali National Trust, Inc. and Syntellect Inc. Syntellect's 2000 Form 10-K for an office facility in Phoenix, Arizona (10)(vii) Form of Indemnification Agreement between Incorporated by reference to Exhibit No. 10-L Syntellect and its directors and officers to Syntellect's S-1 (10)(viii) Form of Registration Rights Agreement Incorporated by reference to Exhibit 10.13 to Syntellect's S-4 (10)(ix) Line of Credit Agreement Filed Herewith (21) Subsidiaries of Registrant Filed Herewith (23) Consents of Experts Filed Herewith
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during 2001. 55 Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Syntellect has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. SYNTELLECT INC. By: /S/ Timothy P. Vatuone -------------------------------------- Timothy P. Vatuone Vice President, Chief Financial Officer, Secretary and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons in the capacities and on the dates indicated.
NAME AND SIGNATURE TITLE DATE: - ------------------ ----- ----- /S/ Anthony V. Carollo Chairman of the Board, Chief Executive March 20, 2002 - ---------------------- Officer, President, and Director ANTHONY V. CAROLLO (Principal Executive Officer) /S/ Timothy P. Vatuone Vice President, Chief Financial Officer, March 20, 2002 - ---------------------- Secretary and Treasurer TIMOTHY P. VATUONE (Principal Financial Officer) /S/ Charles F. Sonneborn III Vice President and Controller March 20, 2002 - ---------------------------- (Principal Accounting Officer) CHARLES F. SONNEBORN III /S/ Michael R. Bruce Director March 20, 2002 - -------------------- MICHAEL R. BRUCE /S/ William P. Conlin Director March 20, 2002 - --------------------- WILLIAM P. CONLIN /S/ Roy A. Herberger, Jr. Director March 20, 2002 - ------------------------- ROY A. HERBERGER, JR. /S/ Michael D. Kaufman Director March 20, 2002 - ---------------------- MICHAEL D. KAUFMAN /S/ Kent C. Mueller Director March 20, 2002 - ------------------- KENT C. MUELLER
56 EXHIBIT INDEX
EXHIBIT PAGE NUMBERS IN OUR ANNUAL REPORT NO. DESCRIPTION OR METHOD OF FILING --- ----------- ------------------- (2)(i) Agreement and Plan of Reorganization as of Incorporated by reference to Exhibit No. 2 to December 6, 1995, between Syntellect Inc., Syntellect's Registration Statement on Syntellect Acquisition Co., and Pinnacle Form S-4 dated February 9, 1996 (the "S-4") Investment Associates Inc. (2)(ii) Form of Affiliate Agreement between Syntellect Incorporated by reference to Exhibit No.10.10 Inc. and affiliates of Pinnacle Investment to Syntellect's S-4 Associates Inc. (3)(i)(a) Restated Certificate of Incorporation of Incorporated by reference to Exhibit No. 3-A Registrant, filed with the Delaware Secretary of to Syntellect's Registration Statement on State on April 2, 1990 Form S-1 dated February 23, 1995 (the "S-1") (3)(i)(b) Certificate of Amendment to Restated Certificate Incorporated by reference to Exhibit of Incorporation of Registrant, filed with the No. 3.1(b) to Syntellect's S-4 Delaware Secretary of State on May 18, 1993 (3)(i)(c) Certificate of Amendment to Restated Certificate Incorporated by reference to Exhibit 3.1(c) to of Incorporation of Registrant filed with the Syntellect's 1995 Form 10-K Delaware Secretary of State on March 14, 1996 (3)(ii) By-laws of Syntellect Inc. as Amended and Incorporated by reference to Exhibit (10) to Restated Through August 9, 2001 Syntellect's Third Quarter 2001 Form 10-Q (4) Specimen Certificate representing Common Stock Incorporated by reference to Exhibit No. 4 to Amendment No. 1 of Syntellect's S-1 (10)(i) Syntellect Inc. Restated Stock Option Plan (as Incorporated by reference to Exhibit 10 (i) to amended through February 17, 1998) Syntellect's 2000 Form 10-K (10)(ii) Syntellect Inc. 1990 Employee Stock Purchase Filed herewith Plan (as amended through June 14, 2001) (10)(iii) Syntellect Inc. Long-term Incentive Plan (as Filed herewith amended through June 14, 2001) (10)(iv) Syntellect Inc. Executive 401(K) Plan Incorporated by reference to Exhibit 10(iv) to Syntellect's 2000 Form 10-K (10)(v) Syntellect Inc. Nonemployee Director Stock Plan Incorporated by reference to Exhibit (10) to (as amended through May 17, 2001) Syntellect's Second Quarter 2001 Form 10-Q (10)(vi) Lease Agreement dated March 6, 2000 between Incorporated by reference to Exhibit 10(vi) to Denali National Trust, Inc. and Syntellect Inc. Syntellect's 2000 Form 10-K for an office facility in Phoenix, Arizona (10)(vii) Form of Indemnification Agreement between Incorporated by reference to Exhibit No. 10-L Syntellect and its directors and officers to Syntellect's S-1 (10)(viii) Form of Registration Rights Agreement Incorporated by reference to Exhibit 10.13 to Syntellect's S-4 (10)(ix) Line of Credit Agreement Filed Herewith (21) Subsidiaries of Registrant Filed Herewith (23) Consents of Experts Filed Herewith
EX-10.II 3 p66190ex10-ii.txt EX-10.II EXHIBIT (10)(ii) - -------------------------------------------------------------------------------- SYNTELLECT INC. 1990 EMPLOYEE STOCK PURCHASE PLAN (AS AMENDED THROUGH JUNE 14, 2001) The following constitute the provisions of the 1990 Stock Purchase Plan of Syntellect Inc. 1. Purpose. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. a. "Board" shall mean the Board of Directors of the Company. b. "Code" shall mean the Internal Revenue Code of 1986, as amended. c. "Common Stock" shall mean the Common Stock of the Company. d. "Company" shall mean Syntellect, Inc., a Delaware corporation. e. "Compensation" shall mean all base straight time gross earnings including payments for overtime, shift premium, incentive compensation, incentive payments, bonuses, commissions or other compensation. f. "Designated Subsidiaries" shall mean the Subsidiaries which have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. g. "Employee" shall mean any individual who is an employee of the Company for purposes of tax withholding under the Code whose customary employment with the Company or any Designated Subsidiary is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship will be deemed to have terminated on the 91st day of such leave. h. "Enrollment Date" shall mean the first day of each Offering Period. i. "Exercise Date" shall mean the last day of each Offering Period. j. "Offering Period" shall mean an initial period commencing on the date the Company's registration statement respecting its public offering is declared effective by the Securities and Exchange Commission and ending on December 31, 1990, and subsequent six month exercise periods thereafter commencing on July 1, 1990 during which options granted pursuant to the Plan may be exercised. k. "Plan" shall mean this Employee Stock Purchase Plan. l. "Subsidiary" shall mean a corporation, domestic or foreign, of which not less than 50 of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. m. "Trading Day" shall mean a day on which national stock exchanges and the National Association of Securities Dealers Automated Quotation (NASDAQ) System are open for trading. 3. Eligibility. a. Any Employee as defined in paragraph 2 shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. b. Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 425(d) of the Code) would own stock and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any subsidiary of the Company, or (ii) which permits his rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive Offering Periods after the initial Offering Period with a new Offering Period commencing on the first Trading Day of July and January of each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with paragraph 19 or 22 hereof. The Board shall have the power to change the duration of Offering Periods with respect to future offerings without shareholder approval if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first Offering Period to be affected. 5. Participation. a. An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company's payroll office at such time as is specified by the Company and is prior to the applicable Enrollment Date (unless a later time for filing the subscription agreement is set by the Board for all eligible Employees with respect to a given Offering Period). Once properly made, an eligible Employee's election to participate shall be automatically renewed for each subsequent offering period, subject to any termination or withdrawal as provided in paragraph 10. b. Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in paragraph 10. 6. Payroll Deductions. a. At the time a participant files his subscription agreement, he shall elect to have payroll deductions made on each payday during the Offering Period in an amount not exceeding ten percent (10%) of the Compensation which he receives on each payday during the Offering Period, and the aggregate of such payroll deductions during the Offering Period shall not exceed ten percent (10%) of the participant's Compensation during said Offering Period. b. All payroll deductions made for a participant shall be credited to his account under the Plan and will be withheld in whole percentages only. A participant may not make any additional payments into such account. c. A participant may discontinue his participation in the Plan as provided in paragraph 10, or may decrease (but not increase) the rate of his payroll deductions during the offering period by completing or filing with the Company a new authorization for payroll deduction. The change in rate shall be effective fifteen (15) days following the Company's receipt of the new authorization. d. Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and paragraph 3(b) herein, a participant's payroll deductions may be decreased to 0% at such time during any Offering Period which is scheduled to end during the current calendar year (the "Current Offering Period") that the aggregate of all payroll deductions which were previously used to purchase stock under the Plan in a prior Offering Period which ended during that calendar year plus all payroll deductions accumulated with respect to the Current Offering Period equal $21,250. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Offering Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in paragraph 10. e. At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but will not be obligated to, withhold from the participant's Compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. a. On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on the Exercise Date for such Offering Period (at the per share option price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the lower of (i) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Enrollment Date or (ii) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Exercise Date; provided that in no event shall an Employee be permitted to purchase during each Offering Period more than a number of shares determined by dividing $12,500 by the fair market value of a share of the Company's Common Stock on the Enrollment Date, and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8, unless the participant has withdrawn pursuant to Section 10, and shall expire on the last day of the Offering Period. Fair market value of a share of the Company's Common Stock shall be determined as provided in Section 7(b) herein. b. The option price per share of the shares offered in a given Offering Period shall be the lower of: (i) 85% of the fair market value of a share of the Common Stock of the Company on the Enrollment Date; or (ii) 85% of the fair market value of a share of the Common Stock of the Company on the Exercise Date. The fair market value of the Company's Common Stock shall be the closing bid price of the Common Stock for such date, as reported by the NASDAQ National Market System, or, in the event the Common Stock is listed on a stock exchange, the fair market value per share shall be the closing price on such exchange on such date, as reported in the Wall Street Journal. In the event the Enrollment Date or the Exercise Date occurs on a weekend or legal holiday, the fair market value shall be based on the closing bid price on the next trading day. 8. Exercise of Option. Unless a participant withdraws from the Plan as provided in paragraph 10 below, his option for the purchase of shares will be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable option price with the accumulated payroll deductions in his account. No fractional shares will be purchased. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery. As promptly as practicable after the Exercise Date of each Offering Period, the Company shall arrange the delivery to each participant, as appropriate, a certificate representing the shares purchased upon exercise of his option. Any cash remaining to the credit of a participant's account under the Plan after a purchase by him of shares at the termination of each Offering Period, or which is insufficient to purchase a full share of Common Stock of the Company, shall be returned to said participant. 10. Withdrawal; Termination of Employment. a. A participant may withdraw all but not less than all the payroll deductions credited to his account and not yet used to exercise his option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his account will be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period will be automatically terminated, and no further payroll deductions for the purchase of shares will be made during the Offering Period. If a participant withdraws from an Offering Period, payroll deductions will not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. b. Upon a participant's ceasing to be an Employee for any reason or upon termination of a participant's employment relationship (as described in Section 2(g)), the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option will be returned to such participant or, in the case of his death, to the person or persons entitled thereto under paragraph 14, and such participant's option will be automatically terminated. c. In the event an Employee fails to remain an Employee of the Company for at least twenty (20) hours per week during an Offering Period in which the Employee is a participant, he will be deemed to have elected to withdraw from the Plan and the payroll deductions credited to his account will be returned to such participant and such participant's option terminated. d. A participant's withdrawal from an Offering Period will not have any effect upon his eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. 11. Interest. No interest shall accrue on the payroll deductions of a participant in the Plan. 12. Stock. a. The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 1,000,000 shares, subject to adjustment upon changes in capitalization of the Company as provided in paragraph 18. If on a given Exercise Date the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. b. The participant will have no interest or voting right in shares covered by his option until such option has been exercised. c. Shares to be delivered to a participant under the Plan will be registered in the name of the participant or in the name of the participant and his spouse. d. The Common Stock to be sold to participants under the Plan may, at the election of the Company, be either treasury stock or stock originally issued for such purpose. 13. Administration. The Plan shall be administered by the Board of the Company or a committee appointed by the Board; provided, however, the administration of the Plan shall be consistent with Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of 1934. The administration, interpretation or application of the Plan by the Board or a committee appointed by the Board shall be final, conclusive and binding upon all participants. 14. Designation of Beneficiary. a. A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. b. Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. Transferability. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution, a "qualified domestic relations order" under the Code and the Employee Retirement Income Security Act ("ERISA"), or as provided in paragraph 14 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with paragraph 10. 16. Use of Funds. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 17. Reports. Individual accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees at least annually, which statements will set forth the amounts of payroll deductions, the per share purchase price, the number of shares purchased and the remaining cash balance, if any. 18. Adjustments Upon Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the price per share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall effect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. In the event of the proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each option under the Plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, to shorten the Offering Period then in progress by setting a new Exercise Date (the "New Exercise Date"). If the Board shortens the Offering Period then in progress in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify each participant in writing, at least (30) days prior to the New Exercise Date, that the Exercise Date for his option has been changed to the New Exercise Date and that his option will be exercised automatically on the New Exercise Date, unless prior to such date he has withdrawn from the Offering Period as provided in paragraph 10. For purposes of this paragraph, an option granted under the Plan shall be deemed to be assumed if, following the sale of assets or merger, the option confers the right to purchase, for each share of option stock subject to the option immediately prior to the sale of assets or merger, the consideration (whether stock, cash or other securities or property) received in the sale of assets or merger by holders of Common Stock for each share of Common Stock held on the effective date of the transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, however, that if such consideration received in the sale of assets of merger was not solely common stock of the successor corporation or its parent (as defined in Section 425(e) of the Code), the Board may, with the consent of the successor corporation and the participant, provide for the consideration to be received upon exercise of the option to be solely common stock of the successor corporation or its parent equal in fair market value to the per share consideration received by holders of Common Stock and the sale of assets or merger. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, and in the event of the Company being consolidated with or merged into any other corporation. 19. Amendment or Termination. a. The Board may at any time and for any reason terminate the Plan. The Board may also amend the Plan from time to time in such respects as the Board may deem advisable. Except as provided in paragraph 18, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Plan is in the best interests of the Company and its shareholders. Except as provided in paragraph 8, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent required by applicable law, the Company shall obtain shareholder approval. b. Without shareholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. c. Notwithstanding the foregoing, the Board or a committee appointed by the Board may not amend the Plan formula for determining the amount, price or timing of options to purchase shares of the Company's Common Stock granted under the Plan more than once every six months, other than to comport with changes in the Code and ERISA. 20. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 22. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company. It shall continue in effect for a term of twenty (20) years unless sooner terminated under paragraph 19. 23. Gender. For purposes of this Plan, words used in the masculine gender shall include the female and neuter, and the singular shall include the plural and vice versa, as appropriate. END OF EXHIBIT (10)(ii) EX-10.III 4 p66190ex10-iii.txt EX-10.III EXHIBIT (10)(iii) - -------------------------------------------------------------------------------- SYNTELLECT INC. LONG-TERM INCENTIVE PLAN (AS AMENDED THROUGH JUNE 14, 2001) ARTICLE 1 PURPOSE 1.1. GENERAL. The purpose of the Syntellect Inc. Long-Term Incentive Plan (the "Plan") is to promote the success, and enhance the value, of Syntellect Inc. (the "Company") by linking the personal interests of its employees, consultants and advisors to those of Company shareholders and by providing its employees, consultants and advisors with an incentive for outstanding performance. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of employees, consultants and advisors upon whose judgment, interest, and special effort the successful conduct of the Company's operation is largely dependent. Accordingly, the Plan permits the grant of incentive awards from time to time to selected employees, consultants and advisors of the Company and any Subsidiary. ARTICLE 2 EFFECTIVE DATE 2.1. EFFECTIVE DATE. The Plan became effective on February 1, 1995 (the "Effective Date), the date the Plan was approved by the Board. The Plan was approved by the shareholders of the Company on May 23, 1995. ARTICLE 3 DEFINITIONS AND CONSTRUCTION 3.1. DEFINITIONS. When a word or phrase appears in this Plan with the initial letter capitalized, and the word or phrase does not commence a sentence, the word or phrase shall generally be given the meaning ascribed to it in this Section or in Sections 1.1 or 2.1 unless a clearly different meaning is required by the context. The following words and phrases shall have the following meanings: (a) "Award" means any Option, Stock Appreciation Right, Restricted Stock Award, Performance Share Award, Dividend Equivalent Award, or Other Stock-Based Award, or any other right or interest relating to Stock or cash, granted to a Participant under the Plan. (b) "Award Agreement" means any written agreement, contract, or other instrument or document evidencing an Award. (c) "Board" means the Board of Directors of the Company or a Committee thereof formed under Section 4, as the case may be. (d) "Cause" means (except as otherwise provided in an Option Agreement) if the Board, in its reasonable and good faith discretion, determines that the employee, consultant or advisor (i) has developed or pursued interests substantially adverse to the Company, (ii) materially breached any employment, engagement or confidentiality agreement or otherwise failed to satisfactorily discharge his or her duties, (iii) has not devoted all or substantially all of his or her business time, effort and attention to the affairs of the Company (or such lesser amount as has been agreed to in writing by the Company), (iv) is convicted of a felony involving moral turpitude, or (v) has engaged in activities or omissions that are detrimental to the well-being of the Company. (e) "Change of Control" means and includes each of the following (except as otherwise provided in an Option Agreement): (1) there shall be consummated any consolidation or merger of the Company in which the Company is not the continuing or surviving entity, or pursuant to which Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's Stock immediately prior to the merger have the same proportionate ownership of beneficial interest of common stock or other voting securities of the surviving entity immediately after the merger; (2) there shall be consummated any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of assets or earning power aggregating more than 40% of the assets or earning power of the Company and its subsidiaries (taken as a whole); (3) the shareholders of the Company shall approve any plan or proposal for liquidation or dissolution of the Company; (4) any person (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act), other than any employee benefit plan of the Company or any subsidiary of the Company or any entity holding shares of capital stock of the Company for or pursuant to the terms of any such employee benefit plan in its role as an agent or trustee for such plan, shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 20% or more of the Company's outstanding Stock; or (5) during any period of two consecutive years, individuals who at the beginning of such period shall fail to constitute a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (f) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (g) "Committee" means the committee of the Board described in Article 4. (h) "Disability" shall mean any illness or other physical or mental condition of a Participant which renders the Participant incapable of performing his customary and usual duties for the Company, or any medically determinable illness or other physical or mental condition resulting from a bodily injury, disease or mental disorder which in the judgment of the Committee is permanent and continuous in nature. The Committee may require such medical or other evidence as it deems necessary to judge the nature and permanency of the Participant's condition. (i) "Dividend Equivalent" means a right granted to a Participant under Article 11. (j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (k) "Fair Market Value" means with respect to Stock or any other property, the fair market value of such Stock or other property as determined by the Board in its discretion, under one of the following methods: (i) the average of the closing bid and asked prices for the Stock as reported on any national securities exchange on which the Stock is then listed (which shall include the NASDAQ National Market System) for that date or, if no prices are so reported for that date, such prices on the next preceding date for which closing bid and asked prices were reported; or (ii) the price as determined by such methods or procedures as may be established from time to time by the Board. (l) "Incentive Stock Option" means an Option that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. (m) "Non-Qualified Stock Option" means an Option that is not intended to be an Incentive Stock Option. (n) "Option" means a right granted to a Participant under Article 7 of the Plan to purchase Stock at a specified price during specified time periods. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option. (o) "Other Stock-Based Award" means a right, granted to a Participant under Article 12, that relates to or is valued by reference to Stock or other Awards relating to Stock. (p) "Participant" means a person who, as an employee of or consultant or advisor to the Company or any Subsidiary, has been granted an Award under the Plan. A "Participant" shall not include any Director of the Company or any Subsidiary who is not also an employee of or consultant to the Company or any Subsidiary. (q) "Performance Share" means a right granted to a Participant under Article 9, to receive cash, Stock, or other Awards, the payment of which is contingent upon achieving certain performance goals established by the Committee. (r) "Plan" means the Syntellect Inc. Long-Term Incentive Plan, as amended from time to time. (s) "Restricted Stock Award" means Stock granted to a Participant under Article 10 that is subject to certain restrictions and to risk of forfeiture. (t) "Stock" means the common stock of the Company and such other securities of the Company that may be substituted for Stock pursuant to Article 13. (u) "Stock Appreciation Right" or "SAR" means a right granted to a Participant under Article 8 to receive a payment equal to the difference between the Fair Market Value of a share of Stock as of the date of exercise of the SAR over the grant price of the SAR, all as determined pursuant to Article 8. (v) "Subsidiary" means any corporation, domestic or foreign, of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company. ARTICLE 4 ADMINISTRATION 4.1. BOARD/COMMITTEE. The Plan shall be administered by the Board of Directors or, to the extent required to comply with Rule 16b-3 promulgated under the Exchange Act, a Committee that is appointed by, and serves at the discretion of, the Board. Any Committee shall consist of at least two individuals who are members of the Board and are "disinterested persons," as such term is defined in Rule 16b-3 promulgated under Section 16 of the Exchange Act or any successor provision, except as may be otherwise permitted under Section 16 of the Exchange Act and the regulations and rules promulgated thereunder. For purposes of this Plan, the "Board" shall mean the Board of Directors or the Committee, as the case may be. 4.2. ACTION BY THE BOARD. A majority of the Board shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present and acts approved in writing by a majority of the Board in lieu of a meeting shall be deemed the acts of the Board. Each member of the Board is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other employee of the Company or any Subsidiary, the Company's independent certified public accountants, or any executive compensation consultant or other professional retained by the Company to assist in the administration of the Plan. 4.3. AUTHORITY OF BOARD. The Board has the exclusive power, authority and discretion to: (a) Designate Participants; (b) Determine the type or types of Awards to be granted to each Participant; (c) Determine the number of Awards to be granted and the number of shares of Stock to which an Award will relate; (d) Determine the terms and conditions of any Award granted under the Plan including but not limited to, the exercise price, grant price, or purchase price, any restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, based in each case on such considerations as the Board in its sole discretion determines; (e) Determine whether, to what extent, and under what circumstances an Award may be settled in, or the exercise price of an Award may be paid in, cash, Stock, other Awards, or other property, or an Award may be canceled, forfeited, or surrendered; (f) Prescribe the form of each Award Agreement, which need not be identical for each Participant; (g) Decide all other matters that must be determined in connection with an Award; (h) Establish, adopt or revise any rules and regulations as it may deem necessary or advisable to administer the Plan; and (i) Make all other decisions and determinations that may be required under the Plan or as the Board deems necessary or advisable to administer the Plan. 4.4. DECISIONS BINDING. The Board's interpretation of the Plan, any Awards granted under the Plan, any Award Agreement and all decisions and determinations by the Board with respect to the Plan are final, binding, and conclusive on all parties. ARTICLE 5 SHARES SUBJECT TO THE PLAN 5.1. NUMBER OF SHARES. Subject to adjustment provided in Section 15.1, the aggregate number of shares of Stock reserved and available for Awards or which may be used to provide a basis of measurement for or to determine the value of an Award (such as with a Stock Appreciation Right or Performance Share Award) shall be 2,400,000. 5.2. LAPSED AWARDS. To the extent that an Award terminates, expires or lapses for any reason, any shares of Stock subject to the Award will again be available for the grant of an Award under the Plan and shares subject to SARs or other Awards settled in cash will be available for the grant of an Award under the Plan, in each case to the full extent available pursuant to the rules and interpretations of the Securities and Exchange Commission under Section 16 of the Exchange Act, if applicable. 5.3. STOCK DISTRIBUTED. Any Stock distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Stock, treasury Stock or Stock purchased on the open market. 5.4. LIMITATIONS ON AWARDS TO ANY SINGLE PARTICIPANT. There is no limitation that restricts the number of shares of stock which are subject to Awards issued to any single Participant. ARTICLE 6 ELIGIBILITY 6.1. GENERAL. Awards may be granted only to individuals who are employees (including employees who also are directors or officers) of the Company or a Subsidiary or to consultants or advisors thereto, as determined by the Board. ARTICLE 7 STOCK OPTIONS 7.1. GENERAL. The Board is authorized to grant Options to Participants on the following terms and conditions: (a) EXERCISE PRICE. The exercise price per share of Stock under an Option shall be determined by the Board. (b) TIME AND CONDITIONS OF EXERCISE. The Board shall determine the time or times at which an Option may be exercised in whole or in part. The Board also shall determine the performance or other conditions, if any, that must be satisfied before all or part of an Option may be exercised. (c) PAYMENT. The Board shall determine the methods by which the exercise price of an Option may be paid, the form of payment, including, without limitation, cash, shares of Stock, or other property (including net issuance or other "cashless exercise" arrangements), and the methods by which shares of Stock shall be delivered or deemed to be delivered to Participants. Without limiting the power and discretion conferred on the Board pursuant to the preceding sentence, the Board may, in the exercise of its discretion, but need not, allow a Participant to pay the Option price by directing the Company to withhold from the shares of Stock that would otherwise be issued upon exercise of the Option that number of shares having a Fair Market Value on the exercise date equal to the Option price, all as determined pursuant to rules and procedures established by the Board. (d) EVIDENCE OF GRANT. All Options shall be evidenced by a written Award Agreement between the Company and the Participant. The Award Agreement shall include such provisions as may be specified by the Board. 7.2. INCENTIVE STOCK OPTIONS. The terms of any Incentive Stock Options granted under the Plan must comply with the following additional rules: (a) EXERCISE PRICE. The exercise price per share of Stock shall be set by the Board, provided that the exercise price for any Incentive Stock Option may not be less than the Fair Market Value as of the date of the grant. (b) EXERCISE. In no event, may any Incentive Stock Option be exercisable for more than ten years from the date of its grant. (c) LAPSE OF OPTION. An Incentive Stock Option shall lapse under the following circumstances: (1) The Incentive Stock Option shall lapse ten (10) years after it is granted, unless an earlier time is set in the Award Agreement. (2) The Incentive Stock Option shall lapse upon termination of employment for Cause or for any other reason, other than the Participant's death or Disability, unless the Committee determines in its discretion to extend the exercise period for no more than ninety (90) days after the Participant's termination of employment. (3) In the case of the Participant's termination of employment due to Disability or death, the Incentive Stock Option shall lapse upon termination of employment, unless the Committee determines in its discretion to extend the exercise period of the Incentive Stock Option for no more than twelve (12) months after the date the Participant terminates employment. Upon the Participant's death, any vested and otherwise exercisable Incentive Stock Options may be exercised by the Participant's legal representative or representatives, by the person or persons entitled to do so under the Participant's last will and testament, or, if the Participant shall fail to make testamentary disposition of such Incentive Stock Option or shall die intestate, by the person or persons entitled to receive said Incentive Stock Option under the applicable laws of descent and distribution. (d) INDIVIDUAL DOLLAR LIMITATION. The aggregate Fair Market Value (determined as of the time an Award is made) of all shares of Stock with respect to which Incentive Stock Options are first exercisable by a Participant in any calendar year may not exceed One Hundred Thousand Dollars ($100,000.00). (e) TEN PERCENT OWNERS. An Incentive Stock Option shall be granted to any individual who, at the date of grant, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of Stock of the Company only if, at time such Option is granted, the Option price is at least one hundred ten percent (110%) of the Fair Market Value of the Stock and such Option by its terms is not exercisable after the expiration of five (5) years from the date the Option is granted. (f) EXPIRATION OF INCENTIVE STOCK OPTIONS. No Award of an Incentive Stock Option may be made pursuant to this Plan after the tenth anniversary of the Effective Date. (g) RIGHT TO EXERCISE. During a Participant's lifetime, an Incentive Stock Option may be exercised only by the Participant. (h) EMPLOYEES ONLY. Incentive Stock Options may be granted only to Participants who are employees of the Company or any Subsidiary. ARTICLE 8 STOCK APPRECIATION RIGHTS 8.1. GRANT OF SARs. The Board is authorized to grant SARs to Participants on the following terms and conditions: (a) RIGHT TO PAYMENT. Upon the exercise of a Stock Appreciation Right, the Participant to whom it is granted has the right to receive the excess, if any, of: (1) The Fair Market Value of one share of Stock on the date of exercise; over (2) The grant price of the Stock Appreciation Right as determined by the Board, which shall not be less than the Fair Market Value of one share of Stock on the date of grant in the case of any SAR related to any Incentive Stock Option. (b) OTHER TERMS. All awards of Stock Appreciation Rights shall be evidenced by an Award Agreement. The terms, methods of exercise, methods of settlement, form of consideration payable in settlement, and any other terms and conditions of any Stock Appreciation Right shall be determined by the Board at the time of the grant of the Award and shall be reflected in the Award Agreement. ARTICLE 9 PERFORMANCE SHARES 9.1. GRANT OF PERFORMANCE SHARES. The Board is authorized to grant Performance Shares to Participants on such terms and conditions as may be selected by the Board. The Board shall have the complete discretion to determine the number of Performance Shares granted to each Participant. All Awards of Performance Shares shall be evidenced by an Award Agreement. 9.2. RIGHT TO PAYMENT. A grant of Performance Shares gives the Participant rights, valued as determined by the Board, and payable to, or exercisable by, the Participant to whom the Performance Shares are granted, in whole or in part, as the Board shall establish at grant or thereafter. The Board shall set performance goals and other terms or conditions to payment of the Performance Shares in its discretion which, depending on the extent to which they are met, will determine the number and value of Performance Shares that will be paid to the Participant, provided that the time period during which the performance goals must be met shall, in all cases, exceed six months. 9.3. OTHER TERMS. Performance Shares may be payable in cash, Stock, or other property, and have such other terms and conditions as determined by the Board and reflected in the Award Agreement. ARTICLE 10 RESTRICTED STOCK AWARDS 10.1. GRANT OF RESTRICTED STOCK. The Board is authorized to make Awards of Restricted Stock to Participants in such amounts and subject to such terms and conditions as may be selected by the Board. All Awards of Restricted Stock shall be evidenced by a Restricted Stock Award Agreement. 10.2. ISSUANCE AND RESTRICTIONS. Restricted Stock shall be subject to such restrictions on transferability and other restrictions as the Board may impose (including, without limitation, limitations on the right to vote Restricted Stock or the right to receive dividends on the Restricted Stock). These restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, or otherwise, as the Board determines at the time of the grant of the Award or thereafter. 10.3. FORFEITURE. Except as otherwise determined by the Board at the time of the grant of the Award or thereafter, upon termination of employment during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Company, provided, however, that the Board may provide in any Award Agreement that restrictions or forfeiture conditions relating to Restricted Stock will be waived in whole or in part in the event of terminations resulting from specified causes, and the Board may in other cases waive in whole or in part restrictions or forfeiture conditions relating to Restricted Stock. 10.4. CERTIFICATES FOR RESTRICTED STOCK. Restricted Stock granted under the Plan may be evidenced in such manner as the Board shall determine. If certificates representing shares of Restricted Stock are registered in the name of the Participant, certificates must bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company shall retain physical possession of the certificate until such time as all applicable restrictions lapse. ARTICLE 11 DIVIDEND EQUIVALENTS 11.1. GRANT OF DIVIDEND EQUIVALENTS. The Board is authorized to grant Dividend Equivalents to Participants subject to such terms and conditions as may be selected by the Board. Dividend Equivalents shall entitle the Participant to receive payments equal to dividends with respect to all or a portion of the number of shares of Stock subject to an Option Award or SAR Award, as determined by the Board. The Board may provide that Dividend Equivalents be paid or distributed when accrued or be deemed to have been reinvested in additional shares of Stock, or otherwise reinvested. ARTICLE 12 OTHER STOCK-BASED AWARDS 12.1. GRANT OF OTHER STOCK-BASED AWARDS. The Board is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that are payable in, valued in whole or in part by reference to, or otherwise based on or related to shares of Stock, as deemed by the Board to be consistent with the purposes of the Plan, including without limitation shares of Stock awarded purely as a "bonus" and not subject to any restrictions or conditions, convertible or exchangeable debt securities, other rights convertible or exchangeable into shares of Stock, and Awards valued by reference to book value of shares of Stock or the value of securities of or the performance of specified Subsidiaries. The Board shall determine the terms and conditions of such Awards. ARTICLE 13 PROVISIONS APPLICABLE TO AWARDS 13.1. STAND-ALONE, TANDEM, AND SUBSTITUTE AWARDS. Awards granted under the Plan may, in the discretion of the Board, be granted either alone or in addition to, in tandem with, or in substitution for, any other Award granted under the Plan. If an Award is granted in substitution for another Award, the Board may require the surrender of such other Award in consideration of the grant of the new Award. Awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards. 13.2. EXCHANGE PROVISIONS. The Board may at any time offer to exchange or buy out any previously granted Award for a payment in cash, Stock, or another Award (subject to Section 13.1), based on the terms and conditions the Board determines and communicates to the Participant at the time the offer is made. 13.3. TERM OF AWARD. The term of each Award shall be for the period as determined by the Board, provided that in no event shall the term of any Incentive Stock Option or a Stock Appreciation Right granted in tandem with the Incentive Stock Option exceed a period of ten years from the date of its grant. 13.4. FORM OF PAYMENT FOR AWARDS. Subject to the terms of the Plan and any applicable law or Award Agreement, payments or transfers to be made by the Company or a Subsidiary on the grant or exercise of an Award may be made in such forms as the Board determines at or after the time of grant, including without limitation, cash, Stock, other Awards, or other property, or any combination, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case determined in accordance with rules adopted by, and at the discretion of, the Board. The Board may also authorize payment in the exercise of an Option by net issuance or other cashless exercise methods. 13.5. LIMITS ON TRANSFER. No right or interest of a Participant in any Award may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or a Subsidiary, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than the Company or a Subsidiary. Except as otherwise provided below, no Award shall be assignable or transferable by a Participant other than by will or the laws of descent and distribution or, with the consent of the Board in its sole discretion and except in the case of an Incentive Stock Option, pursuant to a court order that would otherwise satisfy the requirements to be a domestic relations order as defined in Section 414(p)(1)(B) of the Code, if the order satisfies Section 414(p)(1)(A) of the Code notwithstanding that such an order relates to the transfer of a stock option rather than an interest in an employee benefit plan. In the Award Agreement for any Award other than an Award that includes an Incentive Stock Option, the Board may allow a Participant to assign or otherwise transfer all or a portion of the rights represented by the Award to specified individuals or classes of individuals, or to a trust benefiting such individuals or classes of individuals, subject to such restrictions, limitations, or conditions as the Board deems to be appropriate. 13.6. BENEFICIARIES. Notwithstanding Section 13.5, a Participant may, in the manner determined by the Board, designate a beneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Award upon the Participant's death. A beneficiary, legal guardian, legal representative, or other person claiming any rights under the Plan is subject to all terms and conditions of the Plan and any Award Agreement applicable to the Participant, except to the extent the Plan and Award Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Board. If the Participant is married and resides in a jurisdiction in which community property laws apply, a designation of a person other than the Participant's spouse as his beneficiary with respect to more than 50 percent of the Participant's interest in the Award shall not be effective without the written consent of the Participant's spouse. If no beneficiary has been designated or survives the Participant, payment shall be made to the person entitled thereto under the Participant's will or the laws of descent and distribution. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with the Board. 13.7. STOCK CERTIFICATES. All Stock certificates delivered under the Plan are subject to any stop-transfer orders and, other restrictions as the Board deems necessary or advisable to comply with federal or state securities laws, rules and regulations and the rules of any national securities exchange or automated quotation system on which the Stock is listed, quoted, or traded. The Board may place legends on any Stock certificate to reference restrictions applicable to the Stock. 13.8 TENDER OFFERS. In the event of a public tender for all or any portion of the Stock, or in the event that a proposal to merge, consolidate, or otherwise combine with another company is submitted for shareholder approval, the Board may in its sole discretion declare previously granted Options to be immediately exercisable. To the extent that this provision causes Incentive Stock Options to exceed the dollar limitation set forth in Section 7.2(d), the excess Options shall be deemed to be Non-Qualified Stock Options. 13.9. CHANGE OF CONTROL. A Change of Control shall cause every Option outstanding hereunder to become fully exercisable and allow each Participant the right to exercise an Option prior to the occurrence of the event otherwise terminating the Option; provided, however, that in the event (i) the Company's Board of Directors approves a transaction to be accounted for as a "pooling-of-interests" and (ii) the Company's independent accountants have advised the Company in writing that the amendment to this Section 13.9 approved by the Board of Directors on February 17, 1998, precludes such accounting, then, without any further action, such amendment to Section 13.9 shall be null and void, and Section 13.9 shall remain in effect as existing prior to such amendment. ARTICLE 14 CHANGES IN CAPITAL STRUCTURE 14.1. GENERAL. In the event a stock dividend is declared upon the Stock, the shares of Stock then subject to each Award (and the number of shares subject thereto) shall be increased proportionately without any change in the aggregate purchase price therefor. In the event the Stock shall be changed into or exchanged for a different number or class of shares of Stock or of another corporation, whether through reorganization, recapitalization, stock split-up, combination of shares, there shall be substituted for each such share of Stock then subject to each Award (and for each share of Stock then subject thereto) the number and class of shares of Stock into which each outstanding share of Stock shall be so exchanged, all without any change in the aggregate purchase price for the shares then subject to each Award. ARTICLE 15 AMENDMENT, MODIFICATION AND TERMINATION 15.1. AMENDMENT, MODIFICATION AND TERMINATION. With the approval of the Board, at any time and from time to time, the Board may terminate, amend or modify the Plan. However, without approval of the shareholders of the Company or other conditions (as may be required by the Code, by the insider trading rules of Section 16 of the Exchange Act, by any national securities exchange or system on which the Stock is listed or reported, or by a regulatory body having jurisdiction), no such termination, amendment, or modification may: (a) Materially increase the total number of shares of Stock that may be issued under the Plan, except as provided in Section 14.1; (b) Materially modify the eligibility requirements for participation in the Plan; or (c) Materially increase the benefits accruing to Participants under the Plan. 15.2. AWARDS PREVIOUSLY GRANTED. No termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant. ARTICLE 16 GENERAL PROVISIONS 16.1. NO RIGHTS TO AWARDS. No Participant or employee or consultant shall have any claim to be granted any Award under the Plan, and neither the Company nor the Board is obligated to treat Participants and employees or consultants uniformly. 16.2. NO STOCKHOLDERS RIGHTS. No Award gives the Participant any of the rights of a stockholder of the Company unless and until shares of Stock are in fact issued to such person in connection with such Award. 16.3. WITHHOLDING. The Company or any Subsidiary shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy United States Federal, state, and local taxes (including the Participant's FICA obligation and any withholding obligation imposed by any country other than the United States in which the Participant resides) required by law to be withheld with respect to any taxable event arising as a result of this Plan. With respect to withholding required upon any taxable event under the Plan, Participants may elect, subject to the Board's approval, to satisfy the withholding requirement, in whole or in part, by having the Company or any Subsidiary withhold shares of Stock having a Fair Market Value on the date of withholding equal to the amount to be withheld for tax purposes in accordance with such procedures as the Board establishes. The Board may, at the time any Award is granted, require that any and all applicable tax withholding requirements be satisfied by the withholding of shares of Stock as set forth above. 16.4. NO RIGHT TO EMPLOYMENT. Nothing in the Plan or any Award Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or any Subsidiary. 16.5. UNFUNDED STATUS OF AWARDS. The Plan is intended to be an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award Agreement shall give the Participant any rights that are greater than those of a general creditor of the Company or any Subsidiary. 16.6. INDEMNIFICATION. To the extent allowable under applicable law, each member of the Committee or of the Board shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action or failure to act under the Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in such action, suit, or proceeding against him or her provided he or she gives the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Articles of Incorporation or By-Laws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. 16.7. RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of the Company or any Subsidiary. 16.8. EXPENSES. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries. 16.9. TITLES AND HEADINGS. The titles and headings of the Sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. 16.10. FRACTIONAL SHARES. No fractional shares of stock shall be issued and the Board shall determine, in its discretion, whether cash shall be given in lieu of fractional shares or whether such fractional shares shall be eliminated by rounding up. 16.11. SECURITIES LAW COMPLIANCE. With respect to any person who is, on the relevant date, obligated to file reports under Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of the Plan or action by the Board fails to so comply, it shall be void to the extent permitted by law and voidable as deemed advisable by the Board, and such provision or action shall be deemed to be modified so as to comply with Rule 16b-3. 16.12. GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company to make payment of awards in Stock or otherwise shall be subject to all applicable laws, rules, and regulations, and to such approvals by government agencies as may be required. The Company shall be under no obligation to register under the Securities Act of 1933, as amended, any of the shares of Stock paid under the Plan. If the shares paid under the Plan may in certain circumstances be exempt from registration under such act, the Company may restrict the transfer of such shares in such manner as it deems advisable to ensure the availability of any such exemption. 16.13. GOVERNING LAW. The Plan and all Award Agreements shall be construed in accordance with and governed by the laws of the State of Arizona. END OF EXHIBIT (10)(iii) EX-10.IX 5 p66190ex10-ix.txt EX-10.IX EXHIBIT (10)(ix) - -------------------------------------------------------------------------------- ACCOUNTS RECEIVABLE SECURITY AGREEMENT DATE: June 14, 2001 BORROWER: Syntellect Inc., a Delaware corporation ADDRESS: 16610 North Black Canyon Freeway, Suite 100 Phoenix, Arizona 85053 BORROWER: Syntellect Interactive Services, Inc., a Georgia corporation ADDRESS: 16610 North Black Canyon Freeway, Suite 100 Phoenix, Arizona 85053 FCFC: FIRST COMMUNITY FINANCIAL CORPORATION, an Arizona corporation ADDRESS: 4000 North Central Avenue, Suite 100 Phoenix, Arizona 85012 Borrowers (collectively, the "Borrower") are desirous of obtaining a Credit Facility and other financial accommodations from FCFC, and FCFC is willing to make such Credit Facility available to Borrower on the following terms and conditions to be secured by the Collateral hereinafter described: 1. Definitions. 1.1 "Accounts" means and includes all of Borrower's presently existing and hereafter arising accounts, instruments, contract rights, documents, chattel paper (including security agreements and leases), and all other forms of obligations owing to Borrower, all guaranties of such Accounts and other security therefor, the proceeds of such Accounts, all Inventory returned to or reclaimed by Borrower and the Borrower's Books relating to any of the foregoing. 1.2 "Agreement" means and includes this Accounts Receivable Security Agreement, any concurrent or subsequent Rider hereto and any extensions, supplements, amendments or modifications thereto. 1.3 "Borrower's Books" means and includes all of Borrower's books and records including but not limited to: all customer lists and lists of account debtors; all ledgers; records reflecting, summarizing or evidencing Borrower's assets, accounts, business operations or financial condition; computer programs, computer discs, computer printouts, and other computer prepared information and computer equipment of any kind. 1.4 "Collateral" means and includes all of Borrower's existing and hereafter acquired Accounts, Inventory, money, deposit accounts, and general intangibles (including tax refunds, and all trademarks and trade names of Borrower), and any and all other property of Borrower in which FCFC now has or hereafter receives a security interest or which hereafter come into the possession, custody or control of FCFC, and the proceeds thereof, including proceeds of insurance covering the Collateral and the proceeds resulting from the sale, rental, or other disposition of the Collateral. 1.5 "Credit Facility" shall mean a revolving line of credit granted by FCFC to Borrower in the amount of $3,000,000.00, in accordance with the terms and conditions set forth in this Agreement. 1.6 "Eligible Accounts" means Accounts on selling terms of net 30 days or less, which have been validly assigned to FCFC and strictly comply with all of Borrower's warranties and representations set forth in this Agreement, but excluding those Accounts: (a) which are not paid within 90 days of their invoice date; (b) which are owed by a single account debtor, if 25% of the amount owing by said account debtor remains unpaid for more than 90 days after its invoice date; (c) where the total indebtedness owed by an account debtor to Borrower exceeds 15% of all Eligible Accounts; (d) which represent the sale of goods delivered on consignment, guaranteed sale or on other conditional terms; (e) which are subject to any defense, setoff or counterclaim claimed or asserted by the account debtor; (f) which are evidenced by an instrument; (g) which are owed by an account debtor who is not a resident of the United States; (h) where the account debtor is the United States or any department, agency or instrumentality of the United States; (i) where the account debtor is a subsidiary of, related to, affiliated or has common shareholders, officers or directors with Borrower; (j) where the account debtor is an officer, employee or agent of Borrower; (k) which represent goods sold and/or transferred where possession and/or control is held, maintained or retained by Borrower (or its agent) for the account of or subject to further and/or future direction from the account debtor thereof; or (l) Accounts which are not creditworthy, in the sole opinion of FCFC. FCFC will not consider maintenance accounts or advance deposits as "Eligible Accounts". 1.7 "FCFC's Costs" means and includes: filing, recording, publication and search fees incurred by FCFC relating to Borrower; all costs and expenses incurred by FCFC in the enforcement of its rights and remedies under this Agreement, or defending this Agreement or its security interest in the Collateral; long distance telephone and facsimile charges, the expenses of field examiners; all expenses for travel, lodging and food incurred by FCFC's personnel in collecting the Accounts or realizing upon the Collateral; all costs and expenses incurred in gaining possession of, maintaining, handling, preserving, storing, repairing, shipping, selling, preparing for sale and advertising to sell the Collateral, whether or not a sale is consummated; all expenses involved in fulfilling in whole or in part any purchase order from an account debtor; and reasonable attorney's fees and expenses incurred by FCFC as provided for in this Agreement. 1.8 "Inventory" means and includes all of Borrower's goods held for sale or lease, raw materials, components, work in process, finished merchandise, and packing and shipping materials, now owned or hereafter acquired, wherever located; all patents, blueprints and drawings related thereto; all other items hereafter acquired by Borrower by way of substitution, replacement, return, repossession or otherwise, and all additions and accessions thereto; and the resulting product or mass, and any documents of title representing any of the above. 1.9 "Obligations" means and includes all loans, advances (whether evidenced by promissory note(s) or not), indebtedness, liabilities, obligations, lease payments, guaranties, covenants and duties of Borrower to FCFC of every kind, nature and description, (whether arising out of this Agreement, or any other security agreement, mortgage, lease, instrument, document, contract or similar agreement now or hereafter executed by Borrower and delivered to FCFC, or by oral agreement or operation of law and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, liquidated or unliquidated, now existing or hereafter arising, including without limitation any debt, liability or obligation owing by Borrower to others which FCFC may have acquired by assignment or otherwise, and further including, without limitation, all interest and FCFC's Costs which Borrower is required to pay or reimburse by this Agreement, by law or otherwise. The term "Obligations" also includes all amounts which would become due but for the operation of the automatic stay under Section 362(a) of the United States Bankruptcy Code, 11 U.S.C. 362(a), and the operation of Section 502(b) and 506(b) of the United States Bankruptcy Code, 11 U.S.C. 502(b) and 506(b), and including indebtedness of Borrower arising under successive transactions which renew, continue, refinance or refund the Obligations of Borrower. 1.10 "Prime Rate" means the Prime Rate publicly announced by Bank One, Phoenix, Arizona, from time to time (which may not necessarily be the lowest rate charged by such bank to its customers). 1.11 Any and all terms used in this Agreement shall be construed and defined in accordance with the meaning and definitions set forth herein or, to the extent not inconsistent herewith, as such terms are defined in the Arizona Uniform Commercial Code, as amended from time to time (hereinafter referred to as the "Code"). 2. Advances and Charges. 2.1 Upon request of Borrower, from time to time during the term hereof, provided the representations and warranties of paragraph 5. hereof are then true, and so long as no event of default hereunder has occurred and Borrower is in full, faithful and timely compliance with each and all of the covenants, conditions, warranties, and representations, contained in this Agreement or in any other agreement between FCFC and Borrower, FCFC agrees to make advances to Borrower in an amount which when added to the advances then outstanding does not exceed the lesser of the Credit Facility or 65% of the amount of Eligible Accounts of Borrower (less discounts, credits, allowances, service charges, commissions, and freight charges which may be granted to or taken by the account debtors). FCFC may at any time and from time to time change the percentage of Eligible Accounts to be advanced to Borrower. FCFC is hereby authorized to make said advances based upon instructions received from the list of authorized signers attached to this Agreement. 2.2 The Obligations of Borrower to FCFC shall bear interest, for the actual days outstanding at the rate equal to the Prime Rate plus 4.50% per annum, computed on the basis of a 360-day year for actual days elapsed. The Prime Rate of 7.00%, is the rate in effect as of this date. In the event of a change in the Prime Rate from time to time, the rate of interest to be charged to Borrower shall be correspondingly adjusted as of the date of the Prime Rate change. Notwithstanding the foregoing, in no event shall the interest rate chargeable hereunder be less than 11.00% per annum. Interest is due and payable to FCFC under this Agreement on the first day of each month. Any interest not paid when due shall become a part of Borrower's Obligations under this Agreement, and shall thereafter bear interest as provided herein. FCFC shall render statements to Borrower of the Obligations, including all principal, interest and FCFC's Costs owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and FCFC unless, within thirty (30) days after receipt thereof by Borrower, Borrower notifies FCFC in writing specifying the error or errors, if any, contained in any such statements. 2.3 Upon the default by Borrower under any provision of this Agreement, and for as long as Borrower is in default, interest shall accrue on the Obligations from and after such default at a rate of interest which is four percent per annum greater than the rate which is then being charged. 2.4 In consideration for establishing the Credit Facility on the terms and conditions provided for herein, Borrower agrees to pay to FCFC upon the execution hereof a commitment and funding fee of one and one-half percent (1.50%) of the original amount of the Credit Facility, which shall be deemed earned and non-refundable upon payment thereof. In the event that the term of this Agreement is renewed as provided in paragraph 4 below, Borrower shall pay within ten days prior to the anniversary date to FCFC a renewal fee of 1.00% of the amount of the Credit Facility each year that it is renewed. In the event that the amount under the Credit Facility is increased, Borrower shall pay to FCFC a 1.00% line increase fee on the additional commitment amount, which shall be deemed earned and non-refundable upon payment thereof. 2.5 In order to further induce FCFC to grant the Credit Facility to Borrower, Borrower agrees that the minimum amount of interest to be paid monthly by Borrower to FCFC, during the original and each renewal term of this Agreement, shall not be less than $7,500.00 per month. Notwithstanding any default by Borrower, or a termination of this Agreement by FCFC because of such default, this minimum interest shall be charged to and paid by Borrower for the unexpired term of this Agreement. If this loan is repaid from a new credit facility executed by Borrower with Imperial Bank or M&I Thunderbird Bank the minimum interest amount that otherwise would be due and payable will be waived for the remaining term of the Agreement. In the event the monthly interest earned by FCFC on advances made by FCFC to Borrower under this Agreement is less than the minimum set forth above, Borrower will pay to FCFC such difference at the same time as such accrued interest is due and payable. 2.6 It is the intention of the parties hereto that the interest required to be paid by Borrower to FCFC, plus all charges imposed upon Borrower hereunder which may be construed by a court of law to be interest, shall not exceed the maximum rate of interest allowed by the laws of the State of Arizona and if a court of law construes the same to exceed such maximum rate, then the excess so determined shall be applied against the principal balance of Obligations owing to FCFC. 3. Creation of Security Interest. 3.1 Borrower hereby grants to FCFC a continuing security interest in the Collateral to secure the prompt payment and performance by Borrower of all Obligations under this Agreement or otherwise created. 3.2 Borrower shall execute and deliver to FCFC concurrently with Borrower's execution of this Agreement, and at any time or times hereafter at the request of FCFC, financing statements, continuation statements, security agreements, mortgages, assignments, certificates of title, affidavits, reports, notices, schedules of accounts, letters of authority and all other documents that FCFC may request, in form satisfactory to FCFC, to perfect and maintain FCFC's security interest in the Collateral and fully comply with this Agreement. Borrower hereby makes, constitutes and appoints FCFC (and any of FCFC's officers, employees or agents designated by FCFC) as Borrower's true and lawful attorney (which shall be irrevocable until all Obligations are fully paid and satisfied) with power to sign the name of Borrower on any financing statement, continuation statement, security agreement, mortgage, assignment, certificate of title, affidavit, letter of authority, or notice or other similar document necessary to perfect or continue the perfection of FCFC's security interest in the Collateral. Borrower shall make appropriate entries in Borrower's Books disclosing FCFC's security interest in the Accounts. FCFC (through any of its officers, employees or agents) shall have the right at any time or times hereafter during Borrower's usual business hours to inspect the Collateral. 3.3 To further evidence the security interest of FCFC in the Accounts, Borrower shall, from time to time, provide FCFC with schedules and written assignments of its Accounts, in form satisfactory to FCFC. Borrower's failure to execute and deliver such schedules and/or assignments shall not affect or limit FCFC's security interest or any other rights in and to the Accounts. Together with each schedule, Borrower shall furnish FCFC with true and correct copies of Borrower's customers' invoices or the equivalent and original shipping or delivery receipts for all Inventory sold. 3.4 FCFC, or its agents, may at any time (and whether or not Borrower is in default under this Agreement) and without notice thereof to Borrower: (a) notify the account debtors of Borrower that the Accounts have been assigned to FCFC and that FCFC has a security interest therein; (b) direct all account debtors to make payment of all Accounts to FCFC; (c) demand, collect (by legal means or otherwise), receive, receipt for, sue for, compromise, adjust, settle or extend the time for payment of any Account upon such terms as FCFC may reasonably determine under the circumstances, in its own name or in the name of Borrower (crediting Borrower's Accounts with only the net amount received by FCFC in payment of the Accounts, after deducting all FCFC's Costs in connection therewith); and (d) take control of all proceeds from said Accounts. In this regard, Borrower agrees that it will cooperate with FCFC (and execute such forms or notices as FCFC may request) in notifying the account debtors that the Accounts have been assigned to FCFC and that FCFC has a security interest therein. Until such time as FCFC exercises such right, Borrower shall collect the Accounts, receiving in trust all proceeds therefrom as FCFC's trustee and each day deliver said proceeds to FCFC in their original form as received from the account debtors, together with a remittance report, in form satisfactory to FCFC. The receipt of any check or other item of payment by FCFC shall not be considered payment to FCFC until such check or other item of payment is actually paid. For the purpose of computing the interest to be charged to Borrower under paragraph 2.2 hereof all checks, and other items of payment delivered to FCFC from time to time shall be treated as being paid four business day after the date FCFC actually receives such check or other item of payment, subject to reversal of entry in the event such remittance is not paid upon presentment to the drawee bank. Wire transfers received from Imperial Bank shall be deemed to have been paid to FCFC one business day after the date FCFC actually received such transfer. It is further understood that for the purpose of computing interest to be charged to Borrower, the amount of any credit balance which Borrower may have with FCFC shall be treated as an advance by FCFC to Borrower under this Agreement. 3.5 Borrower authorizes FCFC and FCFC shall have the right at any time or times to verify the Accounts by mail, telephone, or otherwise in the name of Borrower or FCFC. In addition, Borrower authorizes FCFC to obtain information from Borrower's suppliers and customers and, in this regard, Borrower waives any right or claim against any such supplier or customer for furnishing information to FCFC. 3.6 Borrower shall promptly provide FCFC with all information relating to the financial condition of any account debtor, and shall notify FCFC of the rejection of goods by any account debtor, delay in the delivery of goods, or any returns or recoveries of goods, nonperformance of contracts, or the assertion by an account debtor of any claim, offset or counterclaim, and the settlement or adjustment of any dispute or claim with an account debtor on terms approved by FCFC. 3.7 Borrower agrees to keep all goods returned by any account debtor and all goods repossessed or stopped in transit by Borrower, segregated from other property of Borrower, holding the same as trustee for FCFC, until otherwise directed in writing by FCFC. 3.8 Borrower does hereby irrevocably designate, make, constitute and appoint FCFC, and any agent of FCFC, as Borrower's true and lawful attorney, with power, without notice to Borrower, and at such time or times (except as otherwise provided herein) as FCFC may, in its sole election, determine, in Borrower's or FCFC's name and at Borrower's expense, to: (a) Endorse Borrower's name on any checks, notes, acceptances, money orders, drafts or other forms of payment or security that may come into FCFC's possession. (b) Exercise all of Borrower's rights and remedies with respect to the collection of Accounts. (c) Sign Borrower's name on any invoice, freight bill or bill of lading relating to any Account, on any draft against an account debtor, on any schedule assignment of Accounts, verification of Accounts or on any notice to account debtors. (d) Prepare, file and sign Borrower's name on any proof of claim in bankruptcy or similar document against an account debtor. (e) Prepare, file and sign Borrower's name on any notice of lien, claim of mechanic's lien or similar document or waiver or satisfaction thereof in connection with an Account. (f) Execute any other documents which may facilitate the collection, liquidation or disposition of the Collateral. FCFC shall not be obligated to do any of the acts or exercise any of the powers hereinabove authorized, but, if FCFC elects to collect said Accounts, do any such act or exercise any of the foregoing powers, it may do so in any manner or means as it may determine, and shall not be liable to Borrower for any error in judgment or mistake of fact or law, excepting willful misconduct or bad faith. This power, being coupled with an interest, is irrevocable until all Obligations of Borrower to FCFC are fully paid and satisfied. All acts by or on behalf of FCFC pursuant hereto are hereby ratified and approved by Borrower. 4. Term. This Agreement shall have a term of one year from the date hereof and shall be automatically renewed from year to year, unless terminated by either party on any anniversary date of this Agreement by written notice to this effect given not less than 30 days, nor more than 45 days, prior to said anniversary date. Notwithstanding the foregoing, Borrower may terminate this Agreement at any time prior to the anniversary date of this Agreement, by giving written notice to FCFC to this effect not less than 30 days, nor more than 45 days, prior to the effective date of such termination, provided that Borrower pays to FCFC on the date of termination, in addition to all Obligations of Borrower to FCFC, the minimum amount of interest required to be paid by Borrower to FCFC during the remainder of the original or renewal term of this Agreement, as provided in paragraph 2.5 above. In the event Borrower defaults in the performance of any provision of this Agreement, FCFC may, at its election, terminate this Agreement at any time, without notice. On the date of termination, all Obligations, including but not limited to, obligations arising by reason of the termination of this Agreement, shall become immediately due and payable without notice or demand. Notwithstanding such termination, until all Obligations have been fully satisfied, FCFC shall retain its security interest in all existing Collateral and Collateral arising thereafter, and Borrower shall continue to turn over all collections from the Accounts to FCFC. It is understood and agreed that if Borrower has given notice of termination, pursuant to the provisions of this paragraph, and fails to pay all Obligations to FCFC on the specified date, or within 10 days thereafter, then this Agreement shall be automatically renewed for an additional one year term. 5. Representations and Warranties. Until all Obligations of Borrower to FCFC have been fully paid and satisfied, Borrower does hereby warrant and represent that: (a) If Borrower is a corporation or a limited liability company, it is duly organized and is and all times hereinafter will be in good standing under the laws of the state of its incorporation and is duly qualified and in good standing in every other state in which the nature of its business requires such qualification. (b) Borrower is the true and lawful owner of the Collateral and has the right, power and authority to grant a security interest therein to FCFC. (c) Borrower's chief place of business (or if it has more than one place of business its chief executive office) and the office where Borrower's Books are kept is at Borrower's address as set forth in this Agreement. (d) Borrower is not doing business and has not done business during the last six years under any trade name or style, except its name(s) as set forth in this Agreement or under the following name(s): - Syntellect - SIS (e) The execution, delivery and performance hereof does not constitute a default under any indenture, agreement or undertaking to which Borrower is now or hereafter a party or by which it is or will be bound and, if Borrower is a corporation or a limited liability company, the same are within Borrower's corporate powers, have been duly authorized and are not in contravention of its articles, bylaws, or operating agreement. (f) All financial statements and information relating to Borrower or any guarantor of Borrower's Obligations or with respect to the Accounts which have been or may hereafter be delivered by Borrower to FCFC are true and correct in all material respects and there has not been any material adverse change in the financial condition of Borrower or any guarantor since the last submission of such financial information to FCFC. (g) There are no actions or proceedings pending by or against Borrower or any guarantor of Borrower's Obligations in any court or administrative agency and Borrower has no knowledge of any pending, threatened or imminent litigation, governmental investigation or claim, complaint, action or prosecution involving Borrower or any guarantor of Borrower, except as may have been specifically disclosed in writing to FCFC and if any of the foregoing arise during the term of this Agreement, Borrower shall immediately notify FCFC in writing with respect thereto. (h) Borrower has duly filed all federal, state and other governmental tax returns which it is required by law to file and that all taxes and other sums which may be due to the United States, any state or other governmental authority have been fully paid and that Borrower now has and shall hereafter maintain reserves adequate in amount to fully pay all such tax liabilities which may hereafter accrue. (i) All assessments and taxes whether real, personal or otherwise due and payable by or imposed, levied or assessed against Borrower or any of its assets have been paid and shall hereafter be paid in full before delinquency. Borrower shall make due and timely payment or deposit of all federal, state and local taxes, assessments or contributions required of it by law (including timely payment or deposit of all F.I.C.A. payments and withholding taxes) and will execute and deliver to FCFC on demand appropriate certificates attesting to the payment or deposit thereof. (j) Borrower is now and shall be at all times hereafter solvent and able to pay its debts as they mature. (k) With respect to all Collateral, FCFC's security interest therein is now and shall hereafter at all times constitute a perfected, choate, and first security interest in the Collateral and is not now and will not hereafter become subordinate or junior to the security interest, lien, encumbrance or claim of any person. (l) All information furnished to FCFC at any time by or on behalf of Borrower was, and will be when furnished, true, complete and correct in all material respects. (m) With respect to each Account now and from time to time hereafter created: (i) It is genuine, in all respects what it purport to be and represents a bona fide, existing, valid and legally enforceable indebtedness of the account debtor named therein, payable in the amount, time and manner stated in the invoice therefor, and is absolutely owing to Borrower and not contingent for any reason. (ii) The delivery receipt and invoice therefor represents bona fide sale in the ordinary course of Borrower's business, represents the kind, quality and quantity of the goods or services described therein, and that the goods or services described herein have been completely delivered, installed or performed and at the time of delivery or installation have been accepted by the account debtor without condition. (iii) No payments have been or shall be made thereon, except payments which are turned over to FCFC by Borrower. (iv) There is no setoff, counterclaim or dispute existing or asserted with respect to the Account and Borrower has not made any agreement with the account debtor thereof for any deduction or discount of the sum payable thereunder, except regular discounts allowed by Borrower in the ordinary course of its business for prompt payment. (v) The goods sold or transferred or the services rendered as evidenced by the Account are not subject to any lien, claim, encumbrance or security interest, except that of FCFC. (vi) Borrower has no knowledge of the insolvency of the account debtor or of any action or proceeding involving the account debtor under any federal or state debtor's relief statute. (vii) Borrower has no knowledge of any fact or circumstance which would impair the validity or collectibility of the Account. (viii) Borrower has not made any assignment of the Account or granted a security interest in the Account to any other party other than FCFC. (ix) All of Borrower's Books, and all records and documents relating to the Account are and will be genuine and in all respects what they purport to be, and accurately reflect the amounts owing or to be owing at maturity by the account debtor. Each warranty, representation and agreement contained in this Agreement shall be automatically deemed repeated with each advance and shall be conclusively presumed to have been relied upon by FCFC regardless of any investigation made or information possessed by FCFC. The warranties, representations and agreements set forth herein shall be cumulative and in addition to any other warranties, representations and agreements which Borrower shall now or hereafter give, or cause to be given to FCFC. 6. Affirmative Covenants. Until all Obligations of Borrower to FCFC are fully paid and satisfied, Borrower will: (a) At all times fully comply with all federal, state and local laws, rules, orders or regulations pertaining to the conduct of its business, including, but not limited to all applicable federal, state and local environmental laws and regulations relating to the storage, usage and disposal of hazardous substances or toxic chemicals by Borrower in its business. In this regard, Borrower agrees to defend, indemnify and hold FCFC harmless for and against any and all costs, claims, demands, damages including attorneys fees, court costs, and investigatory and laboratory fees which FCFC may suffer or incur in connection with any such violation which indemnification shall survive the termination of this Agreement. (b) Maintain Borrower's Books at the address set forth in this Agreement (which is Borrower's place of business or, if it has more than one place of business, its chief executive office) and will not, without prior written consent of FCFC relocate its place of business (or if it has more than one place of business, its chief executive office) or move Borrower's Books outside the State of Arizona. (c) Maintain a standard and modern system of accounting in accordance with generally accepted accounting principles which contain such information as may be requested by FCFC, and permit FCFC or any of its agents, during Borrower's usual business hours or during the usual business hours of any third party having control over the records of Borrower, to have access to and have the right to examine all of Borrower's Books and in connection therewith and permit FCFC or any of its agents to copy and make extracts therefrom. (d) Promptly furnish to FCFC such records, data and other information with respect to the financial condition of Borrower, the Collateral and any guarantor, as FCFC may request from time to time, and deliver to FCFC within 90 days after the end of each Borrower's fiscal year, a detailed report in form satisfactory to FCFC containing a statement of the financial condition and operation of Borrower for each such fiscal year, and within 20 days, after demand by FCFC, deliver to FCFC copies of any financial report or statement prepared by or for Borrower. Each such statement and report shall be reviewed or compiled by an independent CPA or, with the consent of FCFC, prepared by an authorized officer of Borrower certifying that such report, statement or document delivered or caused to be delivered to FCFC is complete, correct and thoroughly presents the financial condition of Borrower and that on the date of said certification no event or condition exists which constitutes a breach or event of default under this Agreement. In addition, Borrower shall deliver to FCFC within 30 days after the end of each month, a detailed report in form satisfactory to FCFC containing a statement of the financial condition and operation of Borrower for each such month. (e) Allow FCFC to possess, remove to FCFC's premises or the premises of any agent of FCFC, copies of Borrower's Books, for so long as FCFC may desire in connection with the enforcement of FCFC's rights under this Agreement. (f) Notify FCFC of any material adverse change in Borrower's financial condition. (g) Make timely payment or deposit of all taxes (including F.I.C.A. payments and deposits of withholding taxes) and assessments required to be paid by Borrower and deliver to FCFC, as requested, evidence of such payment or deposit. (h) Pay all rent when due and otherwise abide by the terms under which Borrower leases or occupies the premises at which the Collateral is located; if Borrower fails to do so, FCFC may, without any obligation, pay such rent and any sum so paid shall be part of FCFC's Costs, secured by the Collateral and payable on demand. (i) Cause to be paid all amounts necessary to fund, in accordance with their terms, all pension plans presently in existence or hereafter created and Borrower will not withdraw from participation in, permit the termination or partial termination of, or permit the occurrence of any other event with respect to any deferred compensation plan maintained for the benefit of its employees under circumstances that could result in liability to the Pension Benefit Guarantee Corporation, or any of its successors or assigns, or to the entity which provides funds for such deferred compensation plan. (j) Maintain a working capital ratio of 1.0:1 and a net worth at least equal to $6,000,000. (k) Maintain itself in good standing in all jurisdictions in which Borrower is doing business, and at the request of FCFC, furnish to FCFC evidence of its good standing in all such jurisdictions. (l) Maintain all Collateral at the address set forth in this Agreement or at: - 3225 Cumberland Boulevard, Suite 400, Atlanta, Georgia 30339 - 1000 Holcomb Woods Parkway, Building 410A, Roswell, Georgia 30076 - 1 East 22nd Street, Suite 510, Lombard, Illinois 60148 - 275 Wyman Street, Suite 160, Waltham, Massachusetts 02451 - 405 South 100 East, Suite 101, Pleasant Grove, Utah 84062 and will not, without the prior written consent of FCFC, move said Collateral to any other address. (m) Promptly deliver to FCFC all documents and instruments relating to the Collateral, including invoices, original orders, shipping documents, delivery receipts, as FCFC may request from time to time. (n) Furnish to FCFC daily or less frequently as FCFC shall permit from time to time, written schedules and reports of the status of Borrower's Accounts in such form as shall be required by FCFC. (o) On request of FCFC, execute and deliver to FCFC any and all additional documents which FCFC may request from time to time to evidence the advances made hereunder or the security interest granted hereby. 7. Negative Covenants. Until all Obligations of Borrower to FCFC are fully paid and satisfied, Borrower will not, without the prior written consent of FCFC: (a) Grant a security interest in the Accounts or the Inventory or permit a lien, claim or encumbrance to be imposed on any of the Collateral. (b) Sell, lease, rent or otherwise dispose of, move, transfer or relocate outside the State of Arizona, Georgia, Illinois, Massachusetts and Utah, whether by sale or otherwise, any of Borrower's property or any interest therein, including the Collateral, but excluding Inventory which may be sold, leased, or otherwise disposed of in the ordinary course of Borrower's business, provided that FCFC shall nevertheless continue to have a security interest in the proceeds thereof. (c) Permit any Collateral to become affixed to real property, become an accession to any property or be used in violation of any applicable law, regulation or policy of insurance. (d) Permit any levy, or attachment to be made on any of Borrower's assets. (e) Permit any receiver, trustee, custodian, assignee for the benefit of creditors or any other person or entity having similar powers or duties to be appointed or to take possession of any or all of Borrower's assets. (f) Change its corporate or trade name, business structure, corporate identity or structure, do business under any additional trade name, or liquidate, merge or consolidate with or into any other business organization. (g) Acquire any entity or purchase the stock or securities of any entity (other than securities of any state or federal government). (h) Permit any sale or disposition of a controlling interest in Borrower or permit a change in the management of Borrower. (i) Enter into any transaction or incur any debts not in the usual course of Borrower's business. (j) Guarantee or otherwise become in any way liable with respect to the obligations of any person except by endorsement of instruments or items of payment for deposit to the account of Borrower or which are transmitted or turned over to FCFC on account of Borrower's Obligations. (k) Pay or declare any dividends upon Borrower's capital stock. (1) Redeem, retire, purchase or otherwise acquire directly or indirectly any of Borrower's capital stock. (m) Make any distribution of Borrower's property or assets. (n) Not Used. (o) Make any advance, loan, contribution or payment of money (other than compensation for personal services), goods or credit to, or guarantee any obligation of any subsidiary, affiliate or parent corporation, or any officer, shareholder or employee, or cause or permit any such advance, loan, contribution or guarantee to be made by any subsidiary corporation other than the guaranty executed in connection herewith with this Agreement. 8. Insurance. Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, and all other hazards and risks ordinarily insured against by owners in similar businesses for the full insurable value thereof, business interruption insurance and public liability and property damage insurance relating to Borrower's ownership and use of its assets. All such policies of insurance shall be in such form, with such companies and in such amounts as may be satisfactory to FCFC. Borrower shall deliver to FCFC certified copies of such policies of insurance and evidence of the payment of all premiums therefor. All such policies of insurance (except those of public liability and property damage) shall contain an endorsement in a form satisfactory to FCFC showing FCFC as the loss payee. All proceeds payable thereunder shall be payable to FCFC and upon receipt by FCFC shall, at FCFC's option, be applied on the account of Borrower's Obligations, whether or not then due, or to the repair or replacement of the Collateral. To secure the payment of Borrower's Obligations, Borrower grants FCFC a security interest in and to all such policies of insurance (except those of public liability and property damage) and the proceeds thereof, and Borrower shall direct all insurers under such policies of insurance to pay all proceeds thereof directly to FCFC. Borrower hereby irrevocably appoints FCFC (and any of FCFC's officers, employees or agents designated by FCFC) as Borrower's attorney for the purpose of making, settling and adjusting claims under such policies of insurance, endorsing the name of Borrower on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and for making all determinations and decisions with respect to such policies of insurance. Each such insurer shall agree, by endorsement upon the policy or policies of insurance issued by it to Borrower as required above, or by independent instruments furnished to FCFC, that it will give FCFC at least 10 days written notice before any such policy or policies of insurance shall be altered or canceled, and that no act of Borrower or any other person or the default hereunder by Borrower, shall affect the right of FCFC to recover under such policy or policies of insurance. FCFC, without waiving or releasing any Obligations or default by Borrower hereunder, may, but shall have no obligation to do so, obtain and maintain such policies of insurance and pay such premiums and take any other action with respect to such policies which FCFC deems advisable. All sums so disbursed by FCFC, as well as reasonable attorneys fees, court costs, expenses and other charges relating thereto, shall be a part of FCFC's Costs, secured by the Collateral and payable on demand. 9. Events of Default. The occurrence of any one or more of the following shall constitute an event of default by Borrower under this Agreement (each an "Event of Default"): (a) Borrower fails to pay any of Borrower's Obligations (whether of principal, interest, taxes, reimbursement of FCFC's Costs, or otherwise) when due and payable or is declared to be due and payable. (b) Borrower fails or neglects to perform, keep or observe any term, provision, condition, or covenant contained in this Agreement, or any other present or future agreement between Borrower and FCFC. (c) Any representation, statement, report or certificate made or delivered by Borrower, or any of its officers or agents, (either individually or as an officer or agent of Borrower) to FCFC proves to be untrue or incorrect in any material respect. (d) Any Collateral cannot be located within five days after FCFC makes demand upon Borrower to inspect the same or any Collateral has been moved outside the State of Arizona, Georgia, Illinois, Massachusetts and Utah, without the consent of FCFC. (e) There is a material impairment in the prospect of repayment of Borrower's Obligations or a material impairment in the value of the Collateral or that the priority of FCFC's security interest in the Collateral is contested. (f) Any of Borrower's assets are attached, seized, or are levied upon, and the same are not released, discharged or bonded against within ten days thereafter. (g) Any proceeding under the Bankruptcy Act is filed by or against Borrower. (h) A notice of lien, levy or assessment is filed of record with respect to any or all of Borrower's assets by the United States Government, or any department, agency or instrumentality thereof, or by any state, county, municipal or other governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a lien, whether choate or otherwise, upon any or all of the Borrower's assets and the same is not paid on the payment date thereof. (i) Borrower is enjoined, restrained or in any way prevented by court order from continuing to conduct all or any material part of its business affairs. (j) Borrower ceases normal business operations. (k) A material portion of the Collateral is stolen, damaged or destroyed. (l) A judgment or other claim becomes a lien or encumbrance upon any or all of Borrower's assets and the same is not satisfied, dismissed or bonded against within 10 days thereafter. (m) If any of Borrower's records are prepared and kept by an outside computer service at any time during the term of this Agreement, and said computer service fails to provide FCFC with any requested information or financial data pertaining to the Collateral, Borrower's financial condition or the results of Borrower's operations. (n) If there is a default in any agreement to which Borrower is a party with any third party resulting in a right by such third party to accelerate the maturity of any indebtedness of Borrower to such third party. (o) Borrower makes any payment on account of indebtedness which has been subordinated to Borrower's Obligations to FCFC, without FCFC's consent, or if any person subordinating such indebtedness terminates or in any way limits his subordination. (p) Not Used. (q) Not Used. 10. FCFC's Rights and Remedies. 10.1 Upon the occurrence of an Event of Default by Borrower under this Agreement, FCFC may, at its election, without notice of its election and without demand upon Borrower or any guarantor, do any one of more of the following, all of which are authorized by Borrower: (a) Declare any or all of Borrower's Obligations, whether evidenced by note(s), or otherwise, immediately due and payable. (b) Terminate this Agreement, but without affecting FCFC's rights and security interests in the Collateral, and the Obligations of Borrower to FCFC. (c) Cease making advances to or for benefit of Borrower under the Credit Facility or reduce the Credit Facility. (d) Continue making advances to Borrower in such amounts as FCFC may determine, in its sole discretion, without waiving any default by Borrower under this Agreement. (e) Proceed to collect the Accounts, pursuant to A.R.S.Section 47-9502, and, in this regard, notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by FCFC, and receive, open and distribute all mail addressed to Borrower, retaining all mail relating to Collateral and forwarding all other mail to Borrower. (f) Exercise any and all of the rights accruing to a secured party under the Code and any other applicable law. (g) Enter, with or without process of law, upon any premises where the Collateral is or believed by FCFC to be located (the "Premises"), using all necessary force to accomplish the same without committing a breach of the peace (Borrower hereby waives all claims for damages or otherwise due to, arising from or connected with such entry and/or seizure); and: (i) Take possession of the Premises and of the Collateral located therein; (ii) Place a custodian in exclusive control of the Premises and of any of the Collateral located therein; (iii) Remove from the Premises the Collateral (and any of Borrower's Books, materials and supplies) in any way relating to the Collateral or useful by FCFC in enforcing its rights hereunder; (iv) Remain upon the Premises and use the same (together with said Borrower's Books, materials and supplies) for the purpose of collecting the Collateral and/or preparing the Collateral for disposition and/or disposing of the Collateral. (h) Make (without any obligation to do so) any payment and take such action as FCFC considers necessary or reasonable to protect or preserve the Collateral or its security interest therein, including paying, purchasing, contesting or compromising any encumbrance, charge or lien which, in the opinion of FCFC, interferes with the enforcement of its security interests or the liquidation or disposition of the Collateral. (i) Require Borrower to assemble the Collateral and, at Borrower's expense, deliver the same to FCFC or to a third party as FCFC's bailee at a place or places to be designated by FCFC which is reasonably convenient to the parties. (j) Ship, reclaim, recover, store, finish, maintain, repair and prepare for sale the Collateral. (k) Sell the Collateral (whether or not the Collateral is present at any such sale) in its then condition, or after further manufacturing, processing or preparation thereof (utilizing, in connection therewith, without charge or liability to FCFC therefor, any of Borrower's assets), at either public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as is commercially reasonable, in the opinion of FCFC. In such event, FCFC shall (unless notice has been waived after default pursuant to the provisions of the Code) give notice to Borrower in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Collateral, the time after which the private sale or other disposition is to be made, at least five days before the date fixed for the sale, or at least five days before the date after which the private sale or other disposition is to be made, unless the Collateral is perishable or threatens to decline speedily in value. FCFC may purchase all or any portion of the Collateral at any public sale. (l) Seek temporary or permanent injunctive relief without the necessity of proving actual damages, as no remedy at law will provide adequate relief to FCFC and, in this regard, the bond which FCFC may be required to post shall be no more than $500.00. (m) Require Borrower to pay all FCFC's Costs incurred in connection with FCFC's enforcement and exercise of any of its rights and remedies as herein provided, whether or not suit is commenced by FCFC. Any deficiency which exists after disposition of the Collateral, as provided above, shall be due and payable by Borrower upon demand, with any excess to be paid by FCFC to Borrower. 10.2 FCFC's rights and remedies under this Agreement and all other agreements shall be cumulative and may be exercised simultaneously or successively, in such order as FCFC shall determine. In addition, FCFC shall have all other rights and remedies not inconsistent herewith as provided by law or in equity. No exercise by FCFC of one right or remedy shall be deemed an election, and no waiver by FCFC of any default on Borrower's part shall be deemed a continuing waiver. No delay by FCFC shall constitute a waiver, election or acquiescence by it. 11. Taxes and Expenses Regarding Borrower's Property. If Borrower fails to pay any assessments, taxes, contributions, or make any deposits, or furnish any required proof thereof as set forth in paragraph 6(g) hereof or in any other provision of this Agreement, FCFC may, in its sole and absolute discretion and without notice to Borrower (a) make payment of the same or any part thereof, or (b) set up such reserves in Borrower's account as FCFC deems necessary to satisfy the liability therefor, or both. If Borrower fails to promptly pay when due to any other person or entity, any sum which Borrower is required to pay by reason of any provision in this Agreement, FCFC may, but is not obligated to, advance any sums which it deems appropriate for the protection or preservation of the Collateral or its security interest therein, and the amount so advanced by FCFC shall bear interest at the highest rate provided for in paragraph 2.3 above, and shall constitute FCFC's Costs, payable on demand, and shall be secured by the Collateral. Any payment made by FCFC shall not constitute (a) an agreement by it to make similar payments in the future, or (b) a waiver by FCFC of any default under this Agreement. FCFC need not contest nor inquire as to the validity of any such expense, tax, security interest, encumbrance or lien, and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 12. Waivers By Borrower. 12.1 FCFC shall not be deemed to have waived any provision of this Agreement, or any right or remedy which it may have hereunder, or at law or equity, unless such waiver is in writing and signed by FCFC. 12.2 Borrower waives the right to direct the application of any payments at any time or times received by FCFC on account of Borrower's Obligations and Borrower agrees that FCFC shall have the continuing exclusive right to apply and reapply such payments in any manner as FCFC may deem advisable. 12.3 Except as otherwise provided for in this Agreement, Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, documents, instruments, chattel paper and guaranties at any time held by FCFC on which Borrower may in any way be liable. 12.4 Failure or delay by FCFC in exercising or enforcing any right, power, privilege, lien, option or remedy hereunder shall not operate as a waiver thereof and a waiver by FCFC of any default by Borrower under this Agreement shall not be construed to create any right or expectation of future waiver of any subsequent breach or default by Borrower under this Agreement. 12.5 FCFC shall not in any way or manner be liable or responsible for (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency or other person whomsoever. All such risk or loss, damage or destruction of the Collateral shall be borne by Borrower. 12.6 Borrower waives (to the extent the same may be lawfully waived): any and all causes of action and claims which it may now or ever have against FCFC for failing to protect any Collateral in its possession, or failing to collect or sell any of the Collateral, notwithstanding the effect of such possession, collection or sale upon the business of Borrower. In addition, Borrower hereby releases FCFC of and from (a) any and all liabilities or penalties for failure of FCFC to perfect or maintain the priority of its security interest or to comply with any statutory or other requirement imposed on FCFC; and (b) any error of judgment or mistake of fact or law. 12.7 In the event FCFC seeks to obtain possession of any of the Collateral by replevin or other judicial process, Borrower hereby waives (a) any bond or security required to be posted by any statute, court rule or otherwise as an incident to such possession and (b) any demand for possession of the Collateral prior to the commencement of any suit or action to recover possession thereof. 12.8 Borrower waives any right to trial by jury in any action or proceeding relating to this Agreement or any transactions hereunder. 13. Notices. Unless otherwise provided in this Agreement, all notices, demands or other communications to either party shall be in writing and shall be mailed, telecopied or communicated by means of facsimile transmission (followed by a mailed or delivered hard copy), or delivered by hand or courier service, at their respective addresses set forth in this Agreement, or at such other addresses as shall be designated by such party in a written notice to the other party. All notices and other communications shall be effective on three business days after deposit in the mail (postage prepaid in the case of mail), upon telecopy or other facsimile transmission or upon hand delivery. 14. Destruction of Borrower's Documents. Any documents, schedules, invoices or other papers delivered to FCFC, may be destroyed or otherwise disposed of by FCFC five months after they are delivered to or received by FCFC, unless Borrower requests, in writing, the return of the said documents, schedules, invoices or other papers and makes arrangements, at Borrower's expense, for their return. 15. Release. Only at such time as all Obligations of Borrower to FCFC shall have been fully paid and satisfied and Borrower and all guarantors of Borrower's obligations execute and deliver to FCFC a release acknowledging that Borrower does not have any claims against FCFC and provides FCFC with an appropriate indemnity indemnifying FCFC for any remittances for which Borrower has received credit and which are not paid, shall FCFC release its security interest in the Collateral and deliver to Borrower an appropriate termination statement. 16. General Provisions. 16.1 The parties intend and agree that their respective rights, duties, powers, liabilities, obligations and discretions shall be performed, carried out, discharged and exercised reasonably and in good faith. 16.2 If at any time or times hereafter FCFC employs counsel for advice or other representation (a) with respect to any of the Collateral or this Agreement or modification thereof, (b) to represent FCFC in any litigation, contest, dispute, suit or proceeding or to commence, defend, or intervene or to take any other action in or with respect to any litigation, contest, dispute, suit or proceeding (whether instituted by FCFC, Borrower or any other party) in any way relating to any of the Collateral, this Agreement or Borrower's affairs, (c) to protect, collect, lease, sell, take possession of or liquidate any of the Collateral, (d) to attempt to enforce any security interest of FCFC in any of the Collateral or (e) to enforce any rights of FCFC against Borrower or against any other person which may be obligated to FCFC by virtue of this Agreement including Borrower's account debtors, then, in any of the foregoing events, all of the reasonable attorneys' fees arising from such services and all expenses, costs and charges in any way arising in connection therewith or relating thereto shall constitute a part of FCFC's Costs secured by the Collateral and be payable on demand. 16.3 Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against FCFC or Borrower, whether under any rule of construction or otherwise; on the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. When permitted by the context, the singular includes the plural and vice versa. 16.4 The validity of this Agreement, its construction, interpretation and enforcement, and the rights of the parties hereunder and concerning the Collateral, shall be determined under and according to the laws of Arizona. In any litigation involving FCFC and Borrower, Borrower does hereby irrevocably submit itself to the process, jurisdiction and venue of the courts of the State of Arizona in Maricopa County or to the process, jurisdiction and venue of the U.S. District Court for Arizona for the purposes of suit, action or other proceedings arising out of or relating to this Agreement or the subject matter hereof, and without limiting the generality of the foregoing, hereby waives and agrees not to assert by way of motion, defense or otherwise in any such suit, action or proceeding any claim that Borrower is not personally subject to the jurisdiction of such courts, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. 16.5 The provisions of this Agreement are independent of and separate from each other. If any provision hereof shall for any reason be held invalid or unenforceable, it is the intent of the parties that such invalidity or unenforceability shall not affect the validity or unenforceability of any other provision hereof and that this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. 16.6 Paragraph headings and paragraph numbers have been set forth herein for convenience only; unless the contrary is compelled by the context, everything contained in each paragraph applies equally to this entire Agreement. 16.7 This Agreement cannot be changed or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations, if any, are merged into this Agreement. 16.8 FCFC shall have the right, without the consent of or notice to Borrower to grant participation interests in the Credit Facility and in this regard may provide the participant with any and all information with respect to Borrower and the Credit Facility. In addition, FCFC may assign this Agreement and its rights and duties hereunder at any time, without the consent of or notice to Borrower. This Agreement shall inure to the benefit of FCFC, its successors and assigns. Borrower may not assign this Agreement or any rights hereunder, without FCFC's prior written consent and any such assignment shall be void and of no effect whatsoever. No consent to any assignment by FCFC shall, without the written consent of FCFC, release Borrower or any guarantor of its Obligations to FCFC. 16.9 This Agreement shall inure to the benefit of FCFC and any successors or assigns of FCFC, including any participant in the Credit Facility. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; however, Borrower may not assign this Agreement or any rights hereunder without FCFC's prior written consent and any prohibited assignment shall be absolutely void. No consent to any assignment by FCFC shall release Borrower or any guarantor of its Obligations to FCFC. FCFC may assign this Agreement and its rights and duties hereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed at Phoenix, Arizona, as of the date written above. FCFC: FIRST COMMUNITY FINANCIAL CORPORATION, an Arizona corporation By: /S/ James C. Adamany ----------------------------------------------- James C. Adamany Title: President BORROWER: Syntellect Inc., a Delaware corporation By: /S/ Anthony V. Carollo ----------------------------------------------- Anthony V. Carollo Title: Chief Executive Officer and President BORROWER: Syntellect Interactive Services, Inc., a Georgia corporation By: /S/ Anthony V. Carollo ----------------------------------------------- Anthony V. Carollo Title: Chief Executive Officer and President AMENDMENT TO ACCOUNTS RECEIVABLE SECURITY AGREEMENT FOR A VALUABLE CONSIDERATION, First Community Financial Corporation (FCFC) and Syntellect Inc., a Delaware corporation and Syntellect Interactive Services, Inc., a Georgia corporation (collectively, BORROWER) do hereby agree to amend paragraphs 1.5 and 2.2 of that certain Accounts Receivable Security Agreement dated June 14, 2001 between the parties (as the same may have been amended from time to time) in its entirety as follows: 1.5 Effective October 1, 2001, "Credit Facility" shall mean a revolving line of credit granted by FCFC to Borrower in the amount of $2,000,000.00, in accordance with the terms and conditions set forth in this Agreement. 2.2 Effective October 1, 2001, the Obligations of Borrower to FCFC shall bear interest, for the actual days outstanding at the rate equal to the Prime Rate plus 8.50% per annum, computed on the basis of a 360-day year for actual days elapsed. The Prime Rate of 5.50%, is the rate in effect as of this date. In the event of a change in the Prime Rate from time to time, the rate of interest to be charged to Borrower shall be correspondingly adjusted as of the date of the Prime Rate change. Notwithstanding the foregoing, in no event shall the interest rate chargeable hereunder be less than 15.00% per annum. Interest is due and payable to FCFC under this Agreement on the first day of each month. Any interest not paid when due shall become a part of Borrower's Obligations under this Agreement, and shall thereafter bear interest as provided herein. FCFC shall render statements to Borrower of the Obligations, including all principal, interest and FCFC's Costs owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and FCFC unless, within thirty (30) days after receipt thereof by Borrower, Borrower notifies FCFC in writing specifying the error or errors, if any, contained in any such statements. AMENDMENT TO ACCOUNTS RECEIVABLE SECURITY AGREEMENT (CONTINUED) Except as amended hereby, all other terms and provisions of the Accounts Receivable Security Agreement (as the same may have been amended from time to time) shall continue in full force and effect and are hereby ratified, confirmed and approved. Dated this 10th day of October, 2001. BORROWER: Syntellect Inc., Syntellect Inc., a Delaware corporation a Delaware corporation By: /S/ Anthony v. Carollo By: /S/ Timothy P. Vatuone --------------------------------------------- -------------------------------------- Anthony V. Carollo Timothy P. Vatuone Title: Chief Executive Officer and President Title: Secretary and Chief Financial Officer Syntellect Inc., Syntellect Interactive Services, Inc., a Delaware corporation a Georgia corporation By: /S/ Charles F. Sonneborn By: /S/ Anthony v. Carollo --------------------------------------------- ------------------------------------ Charles F. Sonneborn Anthony V. Carollo Title: Vice President and Controller Title: Chief Executive Officer and President
FCFC: First Community Financial Corporation, an Arizona corporation By: /S/ James C . Adamany -------------------------------------------- James C. Adamany Title: President AMENDMENT TO ACCOUNTS RECEIVABLE SECURITY AGREEMENT FOR A VALUABLE CONSIDERATION, First Community Financial Corporation (FCFC) and Syntellect Inc., a Delaware corporation and Syntellect Interactive Services, Inc., a Georgia corporation (collectively, BORROWER) do hereby agree to amend paragraph 1.5 and paragraph 6 of that certain Accounts Receivable Security Agreement dated June 14, 2001 between the parties (as the same may have been amended from time to time) in its entirety as follows: 1.5 Effective January 21, 2002, "Credit Facility" shall mean a revolving line of credit granted by FCFC to Borrower in the amount of $2,500,000.00, in accordance with the terms and conditions set forth in this Agreement. 6. Affirmative Covenants. Until all Obligations of Borrower to FCFC are fully paid and satisfied, Borrower will: (a) At all times fully comply with all federal, state and local laws, rules, orders or regulations pertaining to the conduct of its business, including, but not limited to all applicable federal, state and local environmental laws and regulations relating to the storage, usage and disposal of hazardous substances or toxic chemicals by Borrower in its business. In this regard, Borrower agrees to defend, indemnify and hold FCFC harmless for and against any and all costs, claims, demands, damages including attorneys fees, court costs, and investigatory and laboratory fees which FCFC may suffer or incur in connection with any such violation which indemnification shall survive the termination of this Agreement. (b) Maintain Borrower's Books at the address set forth in this Agreement (which is Borrower's place of business or, if it has more than one place of business, its chief executive office) and will not, without prior written consent of FCFC relocate its place of business (or if it has more than one place of business, its chief executive office) or move Borrower's Books outside the State of Arizona. (c) Maintain a standard and modern system of accounting in accordance with generally accepted accounting principles which contain such information as may be requested by FCFC, and permit FCFC or any of its agents, during Borrower's usual business hours or during the usual business hours of any third party having control over the records of Borrower, to have access to and have the right to examine all of Borrower's Books and in connection therewith and permit FCFC or any of its agents to copy and make extracts therefrom. (d) Promptly furnish to FCFC such records, data and other information with respect to the financial condition of Borrower, the Collateral and any guarantor, as FCFC may request from time to time, and deliver to FCFC within 90 days after the end of each Borrower's fiscal year, a detailed report in form satisfactory to FCFC containing a statement of the financial condition and operation of Borrower for each such fiscal year, and within 20 days, after demand by FCFC, deliver to FCFC copies of any financial report or statement prepared by or for Borrower. Each such statement and report shall be reviewed or compiled by an independent CPA or, with the consent of FCFC, prepared by an authorized officer of Borrower certifying that such report, statement or document delivered or caused to be delivered to FCFC is complete, correct and thoroughly presents the financial condition of Borrower and that on the date of said certification no event or condition exists which constitutes a breach or event of default under this Agreement. In addition, Borrower shall deliver to FCFC within 30 days after the end of each month, a detailed report in form satisfactory to FCFC containing a statement of the financial condition and operation of Borrower for each such month. (e) Allow FCFC to possess, remove to FCFC's premises or the premises of any agent of FCFC, copies of Borrower's Books, for so long as FCFC may desire in connection with the enforcement of FCFC's rights under this Agreement. AMENDMENT TO ACCOUNTS RECEIVABLE SECURITY AGREEMENT (CONTINUED) (f) Notify FCFC of any material adverse change in Borrower's financial condition. (g) Make timely payment or deposit of all taxes (including F.I.C.A. payments and deposits of withholding taxes) and assessments required to be paid by Borrower and deliver to FCFC, as requested, evidence of such payment or deposit. (h) Pay all rent when due and otherwise abide by the terms under which Borrower leases or occupies the premises at which the Collateral is located; if Borrower fails to do so, FCFC may, without any obligation, pay such rent and any sum so paid shall be part of FCFC's Costs, secured by the Collateral and payable on demand. (i) Cause to be paid all amounts necessary to fund, in accordance with their terms, all pension plans presently in existence or hereafter created and Borrower will not withdraw from participation in, permit the termination or partial termination of, or permit the occurrence of any other event with respect to any deferred compensation plan maintained for the benefit of its employees under circumstances that could result in liability to the Pension Benefit Guarantee Corporation, or any of its successors or assigns, or to the entity which provides funds for such deferred compensation plan. (j) Effective December 31, 2001, maintain a working capital ratio of 1.0:1 and a net worth at least equal to $3,700,000. (k) Maintain itself in good standing in all jurisdictions in which Borrower is doing business, and at the request of FCFC, furnish to FCFC evidence of its good standing in all such jurisdictions. (l) Maintain all Collateral at the address set forth in this Agreement or at: - 3225 Cumberland Boulevard, Suite 400, Atlanta, Georgia 30339 - 1000 Holcomb Woods Parkway, Building 410A, Roswell, Georgia 30076 - 1 East 22nd Street, Suite 510, Lombard, Illinois 60148 - 275 Wyman Street, Suite 160, Waltham, Massachusetts 02451 - 405 South 100 East, Suite 101, Pleasant Grove, Utah 84062 and will not, without the prior written consent of FCFC, move said Collateral to any other address. (m) Promptly deliver to FCFC all documents and instruments relating to the Collateral, including invoices, original orders, shipping documents, delivery receipts, as FCFC may request from time to time. (n) Furnish to FCFC daily or less frequently as FCFC shall permit from time to time, written schedules and reports of the status of Borrower's Accounts in such form as shall be required by FCFC. (o) On request of FCFC, execute and deliver to FCFC any and all additional documents which FCFC may request from time to time to evidence the advances made hereunder or the security interest granted hereby. AMENDMENT TO ACCOUNTS RECEIVABLE SECURITY AGREEMENT (CONTINUED) Except as amended hereby, all other terms and provisions of the Accounts Receivable Security Agreement (as the same may have been amended from time to time) shall continue in full force and effect and are hereby ratified, confirmed and approved. Dated this 18th day of January, 2002. BORROWER: Syntellect Inc., Syntellect Inc., a Delaware corporation a Delaware corporation By: /S/ Anthony v. Carollo By: /S/ Timothy P. Vatuone --------------------------------------------- -------------------------------------- Anthony V. Carollo Timothy P. Vatuone Title: Chief Executive Officer and President Title: Secretary and Chief Financial Officer Syntellect Inc., Syntellect Interactive Services, Inc., a Delaware corporation a Georgia corporation By: /S/ Charles F. Sonneborn By: /S/ Anthony v. Carollo --------------------------------------------- ------------------------------------ Charles F. Sonneborn Anthony V. Carollo Title: Vice President and Controller Title: Chief Executive Officer and President
FCFC: First Community Financial Corporation, an Arizona corporation By: /S/ James C . Adamany --------------------------------------------- James C. Adamany Title: President June 14, 2001 Phoenix, Arizona MULTIPLE ADVANCE PROMISSORY NOTE FOR VALUE RECEIVED, the undersigned, jointly and severally, promise to pay upon "demand" (as defined below) to the order of First Community Financial Corporation, an Arizona corporation ("FCFC"), at its office located in Phoenix, Arizona, or at such other place as the holder hereof may from time to time designate in writing, such principal sum, up to the maximum amount of **THREE MILLION and NO/100** Dollars ($3,000,000.00), as the holder hereof may advance to or for the benefit of the undersigned in accordance with the terms of that certain Accounts Receivable Security Agreement dated June 14, 2001 between the undersigned and FCFC. Absent default or "demand", interest shall be charged on the unpaid principal balance hereof, to the date of maturity on a daily basis for the actual number of days any portion of said principal is outstanding, at the rate (the "Note Rate") equal to the prime rate announced from time to time by Bank One, Phoenix, Arizona (whether or not it is the lowest rate actually charged by such bank) plus 4.50% per annum. The current Note Rate under the note is 11.50% per annum based upon a prime rate of 7.00%. In the event such prime rate is from time to time hereafter changed, the Note Rate of interest shall correspondingly be adjusted as of the effective date of the prime rate change; provided, however, that the Note Rate payable hereunder shall in no event be less than 11.00% per annum. Interest shall be payable monthly on the first day of each month, commencing with the first day of the month following the initial advance hereunder until all principal and interest hereunder have been fully paid, and shall be fully paid at the maturity. The first interest payment shall include all interest accrued to the date thereof. Interest shall be computed on the basis of a 12-month, 360-day year. All obligations hereunder (including principal, interest, costs and fees) not discharged when due or upon "demand" shall bear interest, until paid in full, at a per annum rate equal to four percent (4%) per annum higher than the Note Rate set forth above. The unpaid principal balance of this obligation at any time shall be the total amount advanced hereunder by the holder hereof, less the amount of payments made hereon by or for the undersigned. At the option of the holder hereof, any of the following shall constitute a "demand" hereunder, and, upon the occurrence of any of the following, all obligations hereunder shall, at the option of the holder hereof, become immediately due and payable, without presentment for payment, diligence, grace, exhibition of this Note, protest, further demand or notice of any kind, all of which are hereby expressly waived: (i) any sum owing hereunder is not paid as agreed; (ii) the undersigned defaults in the payment of any sum owing under, or in the event of a event of default under, or a breach in any representation, warranty or covenant by the undersigned as set forth in the Accounts Receivable Security Agreement dated June 14, 2001, executed by the undersigned and FCFC or any Rider attached thereto, as the same may be amended, modified or extended from time to time (the "Security Agreements"); (iii) the undersigned defaults in the payment of any sum or breaches any representation, warranty or covenant under any other financing agreement now or hereafter executed between the undersigned and FCFC; or (iv) the holder in good faith believes that there is a material impairment of the prospect of repayment of its obligations or that there is a material impairment of the value or priority of FCFC's security interest. No provision of this Note or any other aspect of the transaction of which this Note is a part is intended to or shall require or permit the holder, directly or indirectly, to take, receive, contract for or reserve, in money, goods or things in action, or in any other way, any interest (including amounts deemed by law to be interest, such amounts to then be deemed to be an addition to the rate of interest agreed upon) in excess of the maximum rate of interest permitted by law in the State of Arizona as of the date hereof. If any such excess shall nevertheless be provided for, or be adjudicated by a federal or state court of competent jurisdiction to be provided for, the undersigned shall not be obligated to pay such excess, but, if paid, then such excess shall be applied against the unpaid principal balance hereunder or, to the extent that the principal balance has been paid in full by reason of such application or otherwise, such excess shall be remitted to the undersigned. June 14, 2001 Phoenix, Arizona MULTIPLE ADVANCE PROMISSORY NOTE, CONTINUED The undersigned hereby agrees: (a) to any and all extensions and renewals hereof, from time to time, without notice, and that no such extension or renewal shall constitute or be deemed a release of any obligation of any of the undersigned to the holder hereof; (b) that the acceptance by the holder hereof of any performance which does not comply strictly with the terms hereof shall not be deemed to be a waiver or bar of any right of said holder, nor a release of any obligation of any of the undersigned to the holder hereof; (c) to offsets of any sums or property owed to them or any of them by the holder hereof any time; (d) to pay the holder hereof upon demand any and all costs, expenses and fees in enforcing payment hereof, including reasonable attorneys' fees, incurred before, after or irrespective of whether suit is commenced, and, in the event suit is brought to enforce payment hereof, such costs, expenses and fees and all other issues in such suit shall be determined by a court sitting without a jury; (e) that this Note shall be governed by the laws of the State of Arizona. The undersigned represents and warrants that the indebtedness represented by this Note is for commercial or business purposes. This Note is and shall be secured by a security interest granted or to be granted by the undersigned to FCFC in certain assets of the undersigned as set forth in the Security Agreements or pursuant to any other financing agreement now or hereafter executed between the undersigned and FCFC. Syntellect Inc., Syntellect Interactive Services, Inc., a Delaware corporation a Georgia corporation By: /S/ Anthony V. Carollo By: /S/ Anthony V. Carollo ---------------------------------------- ------------------------------------- Anthony V. Carollo Anthony V. Carollo Its: Chief Executive Officer and President Its: Chief Executive Officer and President
FIRST COMMUNITY FINANCIAL CORPORATION PROMISSORY NOTE MODIFICATION AGREEMENT Modification #1 Date: October 10, 2001 Borrower Syntellect Inc., a Delaware corporation Syntellect Interactive Services, Inc., a Georgia corporation
Obligation #00011 The undersigned ("BORROWER"), is indebted to First Community Financial Corporation ("LENDER") under that certain Multiple Advance Promissory Note, dated June 14, 2001, in the original principal amount of $3,000,000.00, which has been amended and modified from time to time (the "Note"). Borrower and Lender hereby agree that the Note shall be modified in the following respects: 1. Effective October 1, 2001, the maximum line limit shall be decreased to **TWO MILLION AND NO/100** Dollars ($2,000,000.00). 2. Effective October 1, 2001, interest shall be charged on the unpaid principal balance hereof, to the date of maturity on a daily basis for the actual number of days any portion of said principal is outstanding, at the rate of 14.00% per annum; provided, however, that this rate is based upon a prime rate of 5.50%, the prime rate announced by Bank One, Phoenix, Arizona (whether or not it is the lowest rate actually charged by such bank). In the event such prime rate is from time to time hereafter changed, the above rate of interest shall correspondingly be adjusted as of the effective date of the prime rate change; provided, however, that the interest rate payable hereunder shall in no event be less than 15.00% per annum. All other terms and conditions remain unchanged. FIRST COMMUNITY FINANCIAL CORPORATION PROMISSORY NOTE MODIFICATION AGREEMENT (CONTINUED) Except as amended hereby, the Note (as the same may have been amended from time to time) shall continue in full force and effect and is hereby ratified and confirmed. DATED this 10th day of October, 2001. BORROWER: Syntellect Inc., Syntellect Inc., a Delaware corporation a Delaware corporation By: /S/ Anthony V. Carollo By: /S/ Timothy P. Vatuone -------------------------------------------- -------------------------------------- Anthony V. Carollo Timothy P. Vatuone Title: Chief Executive Officer and President Title: Secretary and Chief Financial Officer Syntellect Inc., Syntellect Interactive Services, Inc., a Delaware corporation a Georgia corporation By: /S/ Charles F. Sonneborn By: /S/ Anthony V. Carollo -------------------------------------------- ------------------------------------ Charles F. Sonneborn Anthony V. Carollo Title: Vice President and Controller Title: Chief Executive Officer and President
FCFC: First Community Financial Corporation, an Arizona corporation By: /S/ James C. Adamany -------------------------------------------- James C. Adamany Title: President FIRST COMMUNITY FINANCIAL CORPORATION PROMISSORY NOTE MODIFICATION AGREEMENT Modification #2 Date: January 18, 2002 Borrower: Syntellect Inc., a Delaware corporation Syntellect Interactive Services, Inc., a Georgia corporation Obligation #00011 The undersigned ("BORROWER"), is indebted to First Community Financial Corporation ("LENDER") under that certain Multiple Advance Promissory Note, dated June 14, 2001, in the original principal amount of $3,000,000.00, which has been amended and modified from time to time (the "Note"). Borrower and Lender hereby agree that the Note shall be modified in the following respects: 1. Effective January 21, 2002, the maximum line limit shall be increased to **TWO MILLION FIVE HUNDRED THOUSAND AND NO/100** Dollars ($2,500,000.00). All other terms and conditions remain unchanged. Except as amended hereby, the Note (as the same may have been amended from time to time) shall continue in full force and effect and is hereby ratified and confirmed. DATED this 18th day of January, 2002. BORROWER: Syntellect Inc., Syntellect Inc., a Delaware corporation a Delaware corporation By: /S/ Anthony V. Carollo By: /S/ Timothy P. Vatuone ---------------------------------------- ------------------------------------- Anthony V. Carollo Timothy P. Vatuone Title: Chief Executive Officer and President Title: Secretary and Chief Financial Officer
FIRST COMMUNITY FINANCIAL CORPORATION PROMISSORY NOTE MODIFICATION AGREEMENT (CONTINUED) Syntellect Inc., Syntellect Interactive Services, Inc., a Delaware corporation a Georgia corporation By: /S/ Charles F. Sonneborn By: /S/ Anthony V. Carollo ---------------------------------------- -------------------------------------- Charles F. Sonneborn Anthony V. Carollo Title: Vice President and Controller Title: Chief Executive Officer and President
LENDER: First Community Financial Corporation, an Arizona corporation By: /S/ James C. Adamany ---------------------------------------- James C. Adamany Title: President END OF EXHIBIT (10)(IX) EX-21 6 p66190ex21.txt EX-21 EXHIBIT (21) - -------------------------------------------------------------------------------- SYNTELLECT INC. SUBSIDIARIES OF REGISTRANT Syntellect Canada Inc., an Ontario corporation Syntellect Europe Limited, a corporation formed under the laws of the United Kingdom Syntellect Deutschland GmbH Syntellect Interactive Services, Inc. EX-23 7 p66190ex23.txt EX-23 EXHIBIT (23) - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' CONSENT The Board of Directors Syntellect Inc.: We consent to incorporation by reference in the registration statements (Nos. 333-58029, 333-58027, 333-44587, 333-2368, 333-2302, 33-96472, 33-96464, 33-63642, 33-48638, 33-35976, 33-48637, 33-35973; 33-42704, 33-35974 and 333-48870) filed on Form S-8 of Syntellect Inc. of our report dated February 5, 2002, relating to the consolidated balance sheets of Syntellect Inc. and subsidiaries as of December 31, 2000 and 2001, 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, 2001, which report appears in the December 31, 2001 annual report on Form 10-K of Syntellect Inc. Our report dated February 5, 2002 contains an explanatory paragraph that states that the Company has suffered losses from operations, a working capital deficit, and an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. /s/ KPMG LLP Phoenix, Arizona March 21, 2002 -----END PRIVACY-ENHANCED MESSAGE-----