-----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, Wr+le2n0jY0oSs7qEdCFGu7gBweEWOpQqtT2m9DfHkL7Zvm2mZITjX0PBwnvfD5O nU9v17k4HY9cOqjwiOgaNQ== 0000950153-97-000323.txt : 19970401 0000950153-97-000323.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950153-97-000323 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD 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: 97570121 BUSINESS ADDRESS: STREET 1: 1000 HOLCOMB WOODS PARKWAY STREET 2: SUITE 410A CITY: ROSWELL STATE: GA ZIP: 30076 BUSINESS PHONE: 6027892800 MAIL ADDRESS: STREET 1: 1000 HOLCOMB WOODS PARKWAY STREET 2: SUITE 410A CITY: ROSWELL STATE: GA ZIP: 30076 10-K 1 FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1996 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to ___________________ Commission File No. 0-18323 SYNTELLECT INC.(R) (Exact name of Registrant as specified in its charter) DELAWARE 86-0486871 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1000 Holcomb Woods Parkway, Suite 410A, Roswell, Georgia 30076 (Address of principal executive office) (Zip Code) (770) 587-0700 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: Title or Class Name of exchange on which registered Common Stock, $.01 par value NASDAQ National Market System Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At March 21, 1997, the aggregate market value of common stock held by non-affiliates of the Registrant was $38,024,035. APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] Not applicable (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. 13,310,443 shares of Common Stock outstanding on March 21, 1997. DOCUMENTS INCORPORATED BY REFERENCE Materials from the Registrant's Proxy Statement relating to its 1997 Annual Meeting of Shareholders (the "Proxy Statement") have been incorporated by reference into Part III, Items 10, 11, 12 and 13. 2 TABLE OF CONTENTS PAGE PART I ITEM 1. BUSINESS 3 ITEM 2. PROPERTIES 12 ITEM 3. LEGAL PROCEEDINGS 12 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 13 ITEM 6. SELECTED FINANCIAL DATA 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 44 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 44 ITEM 11. EXECUTIVE COMPENSATION 44 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 44 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 44 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 45 SIGNATURES 49 2 3 PART I ITEM 1 - BUSINESS GENERAL Syntellect Inc. ( together with its subsidiaries, collectively referred to as "Syntellect" or the "Company") develops, markets and integrates voice and call processing systems and application software solutions worldwide. The Company offers a diversified product line which includes both inbound voice processing and outbound predictive dialer products, a worldwide distribution network, and a vertical market focus on the financial services, media, telecommunications and healthcare industries. Syntellect also provides an interactive transaction-based service bureau for those customers who prefer to outsource their voice processing applications, including cable and satellite pay-per-view orders and employee benefits enrollment. The Company has installed over 13,000 systems at more than 3,000 companies in 55 countries. Syntellect currently employs more than 400 people, and in addition to its primary office facilities in Atlanta and Phoenix, maintains nine sales offices in the United States and one each in London and Munich. This report on Form 10-K may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include without limitation, certain statements contained in Part I, Item 1 - "Business" under the captions "Historical Development of the Company", "Industry and Market Background", "Products and Services", "Sales, Marketing, Service & Support", "Product Development", "Manufacturing and Suppliers", "Backlog", and "Proprietary Rights and Intellectual Property"; Part I, Item 3 - "Legal Proceedings"; Part II, Item 5, "Market for the Registrant's Common Equity and Related Stockholder Matters"; and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Also see "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of important factors that could affect the validity of any such forward-looking statements. HISTORICAL DEVELOPMENT OF THE COMPANY Founded in 1984, Syntellect was an early pioneer in the interactive voice response ("IVR") industry, and by 1995 had become the fourth largest provider of IVR solutions in North America, and the largest IVR provider in Europe. Virtually all of the Company's growth during this period was attributable to its proprietary IVR systems (Infobot and Premier). In the early 1990's, the IVR industry experienced a major shift in product demand as the market began to move from proprietary hardware and software applications to advanced, open architecture products that offered increased functionality and a wider range of options for self service - everything from telephones using speech recognition, personal computers and the Internet, to faxes, pagers and mobile phones. In 1993, Syntellect introduced its first open architecture product, the VocalPoint IVR, and announced the phase out of it proprietary lines. During 1995, Syntellect initiated a search within the voice processing industry for a strategic partner relationship that could potentially provide complementary product offerings, wider distribution channels and operating synergies. This search culminated on March 14, 1996 with Syntellect's acquisition of Pinnacle Investment Associates Inc. ("Pinnacle") in a transaction that was accounted for as a pooling of interests. Pinnacle subsequently was merged into its wholly owned subsidiary, Telecorp Systems, Inc. ("Telecorp"). Telecorp develops and distributes inbound and outbound call center systems worldwide, primarily in the cable television, newspaper and healthcare industries, and operates a transaction-based service bureau designed primarily to process pay-per-view orders for the cable television industry. The merger provided the combined company with several distinct marketing advantages including: (i) a more diversified product line which includes both inbound voice processing technology and outbound predictive dialer products; (ii) a larger sales force and distribution network together with improved access and cross-selling opportunities in new vertical markets; and (iii) the combination of recurring revenue from Syntellect's transaction-based service bureau and Telecorp's Home Ticket(TM) pay-per-view service, with the automated processing capacity 3 4 of what the Company believes is one of the world's largest outsourced transaction centers. In addition, the merger provided the combined company with greater financial resources and access to a new management team with substantial expertise in the voice processing industry. Pinnacle's Chairman and Chief Executive Officer, J. Lawrence Bradner, and President, Steve G. Nussrallah, were appointed to the positions of Chairman and Chief Executive Officer and President, Chief Operating Officer and a director, respectively, of Syntellect upon consummation of the merger. David C. Phillips, Pinnacle's Executive Vice President - Finance and Operations, assumed the position of Syntellect's Corporate Vice President - Operations. Jack R. Kelly, Jr., a prior Pinnacle director, was elected to serve as a director of Syntellect in accordance with the terms of the merger. W. Scott Coleman, Syntellect's Vice President of Product Development was promoted to Senior Vice President and General Manager - Call Center Systems. Neal L. Miller, Syntellect's Corporate Vice President, Chief Financial Officer, Secretary and Treasurer, and Lindsay L. Hoopes, Syntellect's Vice President - Controller and Assistant Secretary, remained in their positions following the merger. INDUSTRY AND MARKET BACKGROUND EVOLUTION OF THE CALL CENTER. Traditionally, consumers obtained data or services from organizations such as banks or insurance companies, by phoning a customer service representative or agent who then used a terminal linked to a computer to process the data or service request. While these "call centers" enabled a company to provide a personal touch with its customers, they also created clearly defined inefficiencies and disadvantages as the underlying business experienced growth including: (i) the high cost of maintaining a large pool of agents to answer calls and provide service, (ii) the practical limits on the amount of information and level of service that could be given to individual callers, and (iii) the increased potential for service delays and agent error as call volume increases or substantially varies with the time of day. As a result, organizations have increasingly turned to various methods of automation to process these calls, and in so doing, have redefined the role of their call centers and expanded the definition of a "call" from a person-to-person voice transaction to a range of transactions involving voice, data and workflow automation. Call centers have become "customer interaction centers," linking multiple sites and geographically-dispersed resources through wide area networks, corporate intranets, extranets, and the Internet. In recent years, automated teller machines and well-implemented IVR applications have proven that customers want the convenience of "anytime, anywhere, anyway" customer service. The personal touch of agent-supported services is certainly a requirement, but equally important is a company's ability to provide its customers with automated self-service 24 hours a day, 7 days a week, over the telephone, the Internet, or any other media they may choose. Automated self-service has become a major business requirement as companies realize that this type of fast, friendly and cost efficient service offers distinct competitive advantages. Automated self-service eliminates hold times, provides increased accuracy in transaction processing, and allows for expanded service offerings. Automated self-service applications can effectively handle up to 60 percent of most interactive customer transactions. Many issues still require the assistance of a customer service agent; however, technology has helped to automate the agent's interaction with the customer through the use of solutions such as computer telephony integration ("CTI") which integrates the transmission of voice and data in a single telephone call. For example, an inbound solution may involve a "screen pop" of customer information at the agent's workstation, and an outbound solution may involve the transfer of customer information to an agent's terminal in connection with an outbound calling campaign for telemarketing or collections. Industry sources estimate that more than 70 percent of all business-related transactions are conducted over the telephone network or via the Internet. The use of IVR systems has allowed businesses to broaden the type of transactions that can be conducted in this manner. These transactions now include order entry, package tracking, home banking, customer service, hospital patient information requests, student registration, catalog sales, benefits enrollment, dealer locator services, airline schedule information, pay-per-view ordering and fax-on-demand. As the market continues to evolve, the increased emphasis on cross-industry applications will require the IVR industry to develop solutions that will allow data to be accessible from an even wider range of database systems. This requires multi-vendor networking and application integration capabilities based on open architecture platforms. Standardization and interoperability are expected to facilitate the evolution of the IVR industry's next generation of products. MARKET POTENTIAL AND INDUSTRY RANK. DataQuest, a global market research and consulting firm serving the high-technology and financial communities, estimates in a recent forecast that the North American CTI market will grow at a compounded annual rate of 25 percent from 1996 to the year 2000, with revenue approaching $6.1 4 5 billion by the year 2000. The CTI market is divided into three distinct segments: formal call centers, typically large workgroups using an automatic call distributor ("ACD"); informal call centers, smaller workgroups not using an ACD; and small office/home office products targeted at small businesses and individual knowledge workers from the office. The Company competes primarily in the formal call center market with its VocalPoint IVR and predictive dialer products. DataQuest also reports that there is no dominant industry leader in the domestic voice processing market, as 50% of the market is shared by companies which individually control less than a 1% market share. In June 1996, DataQuest ranked Syntellect sixth in the domestic IVR market in terms of IVR systems shipped and first in the European market. In addition, DataQuest estimates that the predictive dialer market is currently growing at an annual rate of nearly 50 percent. COMPETITION. The voice processing industry is highly competitive and the Company believes that competition will continue to intensify in the future. The industry is characterized by rapid technological advances, frequent introductions of new products, options and features, constant improvement in the performance of IVR products, and downward pressure on prices. Failure to keep pace with technological advances could adversely affect the Company's competitive position and results of operations. Syntellect believes that the principal competitive factors affecting the voice processing industry are price, functionality, service and reputation in the industry. Although management believes that the Company competes favorably with respect to these factors, there can be no assurance that Syntellect can maintain its competitive position against current and potential competitors. Syntellect's principal domestic competitors for IVR products include Lucent Technologies (AT&T), InterVoice Inc., Periphonics Corporation, Edify, Brite Voice Systems Inc., and IBM Corporation. The Company's principal domestic competitors for predictive dialer products are Davox Corporation, EIS International, Inc., Melita International Corporation and Mosaix, Inc. (formerly Digital). Internationally, Syntellect's primary competitors include InterVoice Inc., Telsis, Periphonics and IBM Corporation. Many of the Company's competitors have more extensive engineering, manufacturing, and marketing capabilities, in addition to their substantially greater financial, technological and personnel resources. The Company also expects new competitors to enter its markets. PRODUCTS AND SERVICES PRODUCT FOCUS. Syntellect has undergone a significant transition in its product focus over the past several years in order to meet the changing requirements of its markets. Historically, the Company was a technology-driven organization focused on developing proprietary IVR systems. These products were designed primarily for the formal call system market and required customers to develop their own application software. With the introduction of the VocalPoint IVR in 1993, the Company moved to an open architecture platform that allowed for improved functionality and which integrated industry-standard hardware with application software developed by the Company. Syntellect expanded its product focus with the March 1996 acquisition of Pinnacle. With this acquisition, the Company added an outbound call transaction platform (VocalPoint Predictive Dialer) and the automated processing capacity of what the Company believes is one of the world's largest transaction service bureaus. Syntellect is currently the only company in its industry to offer both inbound and outbound voice processing platforms, and a transaction-based service bureau for those customers who prefer to outsource their voice processing applications. NEW PRODUCT INTRODUCTIONS. The Company believes it introduced more new products in 1996 than in any prior year. The new products are designed to add functionality to existing products, expand the scope of the Company's product offerings, and provide a framework for integrating the core product lines of Syntellect and Pinnacle. The new product introductions include the following: VocalPoint Interactive Services Transaction Architecture(TM) ("VISTA") is a client-server architecture which combines the inbound and outbound VocalPoint product lines with advanced Virtual Access technology to form a seamless system for processing customer transactions. VISTA utilizes VocalPoint IVR systems for telephony and data terminal interfaces and VISTA software servers to offload VocalPoint IVR processing tasks. VISTA is designed to handle high-volume, mission critical applications of large regional or national call centers and transaction centers. Virtual Access Technology allows callers to access an automated self-service application using their choice of communication devices. Telephones, personal computers, personal data assistants, fax machines, pagers and screen phones can all be used to communicate with Virtual Access applications. 5 6 Interactive Communications Management ("ICM") solutions automate the callflow process in customer service departments by eliminating the need for agents to ask customers redundant questions, by reducing call duration and by increasing the ability of agents to solve customer problems. The heart of the ICM solution is the VocalPoint Interaction Server. This Microsoft NT-based server tracks, routes and manages customer calls and Web transactions using rules-based software. VocalPoint Desktop Software then uses CTI to link the agent's terminal with the VocalPoint Interaction Server to provide customer data with each phone call transferred to the agent's desk. This functionality is commonly referred to as a "ScreenPop." The SYNthesizer Graphical Application Generator is an easy-to-use application development tool designed for non-programmers. SYNthesizer allows users to develop applications by creating visual diagrams with "drag-and-drop" icons. This powerful tool provides ICM users with a simple approach to creating and modifying call center applications. ICM also makes use of a VocalPoint Fax Server to receive fax requests from inbound or outbound agents and IVR and Interactive Web Response ("IWR") applications. VocalPoint IWR allows companies to take advantage of the Internet with self service solutions designed exclusively for the World Wide Web. The VocalPoint IWR can be voice-enabled for Virtual Access applications accessible by both Web browsers and phones. The WebCallback(TM) feature allows customers accessing a Web application to initiate a phone call with an agent, whose terminal automatically displays a "WebPop" of the same Web page the customer is viewing. The BankWorks IWR Application is an industry-specific application that allows banks to offer Internet banking services to their customers. INBOUND PRODUCT LINES. The Company's primary inbound product lines are the VocalPoint IVR, an open architecture IVR platform; the VocalPoint 6000 ARU, an audio response product for the cable television industry; and the Premier and Premier 030 proprietary IVR systems. VocalPoint IVR is the Company's flagship product which is designed to meet customer needs for a fully automated system and combines voice processing, information retrieval, caller interaction and application generation capabilities. This open architecture platform addresses the mid-to-high end IVR market, which ranges from 12 to several hundred ports. The VocalPoint IVR system is built on third-party PC hardware, including Dialogic Corporation's ("Dialogic") industry-standard voice processing cards, and features key software technology licensed from IBM's CallPath voice processing architecture. By utilizing off-the-shelf components which leverage the research and development of the third parties, Syntellect is able to not only price competitively, but focus its engineering resources on value-added development. Syntellect markets an array of features for the VocalPoint IVR including Speech Recognition which allows callers to use spoken words to answer program prompts; Text-to-Speech which enables customers to "read" database information to callers without the need to pre-record voice messages; Voice Forms which allows callers to verbally "fill-in-the-blanks" of a form; Audio Text which gives callers access to a range of pre-recorded information such as locations and hours of service; Voice Messaging which allows callers to leave voice messages for subsequent retrieval by agents; FaxPoint which allows customers to maintain a library of information that can be faxed to callers at any time; and VocalPage which delivers information to users via their alphanumeric pagers or personal digital assistants. The Company has also developed a family of industry-specific and cross-industry application packages that run on the VocalPoint IVR platform. Called ApplicationWorks, these ready-to-use, comprehensive applications allow organizations to adopt voice processing capabilities without incurring the expense associated with customized programming. The Company has developed ApplicationWorks packages for the banking, mortgage, newspaper and cable television industries, as well as applications for colleges and universities. Syntellect shipped VocalPoint IVR solutions to 58 new customers during 1996. In total, the Company shipped 6,000 lines of VocalPoint IVR product during 1996, compared to 4,500 lines in 1995 and 3,400 lines in 1994. VocalPoint IVR sales represented 51%, 32% and 28% of the Company's total system sales for fiscal 1996, 1995 and 1994, respectively, and 30%, 20% and 20%, respectively, of total revenues during those years. In addition, Syntellect has sold approximately $3.6 million of ApplicationWorks solutions since their introduction in 1993. VocalPoint 6000 ARU is an audio response unit specifically designed for the cable television industry. The VocalPoint 6000 ARU provides high performance call processing, supporting from four to 60 ports in a single 6 7 chassis. The system can interface directly with the public telephone network or be installed behind a central office switch, a private branch exchange ("PBX") telephone system, or ACD at the customer site. The VocalPoint 6000 ARU comes with a complete range of options for cable and satellite television companies including pay-per-view order processing which presents callers with a list of available broadcast offerings and processes an order immediately based on the number dialed; service changes and upgrades which enable subscribers to add or upgrade to new or premium channel services automatically; account balance inquiries which gives callers their current account balance and the date the last payment was posted without operator intervention; converter reauthorization which gives subscribers and technicians the ability to reauthorize a converter without waiting for a live operator; and automated attendant which handles incoming administrative calls in the same manner as a front-desk receptionist. Syntellect shipped VocalPoint 6000 ARU solutions to 16 new customers during 1996. VocalPoint 6000 ARU sales represented 17%, 8%, and 5% of the Company's total system sales for 1996, 1995 and 1994, respectively, and 10%, 5% and 4%, respectively, of total revenues during those years. Premier 030 is a proprietary IVR system designed to work in conjunction with sophisticated ACD or PBX telephone systems, as well as a variety of host computers. The Premier 030 addresses the need for a powerful IVR system and is sold as a complete voice processing platform or as an upgrade to certain of the Company's earlier generations of IVR systems. The voice processing market continues to move away from proprietary IVR systems. However, many organizations have been reluctant to make a change due to their prior investment in development of customized voice processing applications. Based on market studies, Syntellect anticipates that demand for the Premier 030 product line will decline significantly in 1997. The Company experienced a significant decline in sales of this product line to new customers during 1996 as most Premier 030 sales were add-ons to existing systems in the Company's large install base. As a result, the Company will no longer devote significant development resources to this product line; rather, it will actively market a migration path from the Premier 030 to the VocalPoint IVR while continuing to provide customer support services and software enhancements to its Premier 030 install base. Premier 030 and other proprietary product line sales represented 19%, 41% and 44% of the Company's total system sales for 1996, 1995 and 1994, respectively, and 11%, 25% and 31%, respectively, of total revenues during those years. OUTBOUND PRODUCT LINE. The Company's outbound product line is the VocalPoint Predictive Dialer. The VocalPoint Predictive Dialer is an open architecture system designed for targeted telemarketing, collections and customer service applications. The system incorporates the latest in predictive dialer technology, including call pacing, call screening, call blending, and CTI links between telecommunication equipment and mainframe databases. The VocalPoint Predictive Dialer maximizes the number of live contacts reached, supports on-screen interactive scripts, instantaneously displays contact data when the call goes through, and provides detailed management statistics and reports on agent productivity and calling campaign results. The Company shipped VocalPoint Predictive Dialer solutions to 17 new customers during 1996. VocalPoint Predictive Dialer sales represented 9%, 12% and 6% of the Company's total system sales for 1996, 1995 and 1994, respectively, and 5%, 7% and 4%, respectively, of total revenues during those years. SERVICE BUREAU. The Company operates what it believes is one of the largest outsourced transaction centers in the world through its Syntellect Interactive Services ("SIS") subsidiary. The SIS Transaction Center ("Transaction Center") as it is known, is a service bureau with nearly 5,000 ports, which offers complete automated transaction outsourcing, system redundancy, fault-tolerant power protection and disaster recovery services, 24 hours a day, 7 days a week. The Transaction Center is a call center that unlike most, which are labor intensive, features an automated "lights out" facility. The Transaction Center handles more than four million telephone calls and Internet-based inquiries each month for its customers. The Transaction Center is used for the Company's Home Ticket(TM) pay-per-view service. Home Ticket(TM) combines the speed and convenience of 800 numbers, the user friendly nature of IVR technology and real-time connectivity with cable billing host systems to process orders for over 700 cable and satellite television operators in North America including TCI, Time Warner, Cox Cable and Comcast. Home Ticket(TM) is the pay-per-view service utilized by approximately 10 million households in the United States alone. The Company has added additional features to the Home Ticket(TM) service, including Hot Spots advertising and promotion messaging, commercial ordering for hotels and motels, and Call Redirect which transfers an incoming call to a second destination for enhanced customer service and retailing options. The service bureau is also designed to handle employee benefits enrollments and automated dealer inquiries relating to large, one-time events such as special promotions or customer surveys for companies wishing to automate and outsource these services. These services which generally became available in 1995, are typically billed on a transaction-by-transaction basis. Service bureau revenues represented 17%, 13% and 7% of the Company's total revenues during 1996, 1995 and 1994, respectively. Home Ticket(TM) is the single largest 7 8 component of these revenues representing 90%, 85% and 100%, respectively of total service bureau revenues during those years. SALES, MARKETING, SERVICE & SUPPORT GENERAL. Syntellect provides voice processing solutions to customers in a variety of industries, including banking, education, insurance, service providers, transportation, healthcare, media, telecommunications, public utilities, retailing, government agencies, oil and gas, financial services, manufacturing and newspaper publishing. Syntellect has installed over 13,000 systems at more than 3,000 companies in 55 countries. Syntellect's customer base includes eight of the largest domestic banking firms, five of the ten largest insurance companies, most major domestic cable television providers and numerous other Fortune 500 companies. There can be no assurance that the Company's existing customers will continue their current buying patterns or that changes within those industries will not adversely affect the Company's ability to retain or attract new customers. Syntellect's products are sold through a direct sales force and through domestic and international distributors and value added resellers ("VARs"). The Company currently maintains nine sales offices in the United States and one each in London and Munich. DOMESTIC SALES. Domestic sales including maintenance fees represented 73%, 79% and 76% of the Company's total revenues for 1996, 1995 and 1994, respectively. During these years no single distributor or customer accounted for more than 10% of total revenues. Syntellect's distribution network includes 58 channel distribution partners and VARs located throughout the United States and Canada. More than 90% of the Company's 1996 sales were made by its direct sales force. A substantial portion of these direct sales are made by a limited number of sales representatives, the loss of whom could adversely affect future operating results. INTERNATIONAL SALES. International sales including maintenance fees represented 27%, 21% and 24% of the Company's total revenues for 1996, 1995 and 1994, respectively. For additional information regarding international operations, see Note 19 of Notes to Consolidated Financial Statements. All of the Company's product lines and services are sold internationally with the exception of the service bureau which is currently limited to Canada. The products have been modified to meet specific power, safety and telecommunication requirements of the country of destination. The Company currently offers its products in 30 different languages. Syntellect maintains a direct sales force in London and Munich, and uses 20 distributors to market its systems in various countries around the world. The Company supports its European distributors through the London office. Sales in Canada and the United Kingdom are denominated in Canadian dollars and pounds sterling, respectively, and are subject to foreign currency adjustments. Sales in all other foreign countries are denominated in United States dollars. Syntellect conducts business in international markets in compliance with each country's applicable laws and regulations, including safety and telecommunication laws, import duties and quotas. Syntellect has not experienced any difficulty in obtaining export licenses for foreign sales from the United States Department of Commerce. MARKETING ORGANIZATION AND VERTICAL MARKET FOCUS. Syntellect's marketing organization is charged with (i) enhancing the Company's corporate image; (ii) increasing demand for the Company's voice processing products; (iii) creating market differentiation; and (iv) identifying future development opportunities for market-driven features. The marketing organization conducts market and competitive research, participates in industry trade shows and conferences, creates sales literature and presentations, and maintains relationships with key industry analysts and media contacts. Syntellect's strategic marketing plan is focused on four vertical markets - financial services, media (cable television and newspaper), telecommunications and healthcare industries. Sales to these markets represented approximately 32%, 41%, 9% and 2%, respectively, of the Company's total revenues for 1996; 42%, 30%, 9% and 2%, respectively, for 1995; and 52%, 20%, 12% and 2%, respectively, for 1994. Syntellect markets its products to industry leaders within these vertical markets as management believes the industry leaders have the greatest need for voice processing products, are most likely to require system expansion and additional services, and serve as an important source of customer referrals. CUSTOMER SUPPORT. Syntellect provides customer support in the areas of consulting services, project management, systems planning, application development, installation, scripting and voice file production, database maintenance services for cable television IVR customers, maintenance and software support services, a 24 hour-a-day, 7 day-a-week Help Desk, on-site technical support, remote diagnostics, classroom training and on-site educational services. These services are generally provided as part of the initial sale of a system. Syntellect provides warranties on its various product lines for periods ranging from three months to one year after 8 9 shipment. After the initial warranty period, hardware and software maintenance services are available on both a contractual and on-demand time and material basis. Substantially all of the hardware maintenance and support provided to domestic customers is performed on-site under contractual arrangements with independent third party service providers. Internationally, the Company provides training, service and support services through a combination of its direct customer support function, third party service providers and distributors. PRODUCT DEVELOPMENT Syntellect believes that its success is dependent upon its ability to expand the market for its existing products, provide new options and features on a timely basis, and develop new applications that can be incorporated into commercially viable voice processing products. The Company believes it introduced more new products in 1996 than in any prior year; however, there can be no assurance that these new product lines or features will receive market acceptance. Further, there can be no assurance that future announcements of new products will not cause customers to defer purchases of existing products, which could adversely affect the Company's results of operations. Product development consists of hardware specification, hardware integration, third party software integration, system design and proprietary software design and coding. All product development is performed by employees of, and contractors managed by, the Company's research and development organization. Syntellect performs rigorous testing prior to releasing new products and features. Nevertheless, products as complex as those produced by the Company often contain undetected errors, or "bugs" when first released. These "bugs" are often discovered only after the product has been used by many different customers and in varying applications. There can be no assurance that errors will not be discovered in the future, causing delays in product introductions and shipments or requiring design modifications which could adversely affect the Company's results of operations. Syntellect's product development organization consisted of 73 and 78 individuals at December 31, 1996 and 1995, respectively. In addition, the Company used a significant number of contracted developers during 1996 to assist in the Company's development efforts. The Company spent $5.9 million, $4.9 million, and $ 4.9 million for research and development during 1996, 1995 and 1994, respectively. MANUFACTURING AND SUPPLIERS Syntellect's manufacturing operation consists of in-house configuration, product assembly, product testing and quality control. The Company obtains hardware components from third parties for its VocalPoint family of products, including telephony interface and voice recognition boards which its purchases from Dialogic pursuant to a volume purchase agreement. The agreement with Dialogic expired December 31, 1996 and the Company is currently in the negotiation and renewal process. The Company expects to sign a new agreement with Dialogic. However, should it become necessary or desirable to secure telephony interface and voice recognition boards from a supplier other than Dialogic, management believes that such a change could be made with minor disruption of the business due to the availability of alternative vendors. The Company has used Varian Tempe Electronics Center ("Varian") to perform printed circuit board and system assembly and testing related to the Premier 030 product line. Alternative high quality contract manufacturing suppliers exist, and because Syntellect owns the engineering and source documentation, test equipment and test software for the proprietary Premier 030 product line, a shift in product assembly from Varian or sourcing of components from alternative suppliers could be accomplished without serious disruption to the business. The Company does not believe it is dependent on single source suppliers for components used in any of its primary product lines. Syntellect is currently able to obtain key components in a timely manner from a variety of sources; however, any inability to secure alternate suppliers of key components or alternate assembly sources in a timely manner could adversely affect the Company's results of operations. Sprint Corporation provides telecommunication access and services to the Transaction Center under a contractual agreement that expires June 30, 1997. The Company believes that terms and conditions of the contract are a significant contributor to its ability to provide competitive pricing for the Home Ticket(TM) service and other service bureau applications. Failure to renew this contract or any significant change in the underlying terms and conditions could adversely affect the Company's results of operations. 9 10 BACKLOG The Company's backlog at December 31, 1996 and 1995 was approximately $8.3 million and $6.0 million, respectively. The Company believes that all orders in backlog at December 31, 1996 are firm and will be delivered within the next fiscal year. Because the possibility exists for customers to make changes to their original order, to alter or significantly delay delivery schedules or to cancel their order, the backlog total as of any particular date may not be indicative of actual revenues for any future period. PROPRIETARY RIGHTS AND INTELLECTUAL PROPERTY Syntellect owns a portfolio of computer telephony patents covering various aspects of its technologies in the United States and throughout the world, and has patent applications pending in the United States and in several foreign countries. Syntellect is also licensed to use certain patents, technology and other intellectual property rights owned by others, and, similarly, other companies are licensed to use certain patents, technology and intellectual rights owned by Syntellect. Syntellect considers its patent portfolio to be a significant aspect of its technology licensing program. The patent portfolio includes an extensive group of patents acquired in July 1992 in connection with its acquisition of Dytel Inc., a manufacturer of equipment for the voice messaging and call processing industry. Syntellect sold the Dytel product line in February 1995 to a third party purchaser but retained the rights to the Dytel patent portfolio. The Company received licensing and royalty fees of $2.4 million, $1.2 million, and $1.4 million during 1996, 1995 and 1994, respectively, related to the Dytel patent portfolio. All of the above patents, patent applications and active patent license agreements will expire or terminate over time by operation of law, in accordance with their terms or otherwise. The expiration of such patents, patent applications and active patent license agreements is not expected to have a material adverse affect on the Company's financial position or results of operations. Syntellect establishes and protects proprietary rights in its products and technologies through a combination of registered copyrights, trademarks, service marks, trade secret and patent protection. The Company also enters into confidentiality agreements with its employees, distributors and customers, and seeks to limit access to the distribution of its software, documentation and other proprietary information. Syntellect can provide no assurance that the steps it has taken to protect its licensing and proprietary rights will be adequate to deter misappropriation and/or development of its technologies and products by independent third parties or that third parties will not assert that Syntellect's products infringe upon the rights of others. The Company believes that factors such as technological innovation and expertise and market responsiveness can be as important as the legal protections described above. VocalPoint is a registered trademark and Vista (VocalPoint Interactive Services Transaction Architecture), Home Ticket, Interactive Web Response, and WebCallback are trademarks of Syntellect. All other products mentioned in this Form 10-K are trademarks or registered trademarks of their respective companies. Syntellect's strategic move from proprietary hardware platforms to integration of its application software with industry-standard hardware, has resulted in an increased reliance on licensed technology obtained from third parties for use in the Company's products. The Company contracted with IBM in 1993 to obtain IBM's personal computer-based voice processing software technology, including the key components of the CallPath architecture. Pursuant to the terms of the licensing agreement, Syntellect obtained a worldwide nonexclusive license to develop and sell a version, under the Company's name, of IBM's voice processing software that runs on personal computers using IBM's OS/2 operating system. The agreement also provides the Company with the rights to all future IBM basic and major enhancements to the software, including IBM's language packages for foreign markets. IBM is obligated to provide backup maintenance support for the software it provides under the agreement. The agreement expires in June 2002, subject to certain early termination provisions. In accordance with its obligations under the agreement, Syntellect prepaid royalties of $1 million in June 1994 and $3 million in December 1994. As of December 31, 1996, the Company had utilized all of the prepaid royalties and had accrued $791,000 in additional royalty payments due IBM. The technology licensed under the IBM agreement is the foundation of the VocalPoint family of products and related ApplicationWorks packages. The termination or loss of this agreement or IBM's failure to perform its obligations thereunder would adversely affect the Company's results of operations. Upon certain events of default by IBM, Syntellect has the right to purchase the source code currently licensed under the agreement for $4 million. 10 11 EMPLOYEES At December 31, 1996, Syntellect employed 385 on a full-time basis: 49 in sales, 24 in marketing, 117 in customer support, 31 in manufacturing, 73 in product development, 41 in the service bureau operation, and 50 in administration. The Company's success depends on a number of technical employees. Competition for highly skilled people with extensive experience in systems and applications software and advanced electronics is intense. Syntellect's inability to retain these employees could severely impact the Company's ability to conduct its business. The Company has never had a work stoppage and none of its employees are represented by a labor organization. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is information with respect to the names, ages, positions and offices held with Syntellect by the Executive Officers as of March 21, 1997. J. LAWRENCE BRADNER, 45, became Syntellect's Chairman and Chief Executive Officer upon completion of the merger with Pinnacle on March 14, 1996. He had served as Chairman and Chief Executive Officer of Pinnacle and its wholly owned subsidiary, Telecorp, since their formation in 1991. From 1977 to 1990, Mr. Bradner was employed by Scientific-Atlanta, Inc. ("Scientific-Atlanta"), a leading provider of satellite and other telecommunications products based in Atlanta, Georgia. Mr. Bradner served as President of the Broadband Communications Business Division of Scientific-Atlanta and as Corporate Vice President from 1987 to 1990. Mr. Bradner holds a Bachelors Degree, with honors, in Industrial and Systems Engineering from the Georgia Institute of Technology and a Master of Business Administration Degree from Harvard Business School. STEVE G. NUSSRALLAH, 46, became Syntellect's President and Chief Operating Officer upon completion of the merger with Pinnacle on March 14, 1996. He had served as President of Pinnacle and Telecorp since their formation in 1991. From 1984 to 1990, Mr. Nussrallah was employed by Scientific-Atlanta. From 1988 to 1990, Mr. Nussrallah served as Vice President and General Manger of the Subscriber Business Unit, Scientific-Atlanta's largest single business. Mr. Nussrallah holds a Bachelors Degree, with honors, in Electrical Engineering from the University of Cincinnati and a Masters Degree in Electrical Engineering from the University of Michigan. NEAL L. MILLER, 37, has served as Syntellect's Corporate Vice President, Chief Financial Officer, Secretary and Treasurer since December 1995. Mr. Miller served as Division Finance Director/Controller for the Communications Division of Tandem Computers, Inc. from 1993 to 1995. Prior to that, Mr. Miller served as Vice President and Chief Financial Officer of American Software, Inc. from 1990 to 1993, and in various finance and sales positions with American Software from 1984 to 1990. Mr. Miller is a Certified Public Accountant and holds a Bachelors Degree in Business Administration, with honors, in Accounting from Georgia State University. W. SCOTT COLEMAN, 41, has served as Syntellect's Senior Vice President and General Manager - Call Center Systems since February 1, 1996. Mr. Coleman, together with Director Daniel D. Ross, served in Syntellect's Office of the Chief Executive Officer from November 10, 1995 to March 14, 1996. Prior to that time, Mr. Coleman served as Syntellect's Vice President of Product Development from 1993 to 1995. Mr. Coleman has been involved in the voice processing industry since 1982, serving as Vice President of American Telesystems Corporation, where he was responsible for product strategy, business development and product development activities. Mr. Coleman holds a Master of Science Degree in Electrical Engineering from the Georgia Institute of Technology. DAVID C. PHILLIPS, 43, became Syntellect's Corporate Vice President - Operations upon completion of the merger with Pinnacle on March 14, 1996. He had served as Executive Vice President - Finance and Operations of Telecorp since 1991. From January 1990 to August 1990, Mr. Phillips was employed by CableGraphix, Inc., a producer and distributor of cable-specific marketing and promotional literature for cable subscribers, based in Phoenix, Arizona. From 1979 to 1989, Mr. Phillips was employed in various positions by Scientific-Atlanta. Mr. Phillips, a Certified Public Accountant, received a Bachelors Degree in Business Administration from the University of Georgia and a Masters Degree in Professional Accountancy from Georgia State University. LINDSAY L. HOOPES, 39, has served as Syntellect's Vice President-Controller and Assistant Secretary since December 1995, and as its Corporate Controller from December 1994 to December 1995. Prior to joining Syntellect, Mr. Hoopes served as Vice President and Chief Financial Officer of Advanced Systems Consultants, a franchisee of MicroAge, Inc. from 1993 to 1994. From 1991 to 1992, Mr. Hoopes served as a Regional Controller of ComputerLand Corporation, and from 1987 to 1992 as Corporate Controller of DataPhaz, Inc., a franchisee of 11 12 ComputerLand. Prior to that time, Mr. Hoopes worked for six years with the Big Six accounting firms of Arthur Andersen and Touche Ross. Mr. Hoopes is a Certified Public Accountant and holds a Bachelor of Science Degree in Accounting from the University of Arizona. ITEM 2 - PROPERTIES Syntellect's principal corporate offices are located in 49,100 square feet of leased space in Roswell, Georgia. This facility is also used for certain of the Company's sales, customer support, research and development and production functions. The lease extends through 2001 and provides the Company with options for an additional 44,000 square feet as it becomes available. In June 1996, the Company entered into a ten year lease for a new 70,564 square foot office facility in Phoenix, Arizona. The lease is scheduled to commence in March 1997 concurrent with the expiration of an existing facility lease which covered 46,000 square feet. The new facility will provide for expansion and consolidation of the Company's systems business, and includes space for Phoenix-based customer support, research and development, marketing, production, training and administrative functions. Syntellect leases a 1,600 square foot facility in Atlanta, Georgia for its Transaction Center. This facility is used for the Home Ticket(TM) pay-per-view service and other service bureau applications offered through the Company's Syntellect Interactive Services subsidiary. The Company also leases nine sales and support offices in the United States, including a 9,600 square foot facility in Wood Dale, Illinois, and one each in London and Munich, Germany. Aggregate monthly rental payments for Syntellect's office facilities are approximately $115,000. ITEM 3 - LEGAL PROCEEDINGS Syntellect has settled a lawsuit filed by the former owners of Telecorp in the State Court of Fulton County, Georgia in October 1995. The lawsuit alleged that Telecorp breached certain covenants of consulting and noncompetition agreements that had been executed in connection with Pinnacle's acquisition of Telecorp. The Company settled the litigation in November 1996 for an amount within the accrual that had been established for potential legal expenses and costs relating to this litigation. Syntellect was a defendant in a patent infringement suit filed on May 24, 1996 in the United States District Court for the Southern District of Florida, Miami Division, Case No. 96-1411-CIV-LENARD, entitled Elk Industries, Inc. v. Syntellect Inc. The case charges Syntellect with infringement of U.S. Patent No. 4,124,773 covering an "Audio Storage and Distribution System." The Company settled this litigation in March 1997 for an amount within the accrual that had been established for potential legal expenses and costs relating to this litigation. Syntellect is from time to time involved in legal proceedings of a character normally incident to its business, including complaints filed by the Company against third parties for potential infringement of its patent portfolio. The Company is actively pursuing a program to license its patents to third parties in exchange for a one-time licensing fee and/or recurring royalty payments. Syntellect is not currently a party to any material pending legal proceedings other than as described below: Syntellect is a defendant in a discrimination suit filed by a former employee on February 7, 1996 in United States District Court, District of Arizona, Cause No. CIU 96-359 Phx PGR, entitled Rhonda Arnold v. Syntellect Inc. The case charges Syntellect with discrimination in compensation and other conditions of employment. The Company has answered the complaint, denying all liability, and both parties have begun discovery in the matter. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of Syntellect's shareholders during the fourth quarter of 1996. 12 13 PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Syntellect's common stock has been traded in the over-the-counter market and quoted through The Nasdaq Stock Market ("NASDAQ") since March 29, 1990, under the symbol "SYNL". The following table sets forth the high and low sale prices of the common stock for the two most recent fiscal years as reported on NASDAQ.
Year Ended 1996 High Low - -------------------------------------------------------------------------------- 1st Quarter $ 4 7/8 $ 2 7/8 2nd Quarter 7 7/8 4 3rd Quarter 6 3/8 4 3/8 4th Quarter 5 7/8 3 3/4
Year Ended 1995 High Low - -------------------------------------------------------------------------------- 1st Quarter $ 7 1/8 $ 4 1/4 2nd Quarter 6 1/2 4 3/8 3rd Quarter 5 7/8 3 4th Quarter 5 2 3/4
On March 21, 1997, the closing sale price for Syntellect's common stock was $3 5/8 per share. On such date, there were 248 holders of record of Syntellect's common stock. This figure does not reflect beneficial ownership of shares held in nominee names. Syntellect has never declared or paid a cash dividend on its common stock. Syntellect presently intends to retain earnings for use in its business and does not anticipate paying cash dividends on its outstanding shares in the foreseeable future. As is frequently the case with stock of high technology companies, the market price of Syntellect's common stock has been and may continue to be quite volatile. Factors such as quarterly fluctuations in results of operations, announcements of technological innovations or the introduction of new products by Syntellect or its competitors, and macroeconomic conditions in the computer hardware and software industries generally, may have a significant impact on the market price of Syntellect's common stock. In addition, if revenue or earnings in any quarter were to fail to meet expectations of the investment community, there could be an immediate impact on Syntellect's stock price. Further, the stock market has from time to time experienced extreme price and volume fluctuations which have affected the market price for many high technology companies and which, on occasion, have been unrelated to the operating performance of those companies. These broad market fluctuations may adversely affect the market price of Syntellect's common stock. ITEM 6 - SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with Syntellect's consolidated financial statements and related notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. The selected consolidated financial data presented below under the captions "Statement of Operations Data" and "Balance Sheet Data" for, and as of the end of, each of the years in the five-year period ended December 31, 1996, are derived from the consolidated financial statements of Syntellect Inc. and subsidiaries. The consolidated financial statements as of December 31, 1996 and 1995, and for each of the years in the three-year period ended December 31, 1996, and the report thereon, are included elsewhere herein. 13 14 STATEMENT OF OPERATIONS DATA (in thousands, except per share amounts)
Years Ended December 31 ----------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Net revenues $ 55,305 $ 49,510 $57,396 $ 51,759 $ 47,696 Cost of revenues 27,783 26,147 28,065 24,142 20,601 -------- -------- ------- -------- -------- Gross margin 27,522 23,363 29,331 27,617 27,095 Operating expenses: Selling, marketing and administrative 21,383 23,026 19,263 21,506 18,786 Product development 5,943 4,884 4,893 7,132 6,320 Depreciation and amortization 3,229 3,079 3,401 3,560 3,030 Special charge -- 8,800 879 8,801 -- -------- -------- ------- -------- -------- Total operating expenses 30,555 39,789 28,436 40,999 28,136 -------- -------- ------- -------- -------- Operating income (loss) (3,033) (16,426) 895 (13,382) (1,041) Other income, net 253 302 297 179 994 -------- -------- ------- -------- -------- Income (loss) before income taxes (2,780) (16,124) 1,192 (13,203) (47) Income tax expense (benefit) -- 134 75 80 (72) -------- -------- ------- -------- -------- Net income (loss) $ (2,780) $(16,258) $ 1,117 $(13,283) $ 25 ======== ======== ======= ======== ======== Net income (loss) per common share $ (0.21) $ (1.24) $ .08 $ (1.02) $ -- ======== ======== ======= ======== ======== Shares used in per share calculation 13,256 13,159 13,468 13,026 13,083 ======== ======== ======= ======== ========
BALANCE SHEET DATA (in thousands)
December 31, ------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Working capital $13,677 $17,443 $31,989 $30,304 $36,631 Total assets 34,808 39,719 51,395 49,443 58,435 Long-term debt, less current portion 229 175 875 665 920 Shareholders' equity 22,021 24,176 39,538 38,344 47,028
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PERCENTAGES, SHARE AND PER SHARE AMOUNTS) ACQUISITION OF PINNACLE INVESTMENT ASSOCIATES INC. On March 14, 1996, Syntellect completed its acquisition of Pinnacle Investment Associates Inc. ("Pinnacle") in a transaction accounted for as a pooling of interests. Pursuant to the terms of the merger, Syntellect issued 4,685,838 shares of common stock and assumed outstanding options belonging to Pinnacle stockholders for the purchase of an additional 740,848 shares of common stock at a weighted average exercise price of $1.04 per share. The common stock issued in this transaction had a total value of $20.5 million based on the fair market value of the common stock on the date of issuance. Pinnacle subsequently merged into its wholly owned subsidiary, Telecorp Systems, Inc. ("Telecorp"). Telecorp develops and distributes inbound and outbound call center systems worldwide, primarily in the cable television, newspaper and health care industries, and operates a transaction-based service bureau designed primarily to process pay-per-view orders for the cable television industry. The financial position and results of operations of Syntellect and Pinnacle for all periods presented have been restated to give effect to the merger. The merger provided the combined company with several distinct marketing advantages including: (i) a more diversified product line which includes both inbound voice processing technology and outbound predictive dialer products; (ii) a larger sales force and distribution network together with improved access into new vertical markets; (iii) the formation of the Syntellect Interactive Services, Inc. subsidiary ("SIS") which combined Syntellect's transaction-based service bureau with the processing capacity of Telecorp's National Transaction 14 15 Center (subsequently renamed the SIS Transaction Center). In addition, the merger provides the combined company with greater financial resources and access to a new management team with substantial expertise in the voice processing industry. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 NET REVENUES Net revenues for 1996 were $55.3 million, an increase of 12% over the $49.5 million reported for 1995. Net revenues consist of SYSTEM SALES, SERVICE BUREAU REVENUES and MAINTENANCE AND OTHER SERVICE REVENUES, which represented 57%, 17% and 26% of net revenues, respectively, for 1996 and 61%, 13% and 26% of net revenues, respectively, for 1995. SYSTEM SALES for 1996 were $31.8 million, an increase of $1.7 million, or 6%, over the $30.1 million reported for 1995. System sales include the Company's primary inbound product lines, VocalPoint, an open architecture Interactive Voice Response ("IVR") platform ($16.1 million); the Premier and Premier 030 proprietary IVR systems ($6.0 million); the VocalPoint System 6000 Audio Response Unit for the cable television industry ($6.0 million); and an outbound product, the VocalPoint Predictive Dialer ($2.8 million). VocalPoint IVR sales increased $6.4 million, or 66% between years. Domestic and international sales of VocalPoint increased $2.4 million, or 36%, and $4.0 million, or 129%, respectively, between the comparable periods. The increase in international VocalPoint sales resulted primarily from sales to large telecommunications and cable television customers in the United Kingdom. The Company experienced a significant shift in its product mix during 1996 as more than 60% of all system sales orders received were for VocalPoint IVR. The VocalPoint IVR is a complex solution that requires longer lead times for delivery than the Company's earlier product offerings. This large shift in product sales mix, together with the timing and receipt of several large VocalPoint orders during the final two quarters of 1996, exceeded the Company's capacity to deliver solutions and recognize revenue. The systems backlog at the end of 1996 was approximately $8.3 million, one of the largest in Company history, and included more than $6.3 million in VocalPoint IVR orders. During 1996, the Company also delivered its first ICM solution which uses advanced CTI technology. The Company recorded sales of $700 related to this new product line during 1996. Sales of the Premier and Premier 030 product lines decreased $1.9 million, or 58%, and $4.4 million, or 49%, respectively, between the comparable years. Sales of the older Premier lines continue to decrease as these product lines are in their final phase-out stage. Premier 030 sales decreased $2.2 million in the Company's domestic install base, and by $2.2 million in its international markets, primarily in the Far East and Latin America. The Company introduced and actively marketed VocalPoint IVR solutions in these regions during 1996, and reorganized the management of its international sales operation to facilitate the transition of its product sales mix in these geographical areas. The results of these efforts have fallen short of the Company's expectations, as new VocalPoint IVR sales have not fully replaced the decline in Premier 030 sales. VocalPoint System 6000 sales increased $3.0 million, or 125%, between the comparable years. This increase results from a large call center installation for a cable television customer in the United Kingdom. Sales of the VocalPoint Predictive Dialer decreased $800, or 22%, between the comparable years. Domestic orders for the VocalPoint Predictive Dialer declined during 1996 as customers delayed their purchasing decisions pending release of the product's version 3.0 upgrade, which did not occur until the fourth quarter of 1996. This decrease was off-set in part by an $800 installation of a VocalPoint Predictive Dialer for a cable television customer in the United Kingdom. Sales of the VocalPoint Predictive Dialer were significantly below the Company's plan for 1996. Management is investigating alternatives for increasing its returns in the predictive dialer market. Systems sales were further impacted between the comparable years by a $1.3 million decrease in sales of the Dytel product line and the System/2000 digital voice system manufactured by the Company's former Syntellect Network Systems Inc. ("SNS") subsidiary. The Company sold the Dytel product line to a third party purchaser in February 1995. The SNS subsidiary was sold to an unrelated value added reseller in April 1996. SERVICE BUREAU REVENUES increased $2.8 million, or 43%, between the comparable years. This increase reflects the continued growth of the Company's Home Ticket(TM), a pay-per-view service for cable television 15 16 providers which is offered through the Company's SIS subsidiary. Revenues from other service bureau applications were flat between the comparable periods as a result of infrastructure changes and relocation of the Company's Chicago facility to Atlanta. MAINTENANCE AND OTHER SERVICE REVENUES increased $1.3 million, or 10%, between the comparable years. This increase results from a $1.2 million increase in patent revenue and a $100 increase in maintenance and other services between periods. DOMESTIC AND INTERNATIONAL SALES for 1996 were $40.3 million, or 73%, and $15.0 million, or 27%, of total revenues, respectively, compared to $39.0 million, or 79%, and $10.5 million, or 21% of total revenues, for 1995. The international sales figures for 1996 include a $3.0 million VocalPoint System 6000 call center installation and a $800 VocalPoint Predictive Dialer installation for a cable television customer in the United Kingdom. GROSS MARGIN The gross margin percentage for the year ended December 31, 1996 was 50% of net revenues, as compared with 47% for the year ended December 31, 1995. Gross margins on SYSTEM SALES improved from 36% to 41% between years as a result of changes in the Company's sales discounting policies, a reduction in direct material costs and software licensing fees, and a shift in product mix to higher margin offerings. System margins also improved with the higher mix of revenue from direct sales versus distributor channels. Gross margins for the SERVICE BUREAU decreased from 45% to 40% between years with the Company's decision to increase spending on infrastructure that will facilitate continued growth of the Home Ticket(TM) pay-per-view service and other service bureau applications. Gross margins for MAINTENANCE AND OTHER SERVICE REVENUES increased from 74% to 75% between years. The Company includes those costs directly associated with the generation of revenue in its computation of gross margin, including direct labor, application development, travel, maintenance, customer support, supplies and hardware. Gross margins will fluctuate on a year-to-year basis due to changes in competitive pressures, sales volume, product mix, variations in the ratio of domestic versus international sales, or changes in the mix of direct and indirect sales activity. Accordingly, the gross margins reported for 1996 are not necessarily indicative of the results to be expected for future periods. OPERATING EXPENSES Operating expenses for 1996 were $30.6 million, a decrease of $400, or 1%, from the $31 million reported for 1995, exclusive of an $8.8 million special charge discussed below. Selling, marketing and administrative expenses decreased $1.6 million, or 7%, between years. This decrease resulted primarily from economies of scale related to the integration of the Company's sales function, and a reduction in administrative salaries and benefit costs. The 1995 totals also include $700 in direct transaction costs incurred in connection with the acquisition of Pinnacle. Research and development expenses increased $1.1 million, or 22%, between years. The Company allocated additional resources during 1996 for the development of market-driven features such as CTI, an Interactive Web Response platform, and upgrades for the Company's existing product lines, including version 3.0 of the VocalPoint Predictive Dialer. Depreciation and amortization expense increased $150, or 5%, between years primarily due to the Company's purchase of $2.5 million in computer and voice processing equipment and $2.3 million in other equipment that will be used to expand the capacity of the Service Bureau. SPECIAL CHARGE Syntellect incurred an $8.8 million special charge to operations during 1995. The special charge is described in detail in the comparison of 1995 operating results to 1994. The special charge includes an allowance for inventory obsolescence ($5.0 million), a write-down of software and equipment to be relocated or disposed of ($1.7 million), employee severance for a reduction in force ($1.2 million), an accounts receivable allowance ($700), and other charges ($200). The allowances for accounts receivable and inventory obsolescence were utilized during 1996 to write-off specifically identified receivable balances and inventory disposed of during the year. The reserve for inventory obsolescence at December 31, 1996 represents management's estimate of the valuation allowance necessary for inventory not yet disposed of. The software and equipment charge was utilized during 1996 to write-down the value of specific assets that were relocated, lost or disposed of. The Company made $741 in severance payments to 16 17 terminated employees during 1996 in connection with its reduction in force. As of December 31, 1996, there remained outstanding payments due on severance transactions relating to 1995 and 1996. NET INCOME (LOSS) Syntellect reported a net loss of $2.8 million, or $(0.21) per share for 1996, compared to a net loss of $16.3 million, or $(1.24) per share for 1995. Excluding the effects of the special charge, the Company incurred a net loss for 1995 of $7.5 million, or $(.57) per share. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 NET REVENUES Net revenues for 1995 were $49.5 million, a decrease of $7.9 million, or 14%, from the $57.4 million reported for 1994. Net revenues consist of SYSTEM SALES, SERVICE BUREAU REVENUES and MAINTENANCE AND OTHER SERVICE REVENUES, which represented 61%, 13% and 26% of net revenues, respectively for 1995 and 71%, 7%, and 22%, respectively, for 1994. SYSTEMS SALES for 1995 were $30.1 million, a decrease of $10.8 million, or 26%, from the $40.9 million reported for 1994. System Sales included the VocalPoint IVR ($9.7 million); the Premier and Premier 030 ($12.3 million); the VocalPoint System 6000 Audio Response Unit ($3.0 million); and the VocalPoint Predictive Dialer ($3.6 million). VocalPoint IVR sales decreased $1.6 million, or 14%, between years. Domestic and international sales of VocalPoint IVR decreased $1.1 million, or 13%, and $500, or 16%, respectively, between the comparable periods. Domestic sales of VocalPoint IVR were negatively impacted by insufficient distribution channels, slower than expected productivity from new direct sales representatives and channel partners, increased competition, and the timing of awards of certain major contracts near yearend which delayed the delivery of product and recognition of revenue. The Company also believes that domestic sales were negatively impacted during the second half of 1995 by market uncertainty surrounding the announcement of the pending merger with Pinnacle, and the departure of several members of senior management. The decrease in international VocalPoint IVR sales resulted from the temporary dedication of resources to a major VocalPoint IVR installation in the United Kingdom. This decrease was off-set in part by the receipt of initial orders for the VocalPoint IVR product in the Middle East, South Africa and Australia. Sales of the Premier and Premier 030 product lines decreased $3.9 million, or 55%, and $1.7 million, or 16%, respectively, between the comparable years. The Company began to experience part shortages and sharp increases in component pricing related to the older Premier lines during late 1994 and into 1995, and as a result, the Company announced an official end-of-life for the Premier lines. Sales of the Premier 030 line declined in all markets due to technological changes in the IVR market and increased demand for maximum functionality and durability which are better served by the open architecture platform utilized in the VocalPoint IVR product. VocalPoint System 6000 sales increased $100, or 5%, between the comparable years, primarily from sales to international cable television customers. VocalPoint Predictive Dialer sales increased $1.4 million, or 60%, between years, the largest portion of which resulted from sales to customers in the domestic newspaper industry. System sales were also impacted between the comparable years by decreases of $2.1 million and $3.0 million in sales of the Dytel product line and the System/2000 digital voice system, respectively. The Company sold the Dytel product line to a third party purchaser in February 1995. Anticipated System/2000 orders of over $2.0 million did not materialize during 1995 due to slowdowns and start-up of the related customers' business. SERVICE BUREAU REVENUES increased $2.7 million, or 71%, between the comparable years. Revenues from the Home Ticket(TM) service offered through the Transaction Center increased $1.7 million, or 46%, between years and the Company realized $1.0 million in incremental revenue from the transaction-based service bureau which was launched during 1995. MAINTENANCE AND OTHER SERVICE REVENUES increased a modest $200, or 1%, between years. This small increase reflects the migration in the Company's product lines and the resulting cancellation of maintenance contracts. DOMESTIC AND INTERNATIONAL SALES for 1995 were $39.0 million, or 79%, and $10.5 million, or 21%, of total revenues, respectively, compared to $43.7 million, or 76%, and $13.7 million, or 24%, for 1994. 17 18 GROSS MARGIN The gross margin percentage for the year ended December 31, 1995 was 47% of net revenues, as compared with 51% for the year ended December 31, 1994. Gross margins on SYSTEM SALES decreased from 44% to 36% between years. This decrease resulted from the significant overall decline in system sales between years and the resulting inability of the Company to absorb the fixed costs allocated to cost of revenues. Gross margins for the SERVICE BUREAU increased from 36% to 45% between years as result of the $2.7 million, or 71%, increase in related revenues, particularly the Home Ticket(TM) service. Gross margins for MAINTENANCE AND OTHER SERVICE REVENUES decreased from 77% to 74% between years as result of the Company incurring increased service costs without a corresponding increase in these types of revenues. OPERATING EXPENSES Operating expenses for 1995, exclusive of the $8.8 million special charge, were $31 million, an increase of $3.4 million, or 12%, over the $27.6 million reported for 1994, exclusive of the $879 special charge discussed below. The increase between years included $700 in direct transaction costs incurred during the fourth quarter of 1995 in connection with the acquisition of Pinnacle. Selling, marketing and administrative expenses increased $3.8 million, or 20%, between years. This increase resulted from the Company's actions to increase its domestic sales force, expand the marketing of the VocalPoint Predictive Dialer, the introduction of the transaction-based service bureau and expansion of the Transaction Center, a $600 accrual related to pending legal matters that were subsequently settled during 1996, and $394 in non-cash compensation expense related to stock options granted to two executive officers in connection with the negotiation of their employment agreements. Research and development expenses were comparable between years; however, use of the underlying funds were reallocated to better focus on the enhancement and functionality of existing product lines. Depreciation and amortization decreased between years with the Company's decision to write-down the value of certain equipment as part of the special charge. SPECIAL CHARGES Syntellect initiated a plan in December 1995 designed to improve its presence in the IVR market, regain market share, reduce expenses, focus management and the sales force on the VocalPoint IVR product line and return the Company to profitability. Syntellect incurred an $8.8 million special charge to operations during the fourth quarter of 1995 related to the implementation of this plan. The special charge included a $5.0 million increase in allowances for inventory obsolescence related to (i) proprietary product lines that were discontinued ($2.4 million); (ii) an adjustment of the net realizable value of overstocked components for the Premier 030 and System/2000 product lines ($2.4 million); and (iii) a write-down of obsolete components from early versions of the VocalPoint IVR product line ($200). During the second half of 1994, Syntellect began building an infrastructure to further support the delivery of its whole product solutions and facilitate future growth opportunities. This anticipated growth did not materialize during 1995 and, accordingly, the Company began reducing its infrastructure expenses to a level which was more in line with projected revenue streams. As part of this plan, Syntellect initiated a reduction in force in late 1995 that affected all areas of the organization. The Company provided a special charge of $1.2 million during the fourth quarter of 1995 related to this reduction in force and in accordance with Syntellect's established severance benefit plan. Concurrent with the reduction in force, the Company incurred a special charge of $1.7 million to write-down the value of software and equipment that was relocated or disposed of. A special charge of $700 was also incurred during the fourth quarter of 1995 to increase the allowance for doubtful accounts for specific receivables that were identified in connection with the Company's review of its maintenance revenue database and to provide specific reserves for potential contractual penalties relating to European customers. The Company also incurred a special charge of $879 during 1994 in connection with Pinnacle's write-off of intangible assets related to (i) noncompetition agreements entered into with the former owners of Telecorp and (ii) certain software dating back to Pinnacle's acquisition of Telecorp. Management concluded that no remaining 18 19 value existed with respect to the noncompetition agreements as the threat of competition had diminished with the former owners' involvement in activities that were not similar to Telecorp's business. Management also determined that certain software no longer possessed value due to significant advances in technology since the acquisition of Telecorp. Accordingly, the value of the consulting and noncompetition agreements and software were reduced to zero, resulting in write-offs of $722 and $157, respectively. NET INCOME (LOSS) Syntellect reported a net loss of $16.3 million, or $(1.24) per share for 1995, compared to net income of $1.1 million, or $0.08 per share for 1994. Excluding the effects of the 1995 and 1994 special charges, the Company reported a net loss of $7.5 million, or $(.57) per share for 1995, and net income of $2.0 million, or $0.15 per share, for 1994. LIQUIDITY AND CAPITAL RESOURCES Syntellect had working capital of $13.7 million at December 31, 1996, compared with $17.4 million at December 31, 1995. The current ratio at both these dates was 2.1:1. Cash, cash equivalents and marketable securities at the end of 1996 totaled $6.2 million , compared with the $9.4 million reported at the end of 1995. The Company generated a $1.6 million positive cash flow from operating activities during 1996, reduced its investment in marketable securities by $3.0 million, received $300 in proceeds from the issuance of common stock, and added $342 in long-term debt related to a capital lease. Cash was used during 1996 to make $4.7 million in capital expenditures and $747 in principal payments on long-term debt. Receivables, net of reserves were $13.7 million at December 31, 1996, a decrease of $1.2 million from the $14.9 million reported at December 31, 1995. This decrease resulted from the Company's improved collection efforts which lowered the average collection period for trade receivables from 143 days at December 31, 1995 to 69 days at December 31, 1996. The allowance for doubtful accounts decreased by $295 between years. Inventory balances decreased $1.2 million during 1996 as a result of the Company's improved processing controls and stock reduction plan. Syntellect expects that its current cash, cash equivalents and marketable securities, combined with future cash flows from operating activities and existing credit facilities, will be sufficient to support the Company's operations during 1997. The Company negotiated a $2.0 million revolving credit agreement with a commercial bank during 1996 to replace an existing $500 credit line. The new credit line, which will be used to provide working capital financing, is collateralized by accounts receivable and accrues interest at prime. There were no amounts outstanding on the line of credit at December 31, 1996; however, the Company has reserved $1.1 million of the available balance for a letter of credit that will be used as a security deposit on a new lease for a 70,564 square foot facility in Phoenix, Arizona. The new lease covers a ten-year term and is scheduled to commence in April 1997 at an initial monthly rate of $61. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Independent Auditors' Reports of KPMG Peat Marwick LLP and Deloitte and Touche, LLP and the consolidated financial statements of Syntellect as of December 31, 1996 and 1995, and for each of the years in the three-year period ended December 31, 1996, follows: 19 20 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, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. 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 did not audit the 1995 and 1994 consolidated financial statements of Pinnacle Investments Associates Inc. and subsidiary, a wholly owned subsidiary, which statements reflect total assets constituting 25 percent and total revenues constituting 32 percent and 21 percent of the Syntellect Inc. and subsidiaries consolidated totals as of December 31, 1995 and for each of the years in the two-year period ended December 31, 1995, respectively. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Pinnacle Investment Associates Inc. and subsidiary, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, as it relates to 1995 and 1994, 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Atlanta, Georgia KPMG Peat Marwick LLP February 5, 1997 20 21 Independent Auditors' Report Board of Directors and Stockholders Pinnacle Investment Associates Inc.: We have audited the accompanying consolidated balance sheets of Pinnacle Investment Associates Inc. and subsidiary (the "Company") as of December 31, 1995 and 1994 and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1995 and 1994 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Note 20, the Company was acquired by Syntellect, Inc. on March 14, 1996 in a transaction that will be accounted for as a pooling of interests. Pursuant to the terms of the merger, each shareholder of Pinnacle received 1.15 shares of Syntellect, Inc. common stock in exchange for each outstanding share of Pinnacle common stock. As discussed in Note 1, in 1994 the Company changed its method of accounting for short-term investments to conform with Statement of Financial Accounting Standards No. 115. February 9, 1996, except as to Note 20 Deloitte & Touche LLP which is dated as of March 14, 1996 21 22 SYNTELLECT INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1996 and 1995 (in thousands, except share amounts)
Assets 1996 1995 ---- ---- Current assets: Cash and cash equivalents $ 4,928 $ 5,125 Marketable securities 1,275 4,225 Receivables, net 13,744 14,881 Inventories 4,085 5,293 Prepaid expenses 1,197 2,154 Deferred contract costs 1,006 1,133 -------- -------- Total current assets 26,235 32,811 -------- -------- Property and equipment, net 7,676 5,821 Other assets 897 1,087 -------- -------- $ 34,808 $ 39,719 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 1,302 $ 3,660 Accrued liabilities 6,329 7,168 Customer deposits 699 482 Deferred revenue 3,940 3,311 Current portion of long-term debt 288 747 -------- -------- Total current liabilities 12,558 15,368 -------- -------- Long-term debt, less current portion 229 175 -------- -------- Total liabilities 12,787 15,543 -------- -------- Shareholders' equity: Preferred stock, $.01 par value. Authorized 2,500,000 shares; no shares issued or outstanding -- -- Common stock, $.01 par value. Authorized 25,000,000 shares; issued 13,478,127 and 13,381,753, respectively 135 134 Additional paid-in capital 60,545 60,246 Deferred compensation (52) (91) Accumulated deficit (37,595) (34,815) Foreign currency translation adjustment 136 (140) Net unrealized holding loss on marketable securities (7) (17) -------- -------- 23,162 25,317 Treasury stock, at cost, 175,732 shares (1,141) (1,141) -------- -------- Total shareholders' equity 22,021 24,176 -------- -------- $ 34,808 $ 39,719 ======== ========
See accompanying notes to consolidated financial statements. 22 23 SYNTELLECT INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1996, 1995 and 1994 (in thousands, except per share amounts)
1996 1995 1994 ---- ---- ---- Net revenues: System sales $ 31,811 $ 30,110 $ 40,871 Service bureau 9,284 6,491 3,798 Maintenance and other services 14,210 12,909 12,727 -------- -------- -------- Total net revenues 55,305 49,510 57,396 -------- -------- -------- Cost of revenues: System sales 18,645 19,211 22,773 Service bureau 5,560 3,560 2,424 Maintenance and other services 3,578 3,376 2,868 -------- -------- -------- Total cost of revenues 27,783 26,147 28,065 -------- -------- -------- Gross margin 27,522 23,363 29,331 -------- -------- -------- Operating expenses: Selling, marketing and administrative 21,383 23,026 19,263 Research and development 5,943 4,884 4,893 Depreciation and amortization 3,229 3,079 3,401 Special charge -- 8,800 879 -------- -------- -------- Total operating expenses 30,555 39,789 28,436 -------- -------- -------- Operating income (loss) (3,033) (16,426) 895 -------- -------- -------- Other income (expense), net: Interest income, net 341 530 370 Other expense, net (88) (228) (73) -------- -------- -------- Total other income (expense), net 253 302 297 -------- -------- -------- Income (loss) before income taxes (2,780) (16,124) 1,192 Income taxes -- 134 75 -------- -------- -------- Net income (loss) $ (2,780) $(16,258) $ 1,117 ======== ======== ======== Net income (loss) per common share $ (0.21) $ (1.24) $ 0.08 ======== ======== ======== Shares used in per share calculation 13,256 13,159 13,468 ======== ======== ========
See accompanying notes to consolidated financial statements. 23 24 Syntellect Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity Years Ended December 31, 1996, 1995 and 1994 (In thousands, except share amounts)
Common Stock ------------ Additional $.01 Par Paid-in Deferred Accumulated Shares Value Capital Compensation Deficit ------ ----- ------- ------------ ------- Balance at January 1, 1994 13,239,561 $133 $59,291 $(55) $(19,674) Issuance of common stock upon exercise of stock options 9,396 -- 33 -- -- Issuance of common stock under employee stock purchase 40,854 -- 108 -- -- plan Issuance of stock options below fair value -- -- 18 (18) -- Amortization of deferred compensation related to stock -- -- -- 18 -- options Net income -- -- -- -- 1,117 Foreign currency translation adjustment -- -- -- -- -- Net unrealized holding loss on marketable securities -- -- -- -- -- ---------- ---- ------- ---- -------- Balance at December 31, 1994 13,289,811 133 59,450 (55) (18,557) Issuance of common stock upon exercise of stock options 66,719 1 247 -- -- Issuance of common stock under employee stock purchase 25,223 -- 94 -- -- plan Issuance of stock options below fair value -- -- 61 (61) -- Amortization of deferred compensation related to stock -- -- -- 25 -- options Compensation expense related to stock options issued -- -- 394 -- -- to officers Net loss -- -- -- -- (16,258) Foreign currency translation adjustment -- -- -- -- -- Net unrealized holding gain on marketable securities -- -- -- -- -- ---------- ---- ------- ---- -------- Balance at December 31, 1995 13,381,753 134 60,246 (91) (34,815) Issuance of common stock upon exercise of stock options 49,533 1 143 -- -- Issuance of common stock under employee stock purchase 46,841 -- 156 -- -- plan Amortization of deferred compensation related to stock -- -- -- 39 -- options Net loss -- -- -- -- (2,780) Foreign currency translation adjustment -- -- -- -- -- Net unrealized holding gain on marketable securities -- -- -- -- -- ---------- ---- ------- ---- -------- Balance at December 31, 1996 13,478,127 $135 $60,545 $(52) $(37,595) ========== ==== ======= ==== ========
Net Unrealized Foreign Holding Gain Currency (Loss) On Total Translation Marketable Treasury Shareholders' Adjustment Securities Stock Equity ----------- ------------ -------- ------------- Balance at January 1, 1994 $(210) $-- $(1,141) $ 38,344 Issuance of common stock upon exercise of stock options -- -- -- 33 Issuance of common stock under employee stock purchase -- -- -- 108 plan Issuance of stock options below fair value -- -- -- -- Amortization of deferred compensation related to stock -- -- -- 18 options Net income -- -- -- 1,117 Foreign currency translation adjustment 82 -- -- 82 Net unrealized holding loss on marketable securities -- (164) -- (164) ----- ----- ------- -------- Balance at December 31, 1994 (128) (164) (1,141) 39,538 Issuance of common stock upon exercise of stock options -- -- -- 248 Issuance of common stock under employee stock purchase -- -- -- 94 plan Issuance of stock options below fair value -- -- -- -- Amortization of deferred compensation related to stock -- -- -- 25 options Compensation expense related to stock options issued -- -- -- 394 to officers Net loss -- -- -- (16,258) Foreign currency translation adjustment (12) -- -- (12) Net unrealized holding gain on marketable securities -- 147 -- 147 ----- ----- ------- -------- Balance at December 31, 1995 (140) (17) (1,141) 24,176 Issuance of common stock upon exercise of stock options -- -- -- 144 Issuance of common stock under employee stock purchase -- -- -- 156 plan Amortization of deferred compensation related to stock -- -- -- 39 options Net loss -- -- -- (2,780) Foreign currency translation adjustment 276 -- -- 276 Net unrealized holding gain on marketable securities -- 10 -- 10 ----- ----- ------- -------- Balance at December 31, 1996 $ 136 $ (7) $(1,141) $ 22,021 ===== ===== ======= ========
See accompanying notes to consolidated financial statements. 24 25 SYNTELLECT INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994 (in thousands)
1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ (2,780) $(16,258) $ 1,117 -------- -------- ------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 3,230 3,079 3,401 Write-down of software and equipment values -- 1,700 -- Provision for doubtful accounts 480 1,113 922 Provision for inventory obsolescence 36 5,213 336 Stock option compensation expense 39 419 18 (Increase) decrease in receivables 1,235 4,427 (5,811) (Increase) decrease in inventories 799 (1,578) 894 Increase (decrease) in accounts payable (2,355) 1,237 (1,809) Increase (decrease) in accrued liabilities (1,065) 2,078 2,110 Change in other assets and liabilities 1,996 1,578 (2,577) -------- -------- ------- Total adjustments 4,395 19,266 (2,516) -------- -------- ------- Net cash provided by (used in) operating activities 1,615 3,008 (1,399) -------- -------- ------- Cash flows from investing activities: Purchase of marketable securities (11,825) (1,939) (2,702) Sales of marketable securities 851 190 3,388 Maturities of marketable securities 13,934 1,776 550 Purchase of property and equipment (4,741) (3,479) (2,328) Proceeds from sale of property and equipment 110 -- 21 Purchase of technology and patents -- (19) (140) Proceeds from disposition of SNS subsidiary 30 -- -- Proceeds from disposition of Dytel product line -- 39 -- -------- -------- ------- Net cash used in investing activities (1,641) (3,432) (1,211) -------- -------- ------- Cash flows from financing activities: Proceeds from sale of common stock 300 342 141 Payments on note payable to bank -- (200) -- Principal payments on long-term debt (747) (502) (341) -------- -------- ------- Net cash used in financing activities (447) (360) (200) -------- -------- -------
25 26 SYNTELLECT INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994 (in thousands)
1996 1995 1994 ---- ---- ---- Effect of exchange rates on cash $ 276 $ (12) $ 82 ------- ------- ------- Net decrease in cash and cash equivalents (197) (796) (2,728) Cash and cash equivalents at beginning of year 5,125 5,921 8,649 ------- ------- ------- Cash and cash equivalents at end of year $ 4,928 $ 5,125 $ 5,921 ======= ======= ======= Supplemental disclosure of cash flow information: Cash paid for interest $ 33 $ 166 $ 160 ======= ======= ======= Cash paid for income taxes $ 276 $ 152 $ -- ======= ======= =======
NONCASH INVESTING AND FINANCING ACTIVITIES: The Company entered into capital lease obligations of $342 during 1996 for a telephone system and $943 during 1994 for a management information system. See accompanying notes to consolidated financial statements. 26 27 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts) (1) Summary of Significant Accounting Policies Nature of Business and Principles of Consolidation Syntellect Inc. develops, markets, and integrates voice and information processing systems and application software worldwide. The Company offers a diversified product line which includes both inbound voice processing and outbound predictive dialer products, a worldwide distribution network, and a vertical market focus on the financial services, media, telecommunications and healthcare industries. Syntellect also provides an interactive transaction-based service bureau for those customers who prefer to outsource their voice processing applications, including cable and satellite pay-per-view orders and employee benefits enrollment. The consolidated financial statements include the accounts of Syntellect Inc. and its wholly-owned subsidiaries ("Syntellect" or the "Company"), Pinnacle Investment Associates Inc. ("Pinnacle"), Syntellect Canada Inc., Syntellect Europe Ltd., Syntellect Deutschland GmbH, Syntellect Technology Corp. ("STC", formerly Dytel Inc.), and Syntellect Interactive Services, Inc. ("SIS"). The consolidated financial statements also include the accounts of Syntellect Network Systems, Inc. through March 31, 1996 (See Note 3). All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition Syntellect recognizes revenue from sales of systems and services after a contract has been signed, custom system specifications, where applicable, have been defined and agreed upon, and the system has been shipped or services rendered. Revenue from maintenance contracts is deferred and recognized ratably over the terms of the agreements. Cash and Cash Equivalents Cash and cash equivalents consist of cash, money market and overnight deposits with original maturities of three months or less. 27 28 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts) Marketable Securities Marketable securities are classified as available-for-sale and are available to support current operations. These securities are stated at estimated fair value based on market quotes with any net unrealized holding gain or loss included in the consolidated financial statements as a component of shareholders' equity until realized. Inventories Inventories are stated primarily at the lower of weighted average cost or market. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. 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 on the straight-line method over the shorter of the lease term or the estimated useful life of the asset. The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121") effective January 1, 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles held and used by a company be reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company has determined that SFAS No. 121 did not have a material impact on its financial statements upon adoption. Other Assets Other assets consist primarily of patents and purchased technology that are being amortized over five to fifteen years using the straight-line method. Syntellect estimates the recoverability of purchased technology by determining whether the unamortized balance of purchased technology can be recovered over its remaining life through future product sales. Syntellect accounts for patents at the lower of amortized cost or net realizable value. On an ongoing basis, Syntellect reviews the valuation and amortization of its patents. As part of this review, Syntellect estimates the net realizable value of the patents, taking into consideration any events and circumstances which might have diminished their value, and assesses whether the remaining patent balance could be recovered through expected future net cash flows over the remaining life of the patents. Warranty Expense Syntellect generally provides customers with product warranties for periods ranging from three months to one year after shipment. The Company has provided a reserve for estimated warranty expense. 28 29 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts) Product Development Development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional costs would be capitalized in accordance with Statement of Financial Accounting Standards No. 86. Because Syntellect believes its current process for developing software is essentially completed concurrent with the establishment of technological feasibility, no costs have been capitalized to date. Income Taxes Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred income tax assets and liabilities is recognized in income for the period that includes the enactment date. Foreign Currency Translation Financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for the revenues and expenses reported in each fiscal period. Foreign currency translation adjustments are recorded as a separate component of shareholders' equity. Net Income (Loss) Per Common Share Net income (loss) per common share is based on the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the year. Dilutive common stock equivalents are computed using the treasury stock method and consist of stock options. Fully diluted net income (loss) per common share is not presented since the results of the computation are anti-dilutive or not significantly different from the net income (loss) per common share presented. Stock-Based Compensation Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations ("APB No. 25"). As such, compensation expense would be recorded on the date of grant if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996 the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which encourages entities to recognize as expense, over the vesting period, the fair value of all stock-based awards on the date of grant. Alternatively, SFAS. No. 123 also allows entities to continue to apply the provisions of APB No. 25 and provide pro forma disclosure of net income (loss) and net income (loss) per common share for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB No. 25 and provide the pro forma disclosures under the provisions of SFAS No. 123 (see Note 16). 29 30 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts) Reclassifications Certain 1995 and 1994 consolidated financial statement balances have been reclassified to conform to the 1996 presentation. (2) Acquisition Of Pinnacle Investment Associates, Inc. On March 14, 1996, Syntellect completed its acquisition of Pinnacle in a transaction accounted for as a pooling of interests. Pursuant to the terms of the merger, Syntellect issued 4,685,838 shares of common stock and assumed outstanding options belonging to Pinnacle stockholders for the purchase of an additional 740,848 shares of common stock at a weighted average exercise price of $1.04 per share. The common stock issued in this transaction had a total value of $20.5 million based on the fair market value of the common stock on the date of issuance. Pinnacle subsequently merged into its wholly owned subsidiary, Telecorp Systems, Inc. ("Telecorp"). Telecorp develops and distributes inbound and outbound call center systems worldwide, primarily in the cable television, newspaper and health care industries, and operates a transaction-based service bureau designed primarily to process pay-per-view orders for the cable television industry. The consolidated financial statements included herein have been restated to include the accounts of Pinnacle for all periods presented. The net revenues of Syntellect and Pinnacle were $6.3 million and $6.6 million, $33.5 million and $16.0 million, and $45.4 million and $12.0 million, for the period in 1996 prior to the merger and for the years ended December 31, 1995 and 1994, respectively. The net income (loss) for these same periods was $(2.3) million and $1.2 million, $(16.6) million and $308 million, and $2.1 million and $(1.0) million, respectively. (3) Disposition of Syntellect Network Systems Inc. Subsidiary and Dytel Product Lines In April 1996, the Company sold its Syntellect Network Systems Inc. subsidiary ("SNS") under a stock purchase agreement with an unrelated third party. Under the agreement, the Company sold all of the issued and outstanding shares of SNS common stock for $720. The Company received $30 of the sales price in cash at closing with the remaining $690 to be received in 23 monthly installments of $30, without interest, beginning May 1996. The completion of this transaction did not significantly impact the Company's results of operations for 1996. In February 1995, the Company disposed of its Dytel product line in a sale to a third party purchaser for $176. As consideration, the Company received cash of $39, a promissory note for $118, and the purchaser assumed $19 in maintenance contract obligations. The assets, consisting primarily of inventory and business equipment, were sold at net book value and accordingly, no gain or loss was recognized on the transaction. Syntellect has retained the rights to Dytel's extensive patent portfolio. 30 31 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts) (4) Marketable Securities The Company has classified all marketable securities as available-for-sale at December 31, 1996 and 1995. The amortized cost, gross unrealized holding gains and losses and fair value of the available-for-sale securities by major security type are as follows:
Gross Gross Unrealized Unrealized Amortized Holding Holding Cost Gains Losses Fair Value ---- ----- ------ ---------- 1996 ---- Mortgage-backed securities $1,282 $-- $ (7) $1,275 ====== ==== ====== ====== 1995 ---- U.S. Treasury securities $ 327 $-- $ (2) $ 325 Mortgage-backed securities 3,113 -- (22) 3,091 Corporate income fund investments 802 7 -- 809 ------ ---- ------ ------ $4,242 $ 7 $ (24) $4,225 ====== ==== ====== ======
All marketable securities held at December 31, 1996 have contractual maturities of less than one year. Proceeds and gross realized gains from sales of securities classified as available-for-sale for the years ended December 31, 1996 and 1995 were $851 and $0, and $190 and $29, respectively. For purposes of determining gross realized gains and losses, the cost of securities sold is based on specific identification. (5) Receivables, Net Receivables consist of the following:
1996 1995 ---- ---- Trade receivables $ 14,519 $ 16,157 Other receivables 458 252 -------- -------- 14,977 16,409 Less allowance for doubtful accounts (1,233) (1,528) -------- -------- $ 13,744 $ 14,881 ======== ========
31 32 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts) (6) Inventories Inventories consist of the following:
1996 1995 ---- ---- Finished goods $ 3,085 $ 5,502 Purchased components 2,797 6,870 Repair, warranty and maintenance inventories 2,348 1,946 -------- -------- 8,230 14,318 Less allowance for obsolescence (4,145) (9,025) -------- -------- $ 4,085 $ 5,293 ======== ========
Syntellect contracts with a third-party to perform onsite hardware maintenance for customers in certain geographic areas. Inventories held by Syntellect for the third-party maintenance program are included in repair, warranty and maintenance inventories. (7) Prepaid Expenses Prepaid expenses consist of the following:
1996 1995 ---- ---- Prepaid royalties $ -- $1,282 Deferred income tax asset 620 468 Other prepaids 577 404 ------ ------ $1,197 $2,154 ====== ======
Prepaid royalties at December 31, 1995 represent amounts paid under a licensing agreement with a third party for technology relating to the Company's VocalPoint IVR product. The prepaid royalty balance was utilized during 1996 and as of December 31, 1996, the Company has accrued $791 in royalty expense. (see Note 12) (8) Deferred Contract Costs Deferred contract costs represent direct and indirect costs on contracts for which the related revenue recognition has been deferred. Deferred contract costs at December 31, 1995 relate to a single contract with a major cable television customer. The Company received an advance cash payment of $930 in connection with this contract and reported the payment in deferred revenue at December 31, 1995. 32 33 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts) (9) Property and Equipment, net Property and equipment consist of the following:
1996 1995 ---- ---- Furniture, fixtures and computer equipment $ 19,256 $ 17,686 Service bureau equipment 4,242 1,928 Leasehold improvements 994 907 -------- -------- 24,492 20,521 Less accumulated depreciation and amortization (16,816) (14,700) -------- -------- $ 7,676 $ 5,821 ======== ========
(10) Other Assets Other assets consist of the following:
1996 1995 ---- ---- Patents and purchased technology $ 1,509 $ 1,509 Other 103 96 ------- ------- 1,612 1,605 Less accumulated amortization (715) (518) ------- ------- $ 897 $ 1,087 ======= =======
(11) Credit Facilities The Company negotiated a $2.0 million revolving credit agreement with a commercial bank during July 1996 to replace an existing $500 line of credit. The new credit line, which will be used to provide working capital financing, is collateralized by accounts receivable and accrues interest at prime (8-1/4% at December 31, 1996). The agreement is renewable annually and requires the Company to maintain certain operating ratios with respect to working capital and net worth. There were no amounts outstanding on these lines of credit at December 31, 1996 or 1995; however, the Company has reserved $1.1 million of the available balance at December 31, 1996 for a letter of credit that will be used as a security deposit on a new office facility lease (See Note 14). 33 34 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts) (12) Accrued Liabilities Accrued liabilities consist of the following:
1996 1995 ---- ---- Accrued compensation and benefits $2,982 $4,092 Accrued legal and accounting 381 1,108 Accrued royalties 791 -- Other accrued liabilities 2,175 1,968 ------ ------ $6,329 $7,168 ====== ======
(13) Deferred Revenue Deferred revenue consists of the following:
1996 1995 ---- ---- Maintenance contracts $3,917 $2,381 Deferred systems revenue 23 930 ------ ------ $3,940 $3,311 ====== ======
(14) Long-Term Debt and Lease Commitments Long-term debt consists of the following:
1996 1995 ---- ---- Capital lease obligations with interest ranging from 9.43% to 10%, collateralized by equipment $ 517 $ 501 Subordinated promissory notes with original balances of $1,405, issued to the former owners of Telecorp, interest at 10% payable monthly through January 1996 (see Note 15) -- 421 ----- ----- 517 922 Less current portion (288) (747) ----- ----- $ 229 $ 175 ===== =====
Equipment held under capital lease is included in property and equipment as follows:
1996 1995 ---- ---- Furniture, fixtures and computer equipment $ 1,285 $ 943 Less accumulated amortization (828) (471) ------- ----- $ 457 $ 472 ======= =====
34 35 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts) The Company leases office facilities and various equipment under noncancellable operating leases that expire at various dates through 2007. In June 1996, the Company entered into a ten year lease for a new 70,564 square foot office facility in Phoenix. The lease is scheduled to commence in March 1997 at an initial monthly rate of $61. The Company is required to provide the lessor with a $1,100 letter of credit as a security deposit until certain net worth levels are achieved. The letter of credit will be funded from the revolving credit agreement described in Note 11. Rental expense under operating leases was $1,392 in 1996, $961 in 1995 and $1,011 in 1994. Future minimum lease payments under noncancellable operating leases (with minimum or remaining lease terms in excess of one year) and the present value of future minimum capital lease payments at December 31, 1996 are as follows:
Year Capital Leases Operating Leases - ---- -------------- ---------------- 1997 $ 336 $1,401 1998 104 1,429 1999 95 1,371 2000 61 1,376 2001 -- 1,159 Thereafter -- 4,356 ----- ------ Total minimum lease payments 596 $11,092 ======= Less amounts representing interest (79) ----- Net minimum lease payments $ 517 =====
(15) Litigation Syntellect is involved in various legal proceedings and claims arising in the ordinary course of business. Management believes that the disposition of these matters will not have a material adverse effect on the Company's financial position or results of operations. In January 1991, Pinnacle acquired substantially all the assets of Telecorp in a business combination accounted for using the purchase method of accounting. As part of the acquisition, Pinnacle issued two subordinated promissory notes aggregating $1,405 to the former owners in exchange for consulting and noncompetition agreements that extended through December 31, 1995. These agreements required Pinnacle to pay annual performance payments during the noncompete period based on a percentage of its revenues (as defined in the agreements). The former owners filed a claim against Pinnacle in November 1995 regarding the calculation of the performance payments and seeking in excess of $800 in additional payments. Pinnacle recorded a charge to operations during 1995 in the amount of $600 as an estimate of the potential liability that could be incurred in connection with this matter. Syntellect settled the litigation in November 1996 for an amount within the accrual that has been established. (16) Shareholders' Equity Capital Stock Syntellect's authorized capital stock consists of 2,500,000 shares of preferred stock, $.01 par value, and 25,000,000 shares of common stock, $.01 par value. The preferred stock may be issued in one or more series and is undesignated as to powers, preferences, rights, limitations or restrictions. No shares of preferred stock were issued or outstanding at December 31, 1996 or 1995. Syntellect had 13,478,127 and 13,381,753 shares of common stock issued at December 31, 1996 and 1995, respectively. 35 36 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts) Stock Option Plans Syntellect maintains various stock option plans for employees, consultants and non-employee directors as follows: Syntellect adopted a stock option plan in 1984 that provides for the issuance of up to 1,590,000 shares of common stock to employees under incentive and nonstatutory stock option grants. The plan was amended in July 1994 to include Syntellect's consultants and advisors as eligible participants. Incentive stock options may be granted at a price not less than the fair market value of the common stock at the date of grant. Nonstatutory stock options may be granted at a price not less than 50% of the fair market value of the common stock at the date of grant. The options generally become exercisable over a 50 month period commencing at the date of grant and expire in six years. The plan terminates in September 2004, and as of December 31, 1995, all options under this plan have been granted. Syntellect adopted a long-term incentive plan effective February 1, 1995, as amended, that provides for the issuance of up to 750,000 shares of common stock to employees, consultants and advisors under incentive stock options, non-qualified stock options, stock appreciation rights, performance shares, restricted stock, dividend equivalents and other stock-based awards. Incentive and non-qualified stock options may be granted at a price not less than the fair market value of the common stock at the date of grant, generally become exercisable over a 50 month period commencing at the date of grant, and expire in six years. In no case shall the term of any option issued under this plan exceed ten years from the date of grant. The plan terminates in February 2005. On August 8, 1996, the Board of Directors approved an amendment to the long-term incentive plan, pending shareholder approval, which increased the number of shares authorized for issuance under the plan from 750,000 to 1,500,000. Syntellect adopted a non-employee directors stock option plan in 1990 that provides for the issuance of up to 60,000 shares of common stock to eligible participants. Options may be granted at a price not less than the fair market value of the common stock at the date of grant, generally become exercisable over a 50 month period commencing at the date of grant, and expire in six years. As of December 31, 1995, all options under this plan have been granted. The plan terminates in December 1998. Syntellect adopted a non-employee director stock plan in 1995 that provides for the issuance of up to 50,000 shares of common stock to eligible participants under non-qualified stock option grants. Under the plan, non-employee directors receive a one time grant to purchase 10,000 shares upon appointment to the Board of Directors and an annual grant to purchase 2,000 shares from June 1995 through June 1998. Options may be granted at a price not less than the fair market value at the date of grant, become exercisable over a 50 month period commencing at the date of grant, and expire in six years. The plan has no scheduled termination date. In connection with the acquisition of Pinnacle, Syntellect assumed outstanding options for the purchase of 740,848 shares of common stock (see Note 2). A portion of these options were granted to certain executive officers in connection with the negotiation of their employment agreements. These options, covering 565,702 shares, were granted fully vested and immediately exercisable. The Company recognized compensation expense of $590 and $394 in 1993 and 1995, respectively, related to these options and credited the same to paid-in capital. The remaining options are accounted for as non-compensatory stock options, and generally become exercisable over a 48 month period commencing at the date of grant, and expire in 10 years. Unexercised options will be terminated and not available for future grants in the event an employee holding such options terminates his employment. 36 37 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts) At December 31, 1996, 851,710 options were exercisable under the above plans at prices ranging from $0.87 to $8.00. A summary of the combined stock option activity for all plans during the three-year period ended December 31, 1996 is as follows:
Options Outstanding ------------------- Options Exercise available price per for grant Shares share --------- ------ ----- Balance, January 1, 1994 149,904 766,892 $ 3.75-15.00 Granted (611,210) 611,210 2.75- 4.38 Canceled 577,195 (577,195) 2.75- 8.70 Exercised -- (9,396) 2.88- 6.50 -------- --------- ------------ Balance, December 31, 1994 115,889 791,511 $ 2.75-15.00 Increase in reserved shares 300,000 -- -- Expiration of reserved shares (286,590) -- -- Granted (402,000) 402,000 3.63- 6.25 Canceled 381,301 (381,301) 2.75- 6.25 Exercised -- (66,719) 2.75- 5.00 -------- --------- ------------ Balance, December 31, 1995 108,600 745,491 $ 2.75-15.00 Assumption of Pinnacle options -- 740,848 0.87- 1.74 Termination of Pinnacle options -- (14,551) 0.87- 1.74 Increase in reserved shares 500,000 -- -- Expiration of reserved shares (277,551) -- -- Granted (613,750) 613,750 4.63- 6.75 Canceled 345,241 (345,241) 3.00-15.00 Exercised -- (49,533) 1.74- 6.25 -------- --------- ------------ Balance, December 31, 1996 62,540 1,690,764 $ 0.87- 8.00 ======== ========= ============
Syntellect canceled and reissued 98,300 options to officers of Syntellect during the year ended December 31, 1994. The options were reissued at the fair market value of Syntellect's common stock on the date of issuance ($4.375 per share). As of December 31, 1996, all but 6,000 of these options had been exercised or canceled. Syntellect has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized for the stock option plans except in those instances where options were granted fully vested and immediately exercisable, and when the quoted market price of the Company's stock at the date of grant exceeded the amount an employee must pay to acquire the stock. Had compensation cost for Syntellect's 1996 and 1995 stock option grants been determined based on the fair value at the grant date, as prescribed by the provisions of SFAS No. 123, the Company's net loss and net loss per common share would have been increased to the pro forma amounts indicated below:
1996 1995 ---- ---- Net loss - as reported $ (2,780) $ (16,258) Net loss - pro forma $ (3,723) $ (16,690) Net loss per common share - as reported $ (0.21) $ (1.24) Net loss per common share - pro forma $ (0.28) $ (1.27)
37 38 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: Expected dividend yield 0% Expected stock price volatility 50% Risk-free interest rate 5.88% Expected life of options 3 years Employee Stock Purchase Plan Syntellect has an employee stock purchase plan that provides for the purchase of up to 400,000 shares of common stock. Under the plan, eligible participants may purchase common stock semi-annually at the lower of 85% of the fair market value on either the first day or last day of the offering period, whichever is lower. During 1996, 11,674 and 35,167 shares were purchased at $2.87 and $3.51 per share, respectively. During 1995, 12,938 and 12,285 shares were purchased at $4.57 and $2.87 per share, respectively. During 1994, 40,854 shares were purchased at $2.66 per share. At December 31, 1996, 108,389 shares of common stock were available for issuance under the plan. (17) Employee Benefit Plans Syntellect maintained two 401(k) plans during 1996; one covering eligible employees of Syntellect (the "Syntellect 401(k) Plan") and one covering eligible employees of Pinnacle (the "Pinnacle 401(k) Plan"). Participants could contribute up to 15% and 6%, respectively of their total compensation under these plans. The Company provided matching contributions under the Pinnacle 401(k) Plan equal to 50% of employee contributions, up to a maximum of 2% of the employee's total compensation. The Company could also make discretionary contributions to either plan in amounts determined by the Board of Directors. Participants in the plans vest immediately in their personal contributions and over a six year graded schedule for amounts contributed by the Company. Syntellect made matching contributions to the Pinnacle 401(k) Plan of $91 in 1996, $49 in 1995, and $56 in 1994; however, no discretionary contributions were made by the Company to either plan during these years. Effective January 1, 1997, Syntellect adopted a single 401(k) plan covering all eligible employees of the Company. Under the new plan, participants can contribute up to 15% of their total compensation. The Company will provide matching contributions equal to one third of employee contributions up to a maximum of 7% of the employee's total compensation. The matching contribution is subject to annual review and adjustment by the Board of Directors. Additional discretionary contributions may also be made to the plan in amounts determined by the Board of Directors. Participants will be immediately vested in their personal contributions and on a four year graded schedule for amounts contributed by the Company. Syntellect has established a severance plan in which officers and employees may receive severance benefits upon termination. Benefits under the plan are provided to individuals who have been employed by Syntellect at least six months, are involuntarily terminated and sign a document releasing Syntellect from any liability in connection with their termination. The amount of severance pay varies based upon the individual's length of service and employment classification. 38 39 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts) (18) Income Taxes The provision for income taxes includes income taxes currently payable 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. The components of income tax expense (benefit) included in the consolidated statements of operations are as follows:
1996 1995 1994 ---- ---- ---- Current income tax expense (benefit): Federal $(399) $ 544 $ 64 State (69) 58 11 ----- ----- ---- (468) 602 75 ----- ----- ---- Deferred income tax expense (benefit): Federal 399 (430) -- State 69 (38) -- ----- ----- ---- 468 (468) -- ----- ----- ---- Total income tax expense $ -- $ 134 $ 75 ===== ===== ====
Income (loss) before income tax expense (benefit) consists of the following:
1996 1995 1994 ---- ---- ---- United States Operations $ (2,275) $(13,159) $1,192 International Operations (505) (2,965) -- -------- -------- ------ $ (2,780) $ 16,124 $1,192 ======== ======== ======
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:
1996 1995 1994 ---- ---- ---- Computed "expected" income tax expense $ (945) $(5,482) $ 405 Increase (decrease) in income tax expense resulting from: State income tax expense, net of federal income tax benefit (74) (155) 36 Increase in valuation allowance 1,028 4,892 -- Other, net (9) 879 (366) ------- ------- ----- Total income tax expense $ -- $ 134 $ 75 ======= ======= =====
39 40 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts) The income tax effects of temporary differences that give rise to the Company's deferred income tax assets and liabilities are as follows:
1996 1995 ---- ---- Deferred income tax assets: Net operating loss and tax credit carryforwards $ 11,097 $ 6,264 Warranty and inventory allowances 1,537 3,706 Amortization 462 555 Contract accounting -- 419 Accrued expenses 1,121 1,455 Allowance for doubtful accounts 276 496 Other -- 631 -------- -------- Gross deferred income tax assets 14,493 13,526 -------- -------- Deferred income tax liabilities: Property and equipment due to differences in depreciation (782) (517) Other (168) (26) -------- -------- Gross deferred income tax liabilities (950) (543) -------- -------- Less valuation allowance $(12,923) (12,515) -------- -------- Net deferred income tax asset $ 620 $ 468 ======== ========
The increase (decrease) in the net deferred income tax asset for the years ended December 31, 1996, 1995 and 1994 was $152, $468 and $0, respectively. The increase in the valuation allowance against deferred income tax assets for these years was $408, $4,892, and $0, respectively. Deferred income tax assets and liabilities are recognized for differences between the financial statement carrying amounts and the tax bases of assets and liabilities which will result in future deductible or taxable amounts and for net operating loss and tax credit carryforwards. A valuation allowance has been provided because the realization of all of the deferred income tax asset is uncertain. As of December 31, 1996 the Company had net operating loss, investment tax credit, minimum tax credit, and research and development tax credits available for carryforward of approximately $25,373, $15, $18, and $1,240, respectively, which expire at various dates through the year 2011. (19) Business Segments, Geographic Data and Major Customers Syntellect develops, markets, and integrates voice and information processing systems and application software worldwide. The Company offers a diversified product line which includes both inbound voice processing and outbound dialer products, a worldwide distribution network, and a vertical market focus on the financial services, media, telecommunications and healthcare industries. The Company also provides an interactive transaction-based service bureau for those customers who prefer to outsource their voice processing applications. In addition to its primary office facilities in Atlanta and Phoenix, the Company also maintains nine sales offices in the United States and one each in London and Munich, Germany. 40 41 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts) Net revenues, by geographic area, for the three-year period ended December 31, 1996 are as follows:
Geographic Area 1996 1995 1994 --------------- ---- ---- ---- United States $40,296 $39,047 $43,702 International markets 15,009 10,463 13,694 ------- ------- ------- $55,305 $49,510 $57,396 ======= ======= =======
No single customer accounted for more than 10% of the Company's revenues in 1996, 1995 or 1994. The Company conducts business with a major cable television customer who is also a significant shareholder of the Company. Revenues from this customer were $1,311, $1,266 and $727 for the years ended December 31, 1996, 1995 and 1994, respectively. The Company was due $163 and $222 in outstanding accounts receivable from the customer at December 31, 1996 and 1995, respectively. (20) 1995 Special Charge Syntellect initiated a plan in December 1995 designed to improve its presence in the Interactive Voice Response ("IVR") market, regain market share, reduce expenses, focus management and the sales force on the VocalPoint IVR product line and return Syntellect to profitability. Syntellect incurred a special charge of $8,800 during the quarter ended December 31, 1995 related to the implementation of this plan. The special charge included a $5,000 increase in allowances for inventory obsolescence related to (i) proprietary product lines that are being discontinued ($2,400); (ii) an adjustment of the net realizable value of overstocked components for the Premier 030 and System 2000 product lines ($2,400); and (iii) a write-down of obsolete components from early versions of the VocalPoint IVR product line ($200). During the second half of 1994, Syntellect began building an infrastructure to further support the delivery of its whole product solutions and facilitate future growth opportunities. This anticipated growth did not materialize during 1995 and, accordingly, Syntellect began reducing its infrastructure expenses to a level which was more in line with projected revenue streams. As part of this plan, Syntellect initiated a reduction in force in late 1995 that affected all areas of the organization. Syntellect provided a special charge of $1,200 during the quarter ended December 31, 1995 related to this reduction in force and in accordance with Syntellect's established severance benefit plan. Concurrent with the reduction in force, Syntellect has begun to consolidate most of its administrative, manufacturing and customer support functions, which currently reside in multiple locations. As a result, Syntellect incurred a special charge of $1,700 during the quarter ended December 31, 1995 to write-down the value of software and equipment that will be relocated or disposed of. Syntellect also incurred a special charge of $700 during the quarter ended December 31, 1995, to increase the allowance for doubtful accounts for specific receivables identified in connection with the Company's review of its maintenance revenue database and to provide specific reserves for potential contractual penalties relating to European customers. 41 42 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts) A summary of the major elements of the 1995 special charge of $8,800, or $(0.67) per share, is as follows: Allowance for inventory obsolescence $5,000 Write-down of software and equipment to be relocated or disposed of 1,700 Employee severance for planned reduction in force 1,200 Accounts receivable allowance 700 Other 200 ------ $8,800 ======
The allowances for accounts receivable and inventory obsolescence were utilized during 1996 to write-off specifically identified receivable balances and inventory disposed of during the year. The reserve for inventory obsolescence at December 31, 1996 represents management's estimate of the valuation allowance necessary for inventory not yet disposed of. The software and equipment charge was utilized during 1996 to write-down the value of specified assets that were relocated, lost or disposed of. The Company made $741 in severance payments to terminated employees during 1996 in connection with its reduction in force. As of December 31, 1996, there remained outstanding payments due on severance transactions relating to 1995 and 1996. (21) 1994 Special Charge During 1994, Pinnacle determined that the consulting and noncompetition agreements entered into with the former owners of Telecorp had no remaining value as the threat of competition had diminished over the original life of the agreements (see Note 15). In addition, management determined that certain technology purchased during the acquisition of Telecorp no longer possessed value due to significant advances in technology since the original acquisition date. As a result, Pinnacle wrote-off the remaining value of the consulting and noncompetition agreements and purchased technology. The effect of this valuation adjustment on Syntellect's reported results for 1994 was a decrease in income of $879 or $(0.07) per share. (22) Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires that Syntellect disclose estimated fair values for its financial instruments. The carrying amount of cash and cash equivalents approximates fair value because their maturity is generally less than three months. The fair value of marketable securities classified as available-for-sale are based on quoted market prices at the reporting date for those or similar investments. The carrying amount of receivables, accounts payable and accrued liabilities approximates fair value as they are expected to be collected or paid within 90 days of year-end. The fair value of long-term debt, which is comprised of capital lease obligations, is estimated by discounting the future cash flows at rates currently offered to the Company for similar debt instruments. 42 43 SYNTELLECT INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts) (23) Supplemental Financial Information A summary of additions and deductions related to the allowances for accounts receivable and inventories for the years ended December 31, 1996, 1995 and 1994 follows:
Balance at Charged to beginning costs and Balance at of year expenses Deductions end of year ------- -------- ---------- ----------- Allowance for doubtful accounts: 1996 $1,528 $ 480 $ (775) $1,233 1995 668 1,113 (253) 1,528 1994 1,441 922 (1,695) 668 Allowance for inventory obsolescence: 1996 $9,025 $ 36 $(4,916) $4,145 1995 4,616 5,213 (804) 9,025 1994 5,535 336 (1,255) 4,616
(24) Quarterly Results (Unaudited) The following table presents selected unaudited quarterly operating results for the two year period ended December 31, 1996. Syntellect believes that all necessary adjustments have been included in the amounts stated below to present fairly the related quarterly results.
First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ----- 1996 ---- Net revenues $ 12,946 $ 14,004 $ 12,173 $ 16,182 $ 55,305 Gross margin 6,344 6,950 6,094 8,134 27,522 Operating income (loss) (1,139) (477) (1,522) 105 (3,033) Net income (loss) (1,083) (393) (1,465) 161 (2,780) Net income (loss) per common share $ (0.08) $ (0.03) $ (0.11) $ 0.01 $ (0.21) 1995 ---- Net revenues $ 13,299 $ 11,164 $ 14,403 $ 10,644 $ 49,510 Gross margin 7,178 5,203 7,037 3,945 23,363 Operating income (loss) 420 (1,869) (1,116) (13,861) (16,426) Net income (loss) 564 (1,783) (1,075) (13,964) (16,258) Net income (loss) per common share $ 0.04 $ (0.14) $ (0.08) $ (1.05) $ (1.24)
43 44 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding continuing directors and nominees of Syntellect is set forth under the caption "Information Concerning Directors and Nominees" in the Registrant's Proxy Statement relating to its 1997 Annual Meeting of Shareholders (the "1997 Proxy Statement") incorporated by reference into this Form 10-K, which will be filed with the Securities and Exchange Commission. With the exception of the foregoing information and other information specifically incorporated by reference into this Form 10-K, the 1997 Proxy Statement is not being filed as a part hereof. Information concerning executive officers of the Registrant is set forth in Part I of this Form 10-K. ITEM 11 - EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated herein by reference to the information furnished under the caption "Executive Compensation" in the 1997 Proxy Statement, provided, however, that the "Board Compensation Committee Report on Executive Compensation" and the "Stock Price Performance Graph" contained in the 1997 Proxy Statement are not incorporated by reference herein. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management of Syntellect is incorporated herein by reference to the information furnished under the caption "Security Ownership of Certain Beneficial Owners and Management" in the 1997 Proxy Statement. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. 44 45 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS. The following consolidated financial statements of Syntellect Inc. and Subsidiaries are filed as part of this report on Form 10-K:
Page or Method of Filing Independent Auditors' Report - KPMG Peat Marwick LLP Page 20 Independent Auditors' Report - Deloitte & Touche LLP Page 21 Consolidated Balance Sheets - December 31, 1996 and 1995 Page 22 Consolidated Statements of Operations - Years ended December 31, 1996, 1995 and 1994 Page 23 Consolidated Statements of Shareholders' Equity - Years ended December 31, 1996, 1995 and 1994 Page 24 Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994 Page 25 Notes to Consolidated Financial Statements Page 27
2. CONSOLIDATED SUPPLEMENTAL SCHEDULES All schedules have been omitted because the information required to be set forth therein is not applicable or is included in the Consolidated Financial Statements or notes thereto. 45 46 (B) EXHIBITS.
Exhibit No Description Page or Method of Filing ---------- ----------- ------------------------ 2 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 Form S-4 Syntellect Acquisition Co., and Pinnacle dated February 9, 1996 (the "S-4") Investment Associates Inc. 3.1(a) Restated Certificate of Incorporation of Registrant Incorporated by reference to Exhibit No. 3-A to Syntellect's Registration Statement on Form S-1 dated February 23, 1995 (the "S-1") 3.1(b) Certificate of Amendment to Restated Certificate Incorporated by reference to Exhibit No. 3.1(b) of Incorporation of Registrant, filed with the to Syntellect's S-4 Delaware Secretary of State on May 18, 1993 3.1(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 Annual Report on Form 10-K dated Delaware Secretary of State on March 14, 1996 March 29, 1996. 3.2 Amended and Restated Bylaws of Registrant Incorporated by reference to Exhibit No. 3-B to Syntellect's S-1 4 Specimen Certificate representing Common Stock Incorporated by reference to Exhibit No. 4 to Amendment No. 1 of Syntellect's S-1 10.1 Restated Stock Option Plan, as amended through May Incorporated by reference to Exhibit 10.1 to 23, 1995 Syntellect's Annual Report on form 10-K dated March 29, 1996. 10.2 Employee Stock Purchase Plan Incorporated by reference to Exhibit No. 10-B to Amendment No. 1 of Syntellect's S-1 10.3 1997 Management Incentive Program Page 50 10.4 Long-Term Incentive Plan, as amended August 8, 1996 Page 57 10.5 Nonemployee Director Stock Plan Incorporated by reference to Exhibit B to Syntellect's Proxy Statement for the 1995 Annual Meeting of Stockholders 10.6(a) Lease Agreement and Addendum dated October 13, Incorporated by reference to Exhibit No. 10-E 1987 with Estes Property Management Company for to Syntellect's S-1 Syntellect's corporate headquarters 10.6(b) First Amendment to Lease Agreement dated August Incorporated by reference to Exhibit 10-D(2) of 31, 1992 between Estes-Samuelson Form 10-K for the fiscal year Syntellect ended Partnership and Syntellect December 31, 1992 ("1992 Form 10-K") 10.6(c) Lease Agreement dated June 28, 1996, together with Page 67 first amendment to lease dated October 6, 1996, between Opus Southwest Corporation and Syntellect for an office facility in Phoenix, Arizona 10.7 Form of Indemnification Agreement between Incorporated by reference to Exhibit No. 10-L Syntellect and its directors and officers to Syntellect's S-1
46 47 10.8(a) Agreement for Licensing of IBM Software Technology Incorporated reference to Exhibit 10-I of dated February 3, 1993 between Syntellect and IBM Syntellect's 1992 Form 10-K 10.8(b) Amendment Number One (1) to Agreement for the Incorporated by reference to Exhibit No. Licensing of IBM Technology, Agreement Number 10.8(b) to Syntellect's S-4 JWQ9308, dated March 25, 1993 10.8(c) Amendment Number Two (2) to Agreement for the Incorporated by reference to Exhibit No. Licensing of IBM Technology, Agreement Number 10.8(c) to Syntellect's S-4 JWQ9308, dated June 8, 1993 10.8(d) Amendment Number Three (3) to Agreement for the Incorporated by reference to Exhibit No. Licensing of IBM Technology, Agreement Number 10.8(d) to Syntellect's S-4 JWQ9308, dated December 16, 1993 10.8(e) Amendment Number Four (4) to Agreement for the Incorporated by reference to Exhibit No. Licensing of IBM Technology, Agreement Number 10.8(e) to Syntellect's S-4 JWQ9308, dated October 4, 1994 10.8(f) Amendment Number Five (5) to Agreement for the Page 125 licensing of IBM Technology, Agreement Number JWQ9308, dated February 13, 1995 10.8(g) Amendment Number Six (6) to Agreement for the Page 129 Licensing of IBM Technology, Agreement number JWQ9308, dated June 6, 1995 10.8(h) Amendment Number Seven (7) to Agreement for the Page 130 Licensing of IBM Technology, Agreement Number JWQ9308, dated September 9, 1996 10.8(i) Amendment Number Eight (8) to Agreement for Page 133 Licensing of IBM Technology, Agreement Number JWQ9308, dated March 11, 1997 10.9 Asset Purchase Agreement dated February 21, 1995 Incorporated by reference to Exhibit 10-K of between Syntellect Technology Corp. (formerly Syntellect's 1994 Form 10-K known as Dytel Inc.) and Dytel Incorporated 10.10 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. 10.11 Employment Agreement between J. Lawrence Bradner Incorporated by reference to Exhibit No. 10.11 and Syntellect Inc. dated March 14, 1996 to Syntellect's S-4 10.12 Employment Agreement between Steve Nussrallah and Incorporated by reference to Exhibit No. 10.12 Syntellect Inc. dated March 14, 1996 to Syntellect's S-4 10.13 Form of Registration Rights Agreement Incorporated by reference to Exhibit 10.13 to Syntellect's S-4 10.14 Stock Purchase Agreement, dated April 1, 1996, Incorporated by reference to Exhibit 10.14 to between Syntellect Inc. and Atlas Telecom, Inc. Syntellect's quarterly report on Form 10-Q, dated May 13, 1996.
47 48 10.15(a) Loan agreement, dated July 25, 1996, between Page 134 NationsBank, N.A. (South) and Syntellect Inc. for a $2,000,000 revolving credit line 10.15(b) $1,100,000 Letter of Credit dated February 7, Page 145 1997, issued against the $2,000,000 revolving credit line, to be used as security deposit on lease with Opus Southwest Corporation 11 Statement re computation of per share earnings Page 146 21 Subsidiaries of Registrant Page 147 23 Independent Auditors' Consents Page 148 27 Financial Data Schedule Page 150
(C) REPORTS ON FORM 8-K. There were no Current Reports on Form 8-K filed during the three months ended December 31, 1996. 48 49 Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Syntellect has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Phoenix, State of Arizona, on March 28, 1997. SYNTELLECT INC. By: /s/ Neal L. Miller ------------------------ Neal L. Miller Vice President, Chief Financial Officer, Secretary and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities of the dated indicated.
Name and Signature Title Date - ------------------ ----- ---- /s/ J. Lawrence Bradner Chairman of the Board, - --------------------------------- Chief Executive Officer J. Lawrence Bradner (Principal Executive Officer) March 28, 1997 /s/ Neal L. Miller Vice President, Chief Financial Officer, - --------------------------------- Secretary & Treasurer (Principal Financial Neal L. Miller and Accounting Officer) March 28, 1997 /s/ William P. Conlin Director March 28, 1997 - --------------------------------- William P. Conlin /s/ A. LeRoy Ellison Director March 28, 1997 - --------------------------------- A. LeRoy Ellison /s/ Jack R. Kelly, Jr. Director March 28, 1997 - --------------------------------- Jack R. Kelly, Jr. /s/ Steve G. Nussrallah Director March 28, 1997 - --------------------------------- Steve G. Nussrallah /s/ Daniel D. Ross Director March 28, 1997 - --------------------------------- Daniel D. Ross
49 EX-10.3 2 1997 MANAGEMENT INCENTIVE PROGRAM 1 Exhibit 10.3 SYNTELLECT INC. 1997 MANAGEMENT INCENTIVE PROGRAM 1. PURPOSE. The purpose of this Management Incentive Program (the "Program") is to create additional incentives for the following key officers of Syntellect Inc. (the "Company"): J. Lawrence Bradner, Steve Nussrallah, Scott Coleman, Neal Miller, David C. Phillips, Roger Reece, David Morales, Tricia Lester, Dean Giancola, Lindsay Hoopes and Jim Geer, (the "Participants"). A separate Management Incentive Plan is included for Gary Smith, who is also a key officer of the Company. 2. ELEMENTS OF THE PROGRAM. The program will apply only to the Participants and will consist of four elements: (a) an annual base salary; (b) annual performance-based bonus; (c) stock options; and (d) a special bonus to be awarded at the sole discretion of the Board of Directors (the "Board") and the Compensation Committee of the Board (the "Committee"). a. SALARY. The annual salaries of the Participants shall be as follows:
================================================================ Salary Date of Review Participant Annual Salary - ---------------------------------------------------------------- January 2. 1997 J. Lawrence Bradner S252,000 January 2, 1997 Steve Nussrallah $210,000 October 3, 1996 Scott Coleman $165,000 October 3, 1996 Neal Miller $145,000 October 3, 1997 David C. Phillips $137,500 January 2, 1997 Roger Reece $130,000 October 3, 1996 David Morales $145,000 January 2, 1997 Tricia Lester $ 96,000 January 2, 1997 Dean Giancola $ 95,000 January 1, 1996 Lindsay Hoopes $ 89,000 January 2, 1997 Jim Geer $ 90,000 ================================================================
The next reviews shall take place in January, 1998. (i) COMPUTATION OF ANNUAL BONUS. Each of the Participants shall be entitled to receive an Annual Bonus, subject to the Company achieving its Minimum Profit Objective for the fiscal year ending December 31, 1997. The Annual Bonus of each Participant shall be determined by adding the amounts determined in subsections (A) and (B) below. (A) If the Company achieves its Minimum Profit Objective, each Participant shall receive an amount determined by multiplying the ----------------------------------------------------- 1997 Syntellect Incentive Program page 1 2 Profit Objective premium by the Quarterly Performance Factor and the product multiplied by the appropriate Bonus Amount as set forth below:
================================================================== Participant Profit Bonus Amount - ------------------------------------------------------------------ J. Lawrence Bradner $ 126,000 Steve Nussrallah $ 105,000 Scott Coleman $ 41,250 Neal Miller $ 29,000 David C. Phillips $ 27,500 Roger Reece $ 18,200 David Morales $ 29,000 Tricia Lester $ 14,400 Dean Giancola $ 14,250 Lindsay Hoopes $ 8,900 Jim Geer $ 13,500 ==================================================================
(B) If the Company achieves its Minimum Profit Objective, then each Participant shall receive an amount determined by multiplying the Participant's Performance Premium by the appropriate Performance Bonus set forth below:
==================================================================== Participant Performance Bonus Amount - -------------------------------------------------------------------- J. Lawrence Bradner $25,200 Steve Nussrallah $20,500 Scott Coleman $16,500 Neal Miller $14,000 David C. Phillips $13,750 Roger Reece $13,000 David Morales $14,500 Tricia Lester $ 9,600 Dean Giancola $ 9,500 Lindsay Hoopes $ 4,450 Jim Geer $ 9,000 ====================================================================
The Annual Bonus shall be paid in cash. (ii) DEFINITIONS (A) MINIMUM PROFIT OBJECTIVE. For purposes of this Program, "Minimum Profit Objective" shall mean, with respect to an Annual --------------------------------------------- 1997 Syntellect Incentive Program page 2 3 Bonus, net income before taxes (all bonuses accrued), excluding interest income, of the Company for the year ending December 31, 1997 of eighty percent (80%) of the Plan or $969,000. (B) TARGET PROFIT OBJECTIVE. For purposes of this Program, "Target Profit Objective" shall mean, with respect to an Annual Bonus, net income before taxes (all bonuses accrued), excluding interest income, of the Company for the year ending December 31, 1997 of the 1997 Plan or $1,212,000. (C) ACTUAL PROFIT PERFORMANCE. For purposes of this Program, "Actual Profit Performance" shall mean, with respect to an Annual Bonus, net income before taxes (all bonuses accrued), excluding interest income, of the Company for the year ending December 31, 1997. (D) PROFIT OBJECTIVE PREMIUM. For purposes of this Program, "Profit Objective Premium" shall be determined by the following criteria: (1) If the Company achieves between the Minimum Profit Objective and the Target Profit Objective, the Profit Objective Premium shall be determined by the following formula: Actual Profit Performance =2.5[ ---------------------------.80] +.5 Target Profit Objective (2) If less than the Minimum Profit Objective is achieved, the Profit Objective Premium shall be zero (0); and (3) If the Company achieves greater than the Target Profit Objective, the Profit Objective Premium shall be determined by the following formula: Actual Profit Performance - Target Profit Objective =.5[---------------------------------------------------] + 1.0 Target Profit Objective The maximum Profit Objective Premium shall be 1.5. (E) For purposes of the Program, the "Quarterly Profit Objective" shall mean, with respect to the Quarterly Performance Factor, the estimated net income before taxes excluding interest income for each quarter of the Company for the year ending December 31, 1997 as follows: ------------------------------------------ 1997 Syntellect Incentive Program page 3 4
================================================================================ Quarters Quarterly Profit Objective - -------------------------------------------------------------------------------- Quarter 1 Less than or equal to $(548,000) Quarter 2 Less than or equal to ($218,000) Quarter 3 Greater than or equal to $639,000 Quarter 4 Greater than or equal to $1,339,000 ================================================================================
(F) For the purposes of this Program, "Quarterly Performance Factor" shall be determined by the following criteria:
================================================================================ Number of quarters during fiscal year Quarterly 1997 which the Performance Factor Quarterly Company met or for Participants other Performance Factor exceeded its than J. Larry for Participants J. Quarterly Profit Bradner and Steve Larry Bradner and Objectives Nussrallah Steve Nussrallah - -------------------------------------------------------------------------------- 1 1.000 1.00 2 1.125 1.05 3 1.250 1.10 4 1.500 1.20 ================================================================================
(G) PARTICIPANT'S PERFORMANCE PREMIUM. For purposes of this Program, "Participant's Performance Premium" shall mean a figure between 0.0 and 1.0. This figure shall be determined by the CEO of Syntellect, the President of Syntellect and the direct supervisor of the individual Participant. The basis for this determination shall be subjectively determined based upon: (1) J. LAWRENCE BRADNER. The objectives outlined in Attachment A-1 hereto. (2) STEVE NUSSRALLAH. The objectives outlined in Attachment A-2 hereto. (3) SCOTT COLEMAN. The objectives outlined in Attachment A-3 hereto. (4) NEAL MILLER. The objectives outlined in Attachment A-4 hereto. -------------------------------------- 1997 Syntellect Incentive Program page 4 5 (5) DAVID C. PHILLIPS. The objectives outlined in Attachment A-5 hereto. (6) ROGER REECE. The objectives outlined in Attachment A-6 hereto. (7) TRICIA LESTER. The objectives outlined in Attachment A-7 hereto. (8) DAVID MORALES. The objectives outlined in Attachment A-8 hereto. (9) LINDSAY HOOPES. The objectives outlined in Attachment A-9 hereto. (10) DEAN GIANCOLA. The objectives outlined in Attachment A-10 hereto. (11) JIM GEER. The objectives outlined in Attachment A-11 hereto. b. SPECIAL BONUS. A Special Bonus may be awarded to any or all of the Participants upon recommendation of the Committee in its sole discretion and by approval of the Board in its sole discretion. The Special Bonus is a purely discretionary bonus which may be awarded to a Participant for any reason that the Board or Committee deems appropriate, including but not limited to instances where the profits of the Company far exceed expected profit levels or where a Participant provides superior job performance. The Special Bonuses as recommended by the Audit Committee are attached as Attachment B-1. ------------------------------------ 1997 Syntellect Incentive Program page 5 6 c. STOCK OPTIONS. The Participants shall receive the following Stock Options in accordance with the 1984 Stock Option Plan as revised in May, 1994.
================================================================================ Participant Number of Shares - -------------------------------------------------------------------------------- J. Lawrence Bradner 27,500 Steve Nussrallah 25,000 Scott Coleman 13,000 Neal Miller 10,000 David C. Phillips 10,000 Gary Smith 10,000 Roger Reece 5,000 David Morales 10,000 Tricia Lester 5,000 Dean Giancola -0- Lindsay Hoopes 4,000 Jim Geer 4,000 ================================================================================
3. TIME OF DISTRIBUTION. Distribution of the Annual Bonuses shall be made no later than thirty (30) days after the audit of the books and accounts of the Company for such year has been completed by the Company's independent public accountants. 4. ADMINISTRATION OF THE PROGRAM. Overall administration of the Program shall be vested in the Committee as overseen by the Board. Any provision of the Program to the contrary notwithstanding, the Board may exercise all the powers and shall have all the authority conferred on the Committee by the Program, and in the event of any inconsistency between action taken by the Board and action taken by the Committee with respect to the Program or any provision hereunder, the action taken by the Board shall govern. 5. LIMITATIONS. Neither the action of the Company in establishing the Program not any provisions hereto nor any action by the Board or the Committee in implementing or overseeing the Program shall be construed as giving the Participant the right to be retained in the employ of the Company. Upon termination of employment with the Company for any reason, the rights of the Participant under the Program shall terminate except as to rights accrued through the date of termination. No rights shall accrue under the Program with respect to any bonus payment for any period in which the Participant was not employed by the Company for the entire period. Participants must be an employee of the Company on December 31, 1997 to be eligible for any bonus payments under this Program. The Participant shall not, because of the Program, acquire any right to an accounting or to examine the books or the affairs of the Company. 6. AMENDMENT OR TERMINATIONS. The Board and the Committee, and each of them, reserve the right at any time to make such changes in the Program as they may consider desirable ------------------------------------------ 1997 Syntellect Incentive Program page 6 7 or may terminate or discontinue the Program at any time, and upon such termination, the participant shall have no rights in the Program or any amounts accrued hereunder. 7. CONFLICTS. To the extent there exists any conflict between this Program and the Employment Agreements of J. Lawrence Bradner and Steve Nussrallah, the Employment Agreement shall rule unless specifically noted to the contrary. ----------------------------------------- 1997 Syntellect Incentive Program page 7 EX-10.4 3 LONG-TERM INCENTIVE PLAN 1 EXHIBIT 10.4 SYNTELLECT INC. LONG-TERM INCENTIVE PLAN (AS AMENDED AUGUST 8, 1996) ARTICLE I PURPOSE I.I. 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 is effective as of February 1, 1995 (the "Effective Date). Within one year after the Effective Date, the Plan shall be submitted to the shareholders of the Company for their approval. The Plan will be deemed to be approved by the shareholders if it receives the affirmative vote of the holders of a majority of the shares of stock of the Company present, or represented, and entitled to vote at a meeting duly held (or by the written consent of the holders of a majority of the shares of stock of the Company entitled to vote) in accordance with the applicable provisions of the Delaware Corporation Law and the Company's Bylaws and Articles of Incorporation. Any Awards granted under the Plan prior to shareholder approval are effective when made (unless the Committee specifies otherwise at the time of grant), but no Award may be exercised or settled and no restrictions relating to any Award may lapse before shareholder approval. If the shareholders fail to approve the Plan, any Award previously made shall be automatically canceled without any further act. 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 on 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 1 2 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 taming power of the Company and its subsidiaries (taken as a whole); (3) the stockholders 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 l3d-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 stockholders, 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. (g) "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. 2 3 (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 in 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 arid 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 S. (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; 3 4 (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 1,500,000. 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. No single Participant may receive Awards covering in the aggregate more than 250,000 shares of Stock. 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. 4 5 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 rates 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 representative 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). 5 6 (e) Ten Percent Owners. An Incentive Stock Option shall he granted to my 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 Option. 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. 6 7 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 great 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 required 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. l0.4. 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. 7 8 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 to be 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 an 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) (t) (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. Not withstanding 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 stoptransfer orders and other restrictions as the Board deems necessary or advisable to comply with federal or state 8 9 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 stockholder approval, the Board may in its sole discretion declare previously granted Options to be immediately exercisable. To the tent 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, in the sole discretion of the Committee: (a) Cause every Award outstanding hereunder to become fully exercisable and all restrictions on outstanding Awards to lapse and allow each Participant the right to exercise Awards prior to the occurrence of the event otherwise terminating the Awards over such period as the Committee, in its sole and absolute discretion, shall determine. 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; or (b) Cause every Award outstanding hereunder to terminate, provided that the surviving or resulting corporation shall tender an option or options to purchase its shares or exercise such rights on terms and conditions, as to the number of shares and rights and otherwise, which shall substantially preserve the rights and benefits of any Award then outstanding thereunder. 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 stockholder 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. 9 10 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 my 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 Readings. 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. 10 EX-10.6.C 4 LEASE AGREEMENT DATED JUNE 28, 1996 1 Exhibit 10.6(c) LEASE THIS INDENTURE of lease, dated as of the 28th day of June, 1996, by and between OPUS SOUTHWEST CORPORATION, a Minnesota corporation, owner of the Complex (as hereinafter defined), hereinafter referred to as "Lessor", and SYNTELLECT INC., a Delaware corporation, hereinafter referred to as "Lessee". WITNESSETH: That Lessor, in consideration of the rents and covenants hereinafter set forth, does hereby lease and let unto Lessee, and Lessee does hereby hire and take from Lessor, that certain space shown and designated on the site plan attached hereto and made a part hereof as Exhibit A and that certain space plan attached hereto and made a part hereof as Exhibit D, which space consists of approximately 60,000 rentable square feet, located in the office and warehouse complex known and described as Northgate Center located northwest of the intersection of Beardsley Road and Interstate 17, Phoenix, Arizona. The aforesaid space leased and let unto Lessee is hereinafter referred to as the "Premises"; the land (including all easement areas appurtenant thereto) upon which the building or buildings of which the Premises are a part is hereinafter referred to as the "Property"; and the Property and all buildings and improvements and personal property of Lessor used in connection with the operation or maintenance thereof located therein and thereon and the appurtenant parking facilities, if any, are hereinafter called the "Complex". Lessee hereby accepts this Lease and the Premises upon the covenants and conditions set forth herein and subject to any encumbrances, covenants, conditions, restrictions and other matters of record and all applicable zoning, municipal, county, state and federal laws, ordinances and regulations governing and regulating the use of the Premises. TO HAVE AND TO HOLD THE SAME PREMISES, without any liability or obligation on the part of Lessor to make any alterations, improvements or repairs of any kind on or about the Premises, except as expressly provided herein, for a term of ten (10) years, commencing an the 1ST DAY OF MARCH, 1997, and ending on the 30TH DAY OF APRIL, 2007, subject to extension or early termination, in the manner provided hereinafter, to be occupied and used by Lessee for general office and light assembly purposes and for no other purpose, subject to the covenants and agreements hereinafter contained. ARTICLE 1. BASE RENT: In consideration of the leasing aforesaid, Lessee agrees to pay to Lessor, at c/o Normandale Properties Southwest Corporation, 4742 North 24th Street, Suite 100, Phoenix, Arizona 85016, Attention: Accounting Department or at such other place as Lessor from time to time may designate in writing, an annual rental as hereinafter set forth, sometimes hereinafter referred to as the "Base Rent", payable monthly, in advance, in installments as hereinafter set forth, commencing on the first day of the term and continuing on the first day of each and every month thereafter for the next succeeding months during the balance of the term:
APPLICABLE PORTION MONTHLY OF TERM BASE RENT ------------------ --------- Months 1-60 0.865 per rentable square foot Months 61-120 1.00 per rentable square foot
2 It the term commences on a date other than the first day of a calendar month or ends on a date other than the last day of a calendar month, monthly vent for the first month of the term or the last month of the term, as the case may be, shall be prorated based upon the ratio that the number of days in the term within such month bears to the total number of days in such month. ARTICLE 11. ADDITIONAL RENT: In addition to the Base Rent payable by Lessee under the provisions of Article I hereof, Lessee shall pay to Lessor "Additional Rent" as hereinafter provided for in this Article II. All sums under this Article II and all other sums and changes required to be paid by Lessee under this Lease (except Base Rent), however denoted, shall be deemed to be "Additional Rent". If any such amounts or charges are not paid at the time provided in this Lease, they shall nevertheless be collectible as Additional Rent with the next installment of Base Rent falling due. For purposes of this Article II, the parties hereto agree upon the following Definitions: A. The term "Lease Year" shall mean each of those calendar years commencing with and including the year during which the term of this Lease commences, and ending with the calendar year during which the term of this Lease (including any extensions or renewals) terminates. B. The term "Real Estate Taxes" shall mean and include all personal property taxes of Lessor relating to Lessor's personal property located In the Complex and used or useful in connection with the operation and maintenance thereof, real estate taxes and installments of special assessments, including interest thereon, relating to the Property and the Complex, and all other governmental charges, general and special, ordinary and extraordinary, foreseen as well as unforeseen, of any kind and nature whatsoever, or other tax, however described, which is levied or assessed by the United States of America or the state in which the Complex is located or any political subdivision thereof, against Lessor or all or any part of the Complex as a result of Lessor's ownership of the Property or the Complex, and payable during the respective Lease Year. The term "Real Estate Taxes" shall also include any assessments or other charges imposed against Lessor or all or any part of the Complex and payable during the respective Lease Year as a result of the Complex being subject to any covenants, conditions or restrictions now or hereafter recorded, as the same may be amended from time to time. It shall not include any net income tax, estate tax, inheritance tax, excess profit taxes, franchise taxes, gift taxes, capital stock taxes, other taxes applied or measured by Lessor's net income, and any items included as Operating Expenses (defined below). C. The term "Operating Expenses" shall mean and include all expenses incurred with respect to the maintenance and operation of the Property and the Complex as determined by Lessor's accountant in accordance with generally accepted accounting principles consistently followed, including, but not limited to, insurance premiums, maintenance and repair costs, steam, electricity, water, sewer, gas and other utility charges, fuel, lighting (including the tubes, ballasts and starter of florescent parabolic lights), window washing and janitorial services, trash and rubbish removal, wages payable to employees of Lessor (below the grade of building superintendent whose duties are - 2 - 3 connected with the operation and maintenance of the Property and the Complex (but only for the portion of their time allocable to work related to the Complex), amounts paid to contractors or subcontractors for work or services performed in connection with the operation and maintenance of the Property and the Complex, all costs of uniforms, supplies and materials used in connection with the operation and maintenance of the Property and the Complex, all payroll taxes, unemployment insurance costs, vacation allowances and the cost of providing disability insurance or benefits, pensions, profit sharing benefits, hospitalization, retirement or other so-called fringe benefits, and any other expense imposed on Lessor or its contractors or subcontractors, pursuant to law or pursuant to any collective bargaining agreement covering such employees, all services, supplies, repairs, replacements or other expenses for maintaining and operating the Complex, reasonable attorneys' fees and costs in connection with appeal or contest of real estate taxes or levies, and such other expenses as may be ordinarily incurred in the operation and maintenance of a commercial office/warehouse complex and not specifically set forth herein, including reasonable management fees (not to exceed 3.5% of the total Base Rent and other charges to be paid by Lessee each Lease Year) and the costs of a building office at the Complex. The term "Operating Expenses" shall not include any capital improvement to the Complex other than replacements required for normal maintenance and repair, nor shall it include repairs, restoration or other work occasioned by fire, windstorm or other insured casualty, expenses incurred in leasing or procuring tenants, leasing commissions, advertising expenses, expenses for renovating space for new tenants, legal expenses incident to enforcement or negotiation by Lessor of the terms of any lease, interest or principal payments on any mortgage or other indebtedness of Lessor, compensation paid to any employee of Lessor above the grade of building superintendent, depreciation allowance or expense, any bad debt loss, rent loss or reserves for bad debt losses or rent losses, the costs of any services sold or provided to other tenants or occupants but not to Lessee, or any expense incurred due to Lessor's gross negligence or willful misconduct. Notwithstanding the foregoing, in the event Lessor installs equipment in or makes improvements or alterations to the Complex which are for the purpose of reducing energy costs, maintenance costs or other Operating Expenses or which are required under any governmental laws, regulations or ordinances which were not required at the date of commencement of the term of this Lease, Lessor may include in Operating Expenses reasonable charges for interest on such investment and reasonable charges for depreciation on the same so as to amortize such investment over the reasonable life of such equipment, improvement or alteration on a straight line basis; however, any charges related to improvements or alterations for the purpose of reducing energy costs shall be limited, in any given Lease Year, to the reasonably estimated savings which result. Operating Expenses shall also be deemed to include expenses incurred by Lessor in connection with city sidewalks adjacent to the Property and any pedestrian walkway system (either above or below ground) or other public facility to which Lessor or the Complex is from time to time subject in connection with operations of the Property and the Complex. In the event Lessor includes -3- 4 "Phase II, (as designated on the site plan) as part of the Complex, the "Operating Expenses" for any leasable buildings contained within "Phase II" shall not be included in the Operating Expenses allocable to Lessee, although all "Operating Expenses" related to all other portions of the Complex may be included in Operating Expenses and allocated proportionately. D. The term "Lessee's Pro Rata Share of Real Estate Taxes" shall mean fifty-three and 97/100 percent (53.97%) of the Real Estate Taxes for the applicable Lease Year, and the term "Lessee's Pro Rata Share of Operating Expenses" shall mean fifty-three and 97/100 percent (53.97%) of the Operating Expenses for the applicable Lease Year. Said percentages have been estimated based upon a ratio of $66,000 sq. ft. to 122,300 sq. ft. (i.e., the rentable area of the Premises to the rentable area of the Complex); however, each area amount shall be subject to adjustment, pursuant to Article XXIX of Exhibit C. Further, although said percentages shall be deemed to have been agreed upon by the parties hereto after due consideration of the rentable area of the Premises compared to the rentable area of the Complex; the percentages for Lessee's Pro Rata Share of Operating Expenses and for Lessee's Pro Rata Share of Real Estate Taxes shall be amended each Lease Year to the greater of the following: (i) if the total rentable area leased in the Complex (pursuant to leases under which the term has commenced) is ninety-five percent (95%) or less than the total rentable area of the Complex, the percentages shall be that which the rentable area of the Premises bears to ninety-five percent (95%) of the total rentable area of the Complex for such Lease Year; or (ii) if the total rentable area leased in the Complex (pursuant to leases under which the term has commenced) is greater than ninety-five percent (95%), the percentages shall be that which the rentable area of the Premises bears to the actual rentable area of the Complex for such Lease Year. Rentable area shall include the exterior wall of the building in which the Premises is to be located but shall in no event include basement storage space or garage space. E. Anything herein to the contrary notwithstanding, it is agreed that in the event the Complex is not fully occupied during any calendar year or Lease Year, a reasonable and equitable adjustment shall be made by Lessor in computing the Operating Expenses for such year so that the Operating Expenses shall be adjusted to the amount that would have been incurred had the Complex been fully occupied during such year. As to each Lease Year after the term of this Lease commences, Lessor shall estimate for each such Lease Year (i) the total amount of Real Estate Taxes; (ii) the total amount of Operating Expenses; (iii) Lessee's Pro Rata Share of Real Estate Taxes; (iv) Lessee's Pro Rata Share of Operating Expenses; (v) the computation of the annual and monthly rental payable during such Lease Year as a result of increases or decreases in Lessee's Pro Rata Share of Real Estate Taxes and Lessee's Pro Rata Share of Operating Expenses. Said estimate shall be in writing and shall be delivered or mailed to Lessee at the Premises. Lessee shall pay, as Additional Rent, the amount of Lessee's Pro Rata Share of Real Estate Taxes for each Lease Year and Lessee's Pro Rata Share of Operating Expenses for each Lease Year, so estimated, in equal monthly installments, in advance, on the first day of each month during each applicable Lease Year. -4- 5 In the event that said estimate is delivered to Lessee after the first day of January of the applicable Lease Year, said amount, so estimated, shall be payable as Additional Rent, in equal monthly installments, in advance, on the first day of each month over the balance of such Lease Year, with the number of installments being equal to the number of full calendar months remaining in such Lease Year. From time to time during any applicable Lease Year, Lessor may reestimate the amount of Real Estate Taxes and Operating Expenses and Lessee's Pro Rata Share thereof, and in such event Lessor shall notify Lessee, in writing, of such reestimate in the manner above set forth and fix monthly installments for the then remaining balance of such Lease Year in an amount sufficient to pay the reestimated amount over the balance of such Lease Year after giving credit for payments made by Lessee on the previous estimate. Upon completion of each Lease Year, Lessor shall cause its accountants to determine the actual amount of Real Estate Taxes and Operating Expenses for such Lease Year and Lessee's Pro Rata Share thereof and deliver a written certification of the amounts thereof to Lessee after the end of each Lease Year. If Lessee has paid less than its Pro Rata Share of Real Estate Taxes or its Pro Rata Share of Operating Expenses for any Lease Year, Lessee shall pay the balance of its Pro Rata Share of the same within thirty (30) days after the receipt of such statement. If Lessee has paid more than its Pro Rata Share of Real Estate Taxes or its Pro Rata Share of Operating Expenses for any Lease Year, Lessor shall, at Lessee's option, either (i) refund such excess, or (ii) credit such excess against the most current monthly installment or installments due Lessor for its estimate of Lessee's Pro Rata Share of Real Estate Taxes and Lessee's Pro Rata Share of Operating Expenses for the next following Lease Year. A pro rata adjustment shall be made for a fractional Lease Year occurring during the term of this Lease or any renewal or extension thereof based upon the number of days of the term of this Lease during said Lease Year as compared to three hundred sixty-five (365) days and all additional sums payable by Lessee or credits due Lessee as a result of the provisions of this Article II shall be adjusted accordingly. After the first Lease Year containing twelve (12) full calendar months, Lessee's Pro Rata Share of "controllable" Operating Expenses thereafter, for any given Lease Year, shall not exceed the "cap". For these purposes (i) "controllable" Operating Expenses shall mean those Operating Expenses which are subject to Lessor's control and discretion, and (ii) the "cap" for any "controllable" Operating Expense shall mean 105%, multiplied by the amount of the "controllable" Operating Expense in said first Lease Year, multiplied by the number of Lease Years since said first Lease Year. Examples of Operating Expenses which are not "controllable" include taxes, insurance premiums and utility costs. Further, Lessee shall pay, also as Additional Rent, all other sums and charges required to be paid by Lessee under this Lease, and any tax or excise on rents, gross receipts tax, transaction privilege tax or other tax, however described, which is levied or assessed by the United States of America or the state in which the Complex is located or any political subdivision thereof, or any city or municipality, against Lessor in respect to the Base Rent, Additional Rent, or other charges reserved under this Lease or as a result of Lessor's receipt of such rents or other charges accruing under this Lease; provided, however, Lessee shall have no obligation to pay net income taxes of Lessor. ARTICLE III. LATE CHARGE AND OVERDUE AMOUNTS - RENT INDEPENDENT: Lessee shall pay to Lessor, as liquidated damages, a late charge equal to five percent (5%) of any amount not paid on or before - 5 - 6 five (5) days after the date when the same is due to compensate Lessor for its costs in connection with such late payment by Lessee. The assessment or collection of a late charge hereunder shall not constitute the waiver by Lessor of a default by Lessee under this Lease and shall not bar the exercise by Lessor of any rights or remedies available under this Lease. In addition, any installment of Base Rent, Additional Rent or other charges to be paid by Lessee accruing under the provisions of this Lease, which shall not be paid when due, shall bear interest at the rate of fifteen percent (15%) per annum from the date when the same is due until the same shall be paid, but if such rate exceeds the maximum interest rate permitted by law, such rate shall be reduced to the highest rate allowed by law under the circumstances. Lessee's covenants to pay the Base Rent and the Additional Rent are independent of any other covenant, condition, provision or agreement herein contained. Nothing herein contained shall be deemed to suspend or delay the payment of any amount of money or charge at the time the same becomes due and payable hereunder, or limit any other remedy of Lessor. Base Rent and Additional Rent are sometimes collectively referred to as "rent". Rent shall be payable without deduction, offset, prior notice or demand, in lawful money of the United States. ARTICLE IV. POSSESSION OF PREMISES: If Lessor shall be unable to give possession of the Premises on the date of the commencement of the term because the construction of the Complex or the completion of the Premises has not been sufficiently completed to make the Premises ready for occupancy, or for any other reason, Lessor shall not be subject to any claims, damages or liabilities for the failure to give possession on said date except as expressly set forth below. Under said circumstances, the rent reserved and covenant to pay same shall not commence until possession of the Premises is given or the Premises are ready for occupancy, whichever is earlier. Failure to give possession on the date of commencement of the term shall in no way affect the validity of this Lease or the obligations of Lessee hereunder; provided, however, that if the date of commencement of the initial term is delayed beyond the scheduled commencement date, the expiration date of the initial term shall be extended to provide for a full ten-year initial term of this Lease; and provided further (a) that for every two (2) days' delay in Lessor's delivery of possession (other than for reasons beyond Lessor's control including force majeure) after MARCH 1, 1997 BUT BEFORE APRIL 1, 1997, and (b) that for every one (1) day delay in Lessor's delivery of possession (other than for reasons beyond Lessor's control including force majeure) after APRIL 1, 1997, Lessee shall be entitled to a credit equal to one (1) day of Base Rent, not to exceed ninety (90) total days of credit against Base Rent, to be applied to the Base Rent first due hereunder. If for any reason whatsoever Lessor fails to substantially complete the Premises and deliver possession thereof to Lessee by DECEMBER 1, 1997, then at any time thereafter, Lessee may cancel this Lease by giving written notice to Lessor of such cancellation. If Lessee is given and accepts possession of the Premises on a date earlier than the date above specified for commencement of the term, the rent reserved herein and all covenants, agreements and obligations herein and the term of this Lease shall commence on the date that possession of the Premises is given to Lessee. Subject to the express warranty provided in Article XXVIII of Exhibit C, the acceptance of possession by Lessee shall be deemed conclusively to establish that the Premises and all other improvements of the Complex required to be constructed by Lessor for use thereof by Lessee hereunder have been completed at such time to Lessee's satisfaction and in conformity with the plans approved by Lessee for the Tenant Improvements, pursuant to Article XXIII, of Exhibit C, unless Lessee notifies Lessor in writing within sixty (60) days after commencement of the term as - 6 - 7 to any items not completed. Lessee acknowledges that neither Lessor nor any agent of Lessor has made any representation or warranty with respect to the Premises or the Complex or with respect to the suitability or fitness of either for the conduct of Lessee's business or for any other purpose. ARTICLE V. SERVICES: A. All electric lighting bulbs and tubes and all ballasts and starters within the Premises shall be replaced by Lessee at the expense of Lessee. B. Subject to Article II hereof, Lessor shall provide maintenance in good order, condition and repair of the common area of the Complex, including, without limitation, the parking facilities and all driveways leading thereto and keeping the same free from any unreasonable accumulation of snow. Lessor shall keep and maintain the landscaped area and parking facilities in a neat and orderly condition. Lessor reserves the right to designate areas of the appurtenant parking facilities where Lessee and its agents, employees and invitees shall park and may exclude Lessee, its agents, employees and invitees from parking in other areas as designated by Lessor; provided, however, Lessor shall not be liable to Lessee for the failure of any tenant or its invitees, employees, agents or customers to abide by Lessor's designations or restrictions. No interruption in, or temporary stoppage of, any of the aforesaid services caused by repairs, renewals, improvements, alterations, strikes, lockouts, labor controversies, accidents, inability to obtain fuel or supplies, or other causes shall be deemed an eviction or disturbance of Lessee's use and possession, or render Lessor liable for damages, by abatement of rent or otherwise or relieve Lessee from any obligation herein set forth. In no event shall Lessor be required to provide any heat, air conditioning, electricity or other service in excess of that permitted by voluntary or involuntary guidelines or laws, ordinances or regulations of governmental authority. ARTICLE VI. USE: The Premises shall be used for general office purposes, light assembly and for carrying on such activities as may be incidental thereto and for no other purpose; provided, however, Lessee may not use or occupy the Premises, or knowingly permit the Premises to be used or occupied, contrary to any statute, rule, order, ordinance, requirement or regulation or any covenant, condition or restriction now or hereafter applicable thereto, or in any manner which would violate any certificate of occupancy or permit affecting the same, or which would cause structural injury to the Premises or cause the value or usefulness of the Premises, or any part thereof, substantially to diminish (reasonable wear and tear excepted) or which would constitute a private or public nuisance or waste, and Lessee agrees that it will promptly, upon discovery of any such use, take all necessary steps to compel the discontinuance of such use. ARTICLE VII. CERTAIN RIGHTS RESERVED BY LESSOR: Lessor reserves the following rights exercisable without notice and without liability to Lessee and without effecting an eviction, constructive or actual, or disturbance of Lessee's use or possession, or giving rise to any claim for setoff or abatement of rent: A. To control, install, affix and maintain any and all signs on the Property, or on the exterior of the Complex and in any common corridors, entrances and other common areas thereof, except those signs within the Premises not visible from outside the Premises. - 7 - 8 B. To reasonably designate, limit, restrict and control any service in or to the Complex, including but not limited to the designation of sources from which Lessee may obtain sign painting and lettering. Any restriction, designation, limitation or control imposed by reason of this subparagraph shall be imposed uniformly on Lessee and other tenants occupying space in the Complex. C. To retain at all times and to use in appropriate instances keys to all doors within and into the Premises. No locks shall be changed without the prior written consent of Lessor. This provision shall not apply to Lessee's safes or other areas maintained by Lessee for the safety and security of monies, securities, negotiable instruments or like items. D. To make repairs, improvements, alterations, additions or installations, whether structural or otherwise, in and about the Complex, or any part thereof, and for such purposes upon, reasonable notice to Lessee, to enter upon the Premises, and during the continuation of any of said work, to temporarily close doors, entryways, public spaces and corridors in the Complex and to interrupt or temporarily suspend services and facilities. E. To approve the weight, size and location of safes and other heavy equipment and articles in and about the Premises and the Complex and to require all such items to be moved into and out of the Complex and the Premises only at such times and in such manner as Lessor shall direct in writing. ARTICLE VIII. ALTERATIONS AND IMPROVEMENTS: Lessee shall not make any improvements, alterations, additions or installations in or to the Premises in excess of $10,000.00 (hereinafter referred to as the "Work") without Lessor's prior written consent, which consent may be withheld in Lessor's sole discretion. Along with any request for Lessor's consent and before commencement of the Work or delivery of any materials to be used in the Work to the Premises or into the Complex, Lessee shall furnish Lessor with plans and specifications, names and addresses of contractors, copies of contracts, necessary permits and licenses, an indemnification in such form and amount as may be reasonably satisfactory to Lessor and a performance bond executed by a commercial surety reasonably satisfactory to Lessor in an amount equal to the cost of the Work and for the payment of all liens for labor and material arising therefrom. The bond required by the preceding sentence shall not be required if the cost of the Work is less than $100,000.00. Lessee agrees to defend and hold Lessor forever harmless from any and all claims and liabilities of any kind and description which may arise out of or be connected in any way with said improvements, alterations, additions or installations. All Work shall be done only by contractors or mechanics reasonably approved by Lessor and at such time and in such manner as Lessor may from time to time reasonably designate. All work done by Lessee or its agents, employees or contractors shall be done in such a manner as to avoid labor disputes. Lessee shall pay the cost of all such improvements, alterations, additions or installations (including, if the cost of the Work exceeds $100,000.00, a reasonable charge for Lessor's services and for Lessor's inspection and engineering time) and the cost of painting, restoring or repairing the Premises and the Complex occasioned by such improvements, alterations, additions or installations. Upon completion of the Work, Lessee shall furnish Lessor with contractor's affidavits, full and final waivers of liens and receipted bills covering all labor and materials expended and used. The Work shall comply -8- 9 with all insurance requirements and all laws, ordinances, rules and regulations of all governmental authorities and shall be constructed in a good and workmanlike manner. Lessee shall permit Lessor to inspect construction operations in connection with the Work. Lessee shall not be allowed to make any improvements, alterations, additions or installations if such action results or would result in a labor dispute or otherwise would materially interfere with Lessor's operation of the Complex. Lessor, by written notice to Lessee given at or prior to termination of this Lease, may require Lessee, at Lessee's sole cost and expense, to remove any improvements, alterations, additions or installations installed by Lessee in the Premises and to repair or restore any damage caused by the installation and removal of such improvements, alterations, additions or installations; provided, however, the only improvements, additions or installations which Lessee shall remove shall be those specified in Lessor's notice. Lessee shall keep the Premises and the Complex free from any liens arising out of any work performed, material furnished or obligations incurred by Lessee, and shall indemnify, protect, defend and hold harmless Lessor from any liens and encumbrances arising out of any work performed or material furnished by or at the direction of Lessee. In the event that Lessee shall not, within twenty (20) days following the imposition of any such lien, cause such lien to be released of record by payment or posting of a proper bond, Lessor shall have, in addition to all other remedies provided herein and by law, the right, but not the obligation, to cause the same to be released by such means as it shall deem proper, including payment of and/or defense against the claim giving rise to such lien. All such sums paid by Lessor and all expenses incurred by it in connection therewith, including attorneys' fees and costs, shall be payable as Additional Rent to Lessor by Lessee on demand with interest at the rate provided in Article III accruing from the date paid or incurred by Lessor until reimbursed to Lessor by Lessee. ARTICLE IX. REPAIRS: Subject to Article X hereof, Lessee shall, during the term of this Lease, at Lessee's expense, keep the Premises in as good order, condition and repair as they were at the time Lessee took possession of the same, reasonable wear and tear and damage from fire and other casualties excepted. Lessee shall keep the Premises in a neat and sanitary condition, and Lessee shall not commit any nuisance or waste on the Premises or in, on or about the Complex, throw foreign substances in the plumbing facilities, or waste any of the utilities furnished by the Lessor. All uninsured damage or injury to the Premises or to the Complex caused by Lessee moving furniture, fixtures, equipment or other devices in or out of the Premises or the Complex or by installation or removal of furniture, fixtures, equipment, devices or other property of Lessee or its agents, contractors, servants or employees, due to carelessness, omission, neglect, improper conduct or other cause of Lessee or its servants, employees, agents, visitors or licensees, shall be repaired, restored and replaced promptly by Lessee at its sole cost and expense to the satisfaction of Lessor. All repairs, restorations and replacements shall be in quality and class equal to the original work. Lessor and its employees and agents shall have the right to enter the Premises during or as a result of any emergency, or at any reasonable time or times (upon twenty-four (24) hours notice) for the purpose of inspection, cleaning, repairs, altering or improving the same but nothing contained herein shall be construed as imposing any obligation on Lessor to make any repairs, alterations or improvements which are the obligation of Lessee. Lessee shall give written notice to Lessor at least thirty (30) days prior to vacating the Premises for the express purpose - 9 - 10 of arranging a meeting with Lessor for a joint inspection of the Premises. In the event of Lessee's failure to give such notice and arrange such joint inspection, then Lessor shall notify Lessee of a date, no earlier than five (5) after Lessor's notice on which such joint inspection shall be held, and if Lessee fails to appear at such scheduled inspection, Lessor's inspection at or after Lessee's vacation of the Premises shall be conclusively deemed correct for purposes of determining Lessee's responsibility for repairs and restoration hereunder. ARTICLE X. INSURANCE AND INDEMNITY: Lessor shall keep the Complex insured for the benefit of Lessor in an amount equivalent to the full replacement value thereof (excluding foundation, grading and excavation costs) against: (a) loss or damage by fire; and (b) such other risk or risks of a similar or dissimilar nature as are now or may be customarily covered with respect to buildings and improvements similar in construction, general location, use, occupancy and design to the Complex, including, but without limiting the generality of the foregoing, windstorms, hail, explosion, vandalism, malicious mischief, civil commotion and such other coverage as may be deemed necessary by Lessor, provided such additional coverage is obtainable and provided such additional coverage is such as is customarily carried with respect to buildings and improvements similar in construction, general location, use, occupancy and design to the Complex. These insurance provisions shall in no way limit or modify any of the obligations of Lessee under any provision of this Lease. Lessor agrees that such policy or policies of insurance shall permit releases of liability as provided herein and/or waiver of subrogation clause as to Lessee, and Lessor waives, releases and discharges Lessee from all claims or demands whatsoever which Lessor may have or acquire arising out of damage to or destruction of the Complex or loss of use thereof occasioned by fire or other casualty, whether such claim or demand may arise because of the negligence or fault of Lessee or its agents, employees, customers or business invitees, or otherwise, and Lessor agrees to look to the insurance coverage only in the event of such loss. Insurance premiums paid thereon shall be a portion of the "Operating Expenses" described in Article II hereof. Notwithstanding the above, in the event a release of Lessee or waiver of subrogation as to Lessee (without invalidation of coverage) becomes generally unavailable in insurance policies as to commercial office/warehouse projects similar to the Complex, the release and any waiver of subrogation above provided for shall cease upon written notice by Lessor to Lessee of such event. Thereafter, Lessee may, upon written notice to Lessor, require Lessor to secure a waiver of subrogation as to Lessee if (a) a right to waive subrogation as to Lessee thereafter becomes available without increased premium, or (b) a right to waive subrogation as to Lessee becomes available and Lessee pays any increased premium required in connection therewith. Lessee shall keep all of its machinery, equipment, furniture, fixtures, personal property (including also property under the care, custody or control of Lessee) and business interests which may be located in, upon or about the Premises insured for the benefit of Lessee in an amount equivalent to the full replacement value or insurable value thereof against: (a) loss or damage by fire; and (b) such other risk or risks of a similar or dissimilar nature as are now, or may in the future be, customarily covered with respect to a tenant's machinery, equipment, furniture, - 10 - 11 fixtures, personal property and business located in a building similar in construction, general location, use, occupancy and design to the Complex, including, but without limiting the generality of the foregoing, windstorms, hail, explosions, vandalism, theft, malicious mischief, civil commotion and such other coverage as Lessee may deem appropriate or necessary. Lessee shall be permitted to "self-insure" or to establish deductible limits under such policies, provided, however, that the amount of such retained risk shall not exceed, at any time, ten percent (10%) of Lessee's Tangible Net Worth (defined in Article XX of Exhibit C), as the same may change from time to time. Lessee agrees that such policy or policies of insurance shall permit releases of liability as provided herein and/or waiver of subrogation clause as to Lessor, and Lessee waives, releases and discharges Lessor and its agents, employees and contractors from all claims or demands whatsoever which Lessee may have or acquire arising out of damage to or destruction of the machinery, equipment, furniture, fixtures, personal property and loss of use thereof occasioned by fire or other casualty, whether such claim or demand may arise because of the negligence or fault of Lessor or its agents, employees, contractors or otherwise, and Lessee agrees to look to the insurance coverage only in the event of such loss. Lessor shall, as a portion of the Operating Expenses defined in Article II, maintain, for its benefit and the benefit of its managing agent, general public liability insurance against claims for personal injury, death or property damage occurring upon, in or about the Complex, such insurance to afford protection to Lessor and its managing agent in such amounts as Lessor deems commercially reasonable and comparable to the amounts maintained for projects similar to the Complex, but in no event less than $2,000,000.00 of total insurance coverage for the commercial general liability policy. Lessee shall, at Lessee's sole cost and expense but for the mutual benefit of Lessor, its managing agent and Lessee, maintain general public liability insurance against claims for personal injury, death or property damage occurring upon, in or about the Premises, such insurance to afford protection to Lessor, its managing agent and Lessee to the limit of not less than One Million and No/100 Dollars ($1,000,000.00) in respect to the injury or death to a single person, and to the limit of not less than Three Million and No/100 Dollars ($3,000,000.00) in respect to any one accident, and to the limit of not less than Five Hundred Thousand and No/100 Dollars ($500,000.00) in respect to any property damage. Such policies of insurance shall be written in companies reasonably satisfactory to Lessor, naming Lessor and its managing agent as additional insureds thereunder, and such policies, or a memorandum or certificate of such insurance, shall be delivered to Lessor endorsed "Premium Paid" by the company or agent issuing the same or accompanied by other evidence satisfactory to Lessor that the premium thereon has been paid. At such time as insurance limits required of tenants in office/warehouse buildings in the area in which the Complex is located are generally increased to greater amounts, Lessor shall have the right to require such greater limits as may then be customary. Lessee agrees to include in such policy the contractual liability coverage insuring Lessee's indemnification obligations provided for herein. Any such coverage shall be deemed primary to any liability coverage secured by Lessor. Such insurance shall also afford coverage for all claims based upon acts, omissions, injury or damage, which claims occurred or arose (or the onset of which occurred or arose) in whole or in part during the policy period. Lessor agrees to indemnify and save Lessee harmless against and from any and all claims, loss, damage and expense by or on -11- 12 behalf of any person or persons, firm or firms, corporation or corporations, arising from any breach or default on the part of Lessor in the performance of any covenant or agreement on the part of Lessor to be performed, pursuant to the terms of this Lease, or arising from any negligence or wilful misconduct on the part of Lessor or arising from any accident, injury or damage to the extent caused by the negligence or wilful misconduct of Lessor to any person, firm or corporation occurring during the term of this Lease or any renewal thereof, in or about the Premises and the Office Complex, and from and against all costs, reasonable counsel fees, expenses and liabilities incurred in or about any such claim or action or proceeding brought thereon; and in case any such action or proceeding be brought against Lessee by reason of any such claim, Lessor, upon notice from Lessee, covenants to resist or defend such action or proceeding by counsel reasonably satisfactory to Lessee; provided, however, that notwithstanding anything to the contrary contained in the Article, Lessor shall not be liable for, and Lessor shall not indemnify Lessee against or from, any consequential damages of Lessee, which shall include without limitation any loss of business or loss of profits. Lessee agrees to indemnify, protect, defend and hold harmless Lessor and Lessor's partners, shareholders, employees, lender and managing agent harmless from and against any and all claims, losses, costs, liabilities, actions and damages, including without limitation attorneys' fees and costs, by or on behalf of any person or persons, firm or firms, corporation or corporations, arising from any breach or default on the part of Lessee in the performance of any covenant or agreement an the part of Lessee to be performed, pursuant to the terms of this Lease, or arising from any act or negligence on the part of Lessee or its agents, contractors, servants, employees or licensees, or arising from any accident, Injury or damage to the extent caused by Lessee or its agents or employees to any person, firm or corporation occurring during the term of this Lease or any renewal thereof, in or about the Premises and the Complex, and from and against all costs, reasonable counsel fees, expenses and liabilities incurred in or about any such claim or action or proceeding brought thereon; and in case any action or proceeding be brought against Lessor or its managing agent by reason of any such claim, Lessee, upon notice from Lessor, covenants to resist or defend such action or proceeding by counsel reasonably satisfactory to Lessor. Lessee agrees, to the extent not expressly prohibited by law, and except in the event of the negligence or willful misconduct of Lessor, that Lessor and Lessor's agents, employees and servants shall not be liable, and Lessee waives all claims for damage to property and business sustained during the term of this Lease by Lessee occurring in or about the Complex, resulting directly or indirectly from any existing or future condition, defect, matter or thing in the Premises, the Complex or any part thereof, or from equipment or appurtenances becoming out of repair, or from accident, or from any occurrence or act or omission of Lessor, Lessor's agents, employees or servants, any tenant or occupant of the Complex or any other person. This paragraph shall apply especially, but not exclusively, to damage caused as aforesaid or by the flooding of basements or other subsurface areas, or by refrigerators, sprinkling devices, air conditioning apparatus, water, snow, frost, steam, excessive heat or cold, falling plaster, broken glass, sewage, gas, odors or noise, or the bursting or leaking of pipes or plumbing fixtures, and shall apply equally, whether any such damage results from the act or omission of other tenants or occupants in the Complex or any other persons, and whether such damage be caused by or result from any of the aforesaid, or shall be caused by or result from other circumstances of a similar or dissimilar nature. -12- 13 Anything herein to the contrary notwithstanding, in the event any damage Lo the Complex results from any act or omission of Lessee, its agents, employees or invitees, and all or any portion of Lessor's loss is within the "deductible" portion of Lessor's insurance coverage, Lessee shall pay to Lessor the amount of such deductible loss (not to exceed $1,000 per event). All property in the Complex or on the Premises belonging to Lessee or its agents, employees or invitees or otherwise located at the Premises, shall be at the risk of Lessee only, and Lessor shall not be liable for damage thereto or theft, misappropriation or loss thereof, and Lessee agrees to defend and hold Lessor and Lessor's agents, employees and servants harmless and indemnify them against claims and liability for injuries to such property. Lessee shall not do or permit anything to be done In or about the Premises nor bring or keep anything therein which will in any way increase the existing rate of or affect in any other way any fire or other insurance upon the Complex or any of its contents, or cause a cancellation of any insurance policy covering the Complex or any of its contents. Notwithstanding anything to the contrary contained herein, Lessee shall promptly, upon demand, reimburse Lessor for the full amount of any additional premium charged for such policy by reason of Lessee's failure to comply with the provisions of this paragraph, it being understood that such demand for reimbursement shall not be Lessor's exclusive remedy. Lessee shall promptly, upon demand, reimburse Lessor for any additional premium charged for any such policy by reason of Lessee's failure to comply with the provisions of this Article. In the event Lessee fails to provide Lessor with evidence of insurance required under this Article X, upon three (3) business days' notice to Lessee, Lessor may, but shall not be obligated to, without further demand upon Lessee, and without waiving or releasing Lessee from any obligation contained in this Lease, obtain such insurance and Lessee agrees to repay, upon demand, all such sums incurred by Lessor in effecting such insurance- All such sums shall become a part of the Additional Rent payable hereunder, but no such payment by Lessor shall relieve Lessee from any default under this Lease. ARTICLE XI. ASSIGNMENT A14D SUBLETTING: Lessee shall not, without the prior written consent of Lessor, (I) transfer, pledge, mortgage or assign this Lease or any interest hereunder; (II) permit any assignment of this Lease by voluntary act, operation of law or otherwise; (iii) sublet the Premises or any part thereof; or (iv) permit the use of the Premises by any parties other than Lessee and its agents and employees. Notwithstanding the foregoing, a sublease to a subsidiary of Lessee, or an arrangement resulting from a merger or reorganization in which the surviving entity has a "Tangible Net Worth" (defined in Article XX, Exhibit C) of not less than Lessee's immediately prior to the merger or reorganization, shall not require the consent of Lessor. Lessee shall seek such written consent of Lessor by a written request therefor, setting forth such information as Lessor may deem necessary. Lessee shall, by notice in writing, advise Lessor of Lessee's intention, from, on and after a stated date (which shall not be less than thirty (30) days after the date of Lessee's notice), to assign this Lease or to sublet any part or all of the Premises for the balance or any part of the term. Lessee's notice shall include all of the terms of the proposed assignment or sublease and shall state the consideration therefor. In such event, Lessor shall have the right, to be exercised by giving written notice to Lessee within thirty (30) days after receipt of Lessee's notice, to recapture the space described in Lessee's notice and such recapture notice shall, if given, cancel and terminate this Lease with respect to the space therein described as of the date stated in Lessee's notice. Lessee's notice shall state the name and address of the proposed assignee or subtenant and a true and complete copy of the proposed assignment or sublease shall be -13- 14 delivered to Lessor with Lessee's notice. If Lessee's notice shall cover all of the Premises, and Lessor shall have exercised its foregoing recapture right, the term of this Lease shall expire and end on the date stated in Lessee's notice as fully and completely as if that date had been herein definitely fixed for the expiration of the term. If, however, this Lease be canceled with respect to less than the entire Premises, the Base Rent and Additional Rent shall be equitably adjusted by Lessor with due consideration of the size, location, type and quality of the portion of the Premises so remaining after the "recapture" and such rent shall be reduced accordingly from and after the termination date for said portion, and this Lease as so amended shall continue thereafter in full force and effect. The rent adjustments provided for herein shall be evidenced by an amendment to this Lease executed by Lessor and Lessee. If this Lease shall be terminated in the manner aforesaid, either as to the entire Premises or only a portion thereof, to such extent the term of this Lease shall end upon the appropriate effective date of the proposed sublease or assignment as if that date had been originally fixed in this Lease for such expiration, and in the event of a termination affecting less than the entire Premises, Lessee shall comply with Article XIV ("Surrender of Premises") of this Lease with respect to such portion of the Premises affected thereby. If Lessor, upon receiving Lessee's notice with respect to any such space, shall not exercise its right to recapture as aforesaid, Lessor will not unreasonably withhold its consent to Lessee's assignment of the Lease or subletting such space to the party identified in Lessee's notice, provided, however, that in the event Lessor consents to any such assignment or subletting, and as a condition thereto, Lessee shall pay to Lessor fifty percent (50%) of all profit derived by Lessee from such assignment or subletting. For purposes of the foregoing, profit shall be deemed to include, but shall not be limited to, the amount of all rent payable by such assignee or sublessee in excess of the Base Rent, and rent adjustments, payable by Lessee under this Lease. If a part of the consideration for such assignment or subletting shall be payable other than in cash, the payment to Lessor shall be in cash for its share of any non-cash consideration based upon the fair market value thereof. Lessee shall and hereby agrees that it will furnish to Lessor upon request from Lessor a complete statement, certified by an independent certified public accountant, setting forth in detail the computation of all profit derived and to be derived from such assignment or subletting, such computation to be made in accordance with generally accepted accounting principles. Lessee agrees that Lessor and its authorized representatives shall be given access at all reasonable times to the books, records and papers of Lessee relating to any such assignment or subletting, and Lessor shall have the right to make copies thereof. The percentage of Lessee's profit due Lessor hereunder shall be paid by Lessee to Lessor within ten (10) days of receipt by Lessee of all payments made from time to time by such assignee or sublessee to Lessee. Any subletting or assignment hereunder shall not release or discharge Lessee of or from any liability, whether past, present or future, under this Lease, and Lessee shall continue fully liable thereunder. The subtenant or subtenants or assignee shall agree in a form satisfactory to Lessor to agree to be obligated for, comply with, and be bound by all of the terms, covenants, conditions, provisions and agreements of this Lease to the extent of the space sublet or assigned, and Lessee shall deliver to Lessor promptly after execution an executed copy of each such sublease or assignment and an agreement of compliance by each such subtenant or assignee. Consent by Lessor to any assignment of this Lease or to any subletting of the Premises shall not be a -14- 15 waiver of Lessor's rights under this Article as to any subsequent assignment or subletting. Any sale, assignment, mortgage, transfer or subletting of this Lease which is not in compliance with the provisions of this Article XI shall be of no effect and void. Lessor's right to assign its interest in this Lease shall remain unqualified, but shall be subject to the provisions of Article XVII.I., below. Lessor may make a reasonable charge to Lessee for any reasonable attorneys' fees or expenses incident to a review of any documentation related to any proposed assignment or subletting by Lessee. Notwithstanding anything to the contrary in this Lease, Lessee shall not assign its rights under this Lease or sublet all or any part of the Premises to a person, firm or corporation which is (or, immediately prior to such subletting or assignment, was) a tenant or occupant of the Complex or any warehouse or office building an property contiguous to the Complex owned by Lessor. The consent of Lessor to a transfer may not be unreasonably withheld, provided that should Lessor withhold its consent for any of the following reasons, which list is not exclusive, such withholding shall be deemed to be reasonable: (a) Financial strength of the proposed transferee is not at least equal to that of Lessee at the time of execution of this Lease; (b) A proposed transferee whose occupation of the Premises would cause a diminution in the reputation of the Complex or the other businesses located therein; (c) A proposed transferee whose impact on the common areas or the other occupants of the Complex would be disadvantageous; or (d) A proposed transferee whose occupancy will require any variation in the terms and conditions of this Lease. ARTICLE XII. DAMAGE BY FIRE OR OTHER CASUALTY: If fire or other casualty shall render the whole or any material portion of the Premises untenable, and the Premises can reasonably be expected to be made tenantable within one hundred twenty (120) days from the date of such event, then Lessor shall repair and restore the Premises and the Complex to as near their condition prior to the fire or other casualty as is reasonably possible within such one hundred twenty (120) day period (subject to delays for causes beyond Lessor's reasonable control) and notify Lessee that it will be doing so, such notice to be mailed within thirty (30) days from the date of such damage or destruction, and this Lease shall remain in full force and effect, but the rent for the period during which the Premises are untenantable shall be abated pro rata (based upon the portion of the Premises which is untenantable); provided however, if such casualty occurs within the last two (2) years of the term of this Lease (as the same may be extended), Lessee shall have the right to terminate this Lease by notice given to Lessor within thirty (30) days of the casualty and such termination shall be effective thirty (30) days after said notice. If Lessor is required to repair the Complex and/or the Premises, as aforesaid, said work shall be undertaken and prosecuted with all due diligence and speed. It fire or other casualty shall render the whole or any material part of the Premises untenantable and the Premises cannot reasonably be expected to be made tenantable within one hundred twenty (120) days from the date of such event, then either party, by notice in writing to the other mailed within -15- 16 thirty (30) days from the date of such damage or destruction, may terminate this Lease effective upon a date within thirty (30) days from the date of such notice. In the event that more than fifty percent (50%) of the value of the Complex is damaged or destroyed by fire or other casualty, and irrespective of whether damage or destruction can be made tenantable within one hundred twenty (120) days thereafter, then at Lessor's option, by written notice to Lessee, mailed within forty-five (45) days from the date of such damage or destruction, Lessor may terminate this Lease effective upon a date within thirty (30) days from the date of such notice to Lessee. If fire or other casualty shall render any portion of the Premises or any material portion of the Complex untenantable and the insurance proceeds are not sufficient to make repairs, then Lessor may, by notice to Lessee, mailed within thirty (30) days from the date of such damages or destruction, terminate this Lease effective upon a date within thirty (30) days from the date of such notice. If the Premises or the Complex is damaged, and such damage is of the type insured against under the fire and special form property damage insurance maintained by Lessor hereunder, the cost of repairing said damage up to the amount of the deductible under said insurance policy shall be included as a part of the Operating Expenses. If the damage was due to an act or omission of Lessee, Lessee shall pay Lessor the difference between the actual cost of repair and any insurance proceeds received by Lessor. If fire or other casualty shall render the whole or any material part of the Premises untenantable and the Premises cannot reasonably be expected to be made tenantable within one hundred twenty (120) days from the date of such event and neither party hereto terminates this Lease pursuant to its rights herein or in the event that more than fifty percent (50%) of the value of the Complex is damaged or destroyed by fire or other casualty, and Lessor does not terminate this Lease pursuant to its option granted herein, or in the event that fifty percent (50%) or less of the value of the Complex is damaged or destroyed by fire or other casualty and neither the whole nor any material portion of the Premises is rendered untenantable, then Lessor shall repair and restore the Premises and the Complex to as near their condition prior to the fire or other casualty as is reasonably possible with all due diligence and speed (subject to delays for causes beyond Lessor's reasonable control) and the rent for the period during which the Premises are untenantable shall be abated pro rata (based upon the portion of the Premises which is untenantable). In no event shall Lessor be obligated to repair or restore any special equipment or improvements installed by Lessee. Anything herein contained to the contrary notwithstanding, Lessor shall not be obligated to spend more than the net insurance proceeds available to Lessor on account of any fire or other casualty in order to repair or restore the Premises or the Complex following such casualty; provided, however, Lessor shall notify Lessee promptly after the casualty if Lessor is unwilling to expend more than available net insurance proceeds. In the event of a termination of this Lease pursuant to this Article, rent shall be apportioned on a per them basis and paid to the date of the fire or other casualty. ARTICLE XIII. EMINENT DOMAIN: If the whole of or any substantial part of the Premises is taken by any public authority under the power of eminent domain, or taken in any manner for any public or quasi-public use, so as to render the remaining portion of the Premises unsuitable for the purposes intended hereunder, then the term of this Lease shall cease as of the day possession - 16 - 17 shall be taken by such public authority and Lessor shall make a pro rata refund of any prepaid rent. All damages awarded for such taking under the power of eminent domain or any like proceedings shall belong to and be the property of Lessor, Lessee hereby assigning to Lessor Lessee's interest, if any, in said award. In the event that fifty percent (50%) or more of the building area or fifty percent (50%) or more of the value of the Complex is taken by public authority under the power of eminent domain, then, at Lessor's option, by written notice to Lessee mailed within sixty (60) days from the date possession shall be taken by such public authority, Lessor may terminate this Lease effective upon a date within ninety (90) days from the date of such notice to Lessee. Further, if the whole of or any material part of the Premises is taken by public authority under the power of eminent domain, or taken in any manner for any public or quasi-public use, so as to render the remaining portion of the Premises unsuitable for the purposes intended hereunder, upon delivery of possession to the condemning authority pursuant to the proceedings, Lessee may, at its option, terminate this Lease as to the remainder of the Premises by written notice to Lessor, such notice to be given to Lessor within thirty (30) days after Lessee receives notice of the taking. Lessee shall not have the right to terminate this Lease pursuant to the preceding sentence unless (i) the business of Lessee conducted in the portion of the Premises taken cannot be carried on with substantially the same utility and efficiency in the remainder of the Premises (or any substitute space securable by Lessee pursuant to clause (ii) hereof); and (ii) Lessee cannot secure substantially similar (in Lessee's reasonable judgment) alternate space upon the same terms and conditions as set forth in this Lease (including rental) from Lessor in the Complex. Any notice of termination shall specify the date no more than sixty (60) days after the giving of such notice as the date for such termination. Anything in this Article XIII to the contrary notwithstanding, Lessee shall have the right to prove in any condemnation proceedings and to receive any separate award which may be made for damages to or condemnation of Lessee's movable trade fixture's and equipment and for moving expenses; provided, however, Lessee shall in no event have any right to receive any award for its interest in this Lease or for loss of leasehold; and, provided further, Lessee shall not be entitled to claim any award to the extent the award to Lessor would be reduced below the amount which would be allowed to Lessor absent such claim by Lessee. In the event of a partial condemnation of the Complex or the Premises and this Lease is not terminated, Lessor shall, at its sole cost and expense, restore the Premises and Complex to a complete architectural unit and the Base Rent provided for herein during the period from and after the date of delivery of possession pursuant to such proceedings to the termination of this Lease shall be reduced to a sum equal to the product of the Base Rent provided for herein multiplied by a fraction, the numerator of which is the fair market rent of the Premises after such taking and after the same has been restored to a complete architectural unit, and the denominator of which is the fair market rent of the Premises prior to such taking. Notwithstanding the foregoing provisions of this Article, Lessor may terminate this Lease with no further liability to Lessee whatsoever in the event that following any taking of any part of the Complex by condemnation or right of eminent domain, or any conveyance in lieu thereof, any party holding a mortgage, trust deed or similar lien on Lessor's interest in the Complex elects to require the application of an award or payment for the taking or conveyance in lieu thereof to reduce the indebtedness secured by such mortgage, trust deed or similar lien. Lessor's obligation to rebuild, repair or restore under this Article shall in all events be limited to the extent of the net condemnation proceeds available to Lessor therefor. -17- 18 ARTICLE XIV. SURRENDER OF PREMISES: On the last day of the term of this Lease, or on the sooner termination thereof, Lessee shall peaceably surrender the Premises in good condition and repair consistent with Lessee's duty to make repairs as herein provided. On or before the last day of the term of this Lease, or the date of sooner termination thereof, Lessee shall, at its sole cost and expense, remove all of its property and trade fixtures and equipment from the Premises, and all property not removed shall be deemed abandoned. Lessee hereby appoints Lessor its agent to remove all property of Lessee from the Premises upon termination of this Lease and to cause its transportation and storage for Lessee's benefit, all at the sole cost and risk of Lessee, and Lessor shall not be liable for damage, theft, misappropriation or loss thereof and Lessor shall not be liable in any manner in respect thereto. Lessee shall pay all costs and expenses of such removal, transportation and storage. Lessee shall leave the Premises in good order, condition and repair, reasonable wear and tear and damage from fire and other casualty not caused by Lessee excepted. Lessee shall reimburse Lessor upon demand for any expenses incurred by Lessor with respect to removal, transportation or storage of abandoned property and with respect to restoring said Premises to good order, condition and repair. All improvements, alterations, additions, installations and fixtures, other than Lessee's trade fixtures, equipment and other removable personal property, which have been made or installed by either Lessor or Lessee upon the Premises shall remain the property of Lessor and shall be surrendered with the Premises as a part thereof, unless Lessee is required to remove same pursuant to the provisions of Article VIII hereof. If the Premises are not surrendered at the end of the term or sooner termination thereof, Lessee shall indemnify Lessor against loss or liability resulting from delay by Lessee in so surrendering the Premises, including, without limitation, claims made by any succeeding tenants founded on such delay and any attorneys' fees resulting therefrom. Lessee shall promptly surrender all keys for the Premises to Lessor at the place then fixed for the payment of rent and shall inform Lessor of the combinations of any vaults, locks and safes left on the Premises. In the event Lessee remains in possession of the Premises after expiration of this Lease and without the execution of a new lease, but with Lessor's written consent, Lessee shall be deemed to be occupying the Premises as a tenant from month-to-month, subject to all the provisions, conditions and obligations of this Lease insofar as the same can be applicable to a month-to-month tenancy, except that the Base Rent shall be escalated to one hundred fifteen percent (115%) of the Base Rent payable hereunder immediately prior to the expiration of this Lease. In the event Lessee remains in possession of the Premises after expiration of this Lease and without the execution of a new lease and without Lessor's written consent, Lessee shall be deemed to be occupying the Premises without claim of right and Lessee shall pay Lessor for all costs arising out of loss or liability resulting from delay by Lessee in so surrendering the Premises as above provided and shall pay as a charge for each day of occupancy an amount equal to one hundred fifteen percent (115%) of the Base Rent (on a daily basis) payable hereunder immediately prior to the expiration of this Lease plus the Additional Rent (on a daily basis) then currently being charged by Lessor on new leases in the Complex for space similar to the Premises. ARTICLE XV. DEFAULT OF LESSEE: The occurrence of any one or more of the following events (in this Article sometimes called "Event of Default") shall constitute a default and breach of this Lease by Lessee: A. If Lessee tails to pay any Base Rent or Additional Rent payable under this Lease or fails to pay any obligation required to be paid by Lessee when and as the same -18- 19 shall become due and payable, and such default continues for a period of five (5) days after written notice thereof given by Lessor to Lessee. B. If Lessee fails to perform any of Lessee's nonmonetary obligations under this Lease for a period of thirty (30) days after written notice from Lessor; provided that if more time is required to complete such performance, Lessee shall not be in default if Lessee commences such performance within the thirty-day period and thereafter diligently pursues its completion. However, Lessor shall not be required to give such notice if Lessee's failure to perform constitutes a non-curable breach of this Lease. The notice required by this subsection is intended to satisfy any and all notice requirements imposed by law on Lessor and is not in addition to any such requirement. C. If Lessee, by operation of law or otherwise, violates the provisions of Article XI hereof relating to assignment, sublease, mortgage or other transfer of Lessee's interest in this Lease or in the Premises. D. Lessee, by operation of law or otherwise, violates the provisions of Article XVII. Relating to compliance with environmental laws. E. If (i) Lessee makes a general assignment or general arrangement for the benefit of creditors; (ii) a petition for adjudication of bankruptcy or for reorganization or rearrangement is filed by or against Lessee and is not dismissed within sixty (60) days; (iii) if a trustee or receiver is appointed to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease and possession is not restored to Lessee within sixty (60) days; or (iv) if substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease is subjected to attachment, execution or other judicial or non-judicial seizure which is not discharged within sixty (60) days. If a court of competent jurisdiction determines that any of the acts described in this subsection does not constitute an Event of Default and a trustee is appointed to take possession (or if Lessee remains a debtor in possession) and such trustee or Lessee transfers Lessee's interest hereunder, then Lessor shall receive, as Additional Rent, the difference between the rent (or any other consideration) paid in connection with such assignment or sublease and the rent payable by Lessee hereunder. As used in this subsection, the term "Lessee" shall also mean any guarantor of Lessee's obligations under this Lease. If any such Event of Default shall occur, Lessor, at any time during the continuance of any such Event of Default, may give written notice to Lessee stating that this Lease shall expire and terminate on the date specified in such notice, and upon the date specified in such notice this Lease, and all rights of Lessee under this Lease, including all rights of renewal whether exercised or not, shall expire and terminate, or in the alternative or in addition to the foregoing remedy, Lessor may assert and have the benefit of any other remedy allowed herein, at law, or in equity. Upon the occurrence of an Event of Default by Lessee, and at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which -19- 20 Lessor may have, Lessor shall be entitled to the rights and remedies set forth below: A. Terminate lessee's right to possession of the Premises by any lawful means, in which case this Lease shall not terminate unless Lessor gives written notice to Lessee of its intention to terminate this Lease and Lessee shall immediately surrender possession of the Premises to Lessor. In such event, Lessor shall have the immediate right to reenter and remove all persons and property, and such property may be removed and stored in a public warehouse or elsewhere at the cost of, and for the account of Lessee, all without service of notice or resort to legal process and without being deemed guilty of trespass, or becoming liable for any loss or damage which may be occasioned thereby. In the event that Lessor shall elect to so terminate this Lease, then Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default, including: 1. The equivalent of the amount of the Base Rent and Additional Rent which would be payable under this Lease by Lessee if this Lease were still in effect, less 2. The net proceeds of any reletting affected pursuant to the provisions of this Article XV after deducting all of Lessor's reasonable expenses In connection with such reletting, including, without limitation, all repossession costs, brokerage commissions, legal expenses, reasonable attorneys' fees, alteration costs, and expenses of preparation of the Premises, or any portion thereof, for such reletting. Lessee shall pay such current damages in the amount determined in accordance with the terms of this Article XV as set forth in a written statement thereof from Lessor to Lessee (hereinafter called the "Deficiency"), to Lessor in monthly installments on the days on which the rent would have been payable under this Lease if this Lease were still in effect, and Lessor shall be entitled to recover from Lessee each monthly installment of the Deficiency as the same shall arise. B. At any time after an Event of Default, whether or not Lessor shall have collected any monthly Deficiency as set forth in this Article XV, Lessor shall be entitled to recover from Lessee, and Lessee shall pay to Lessor, on demand, as and for final damages for Lessee's default, an amount equal to the then present worth of the aggregate of the Base Rent and Additional Rent and any other charges to be paid by Lessee hereunder for the unexpired portion of the term of this Lease (assuming this Lease had not been so terminated). In the computation of present worth, a discount at the rate of 6% per annum shall be employed. If the Premises, or any portion thereof, shall be relet by Lessor for the unexpired term of this Lease, or any part thereof, before presentation of proof of such damages to any court, commission or tribunal, the amount of rent received upon such reletting shall be offset against any monies claimed pursuant to this subsection. Nothing herein contained or contained in this Article XV shall limit or prejudice the right of Lessor to prove for and obtain, as damages, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the -20- 21 proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to or less than the amount of the difference referred to above. C. Upon the occurrence of an Event of Default by Lessee, Lessor shall also have the right, with or without terminating this Lease, to reenter the Premises to remove all persons and property from the Premises. Such property may be removed and stored In a public warehouse or elsewhere at the cost of and for the account of Lessee. if Lessor shall elect to reenter the Premises, Lessor shall not be liable fair damages by reason of such reentry. D. If Lessor does not elect to terminate this Lease as provided in this Article XV then Lessor may, from time to time, recover all vent as it becomes due under this Lease. At any time thereafter, Lessor may elect to terminate this Lease and to recover damages to which Lessor is entitled. E. In the event that Lessor should elect to terminate this Lease and to relet the Premises, it may execute any new lease in its own name. In the event that Lessor should not elect to terminate this Lease, it may re-let the premises to a substitute tenant. Lessee hereunder shall have no right or authority whatsoever to collect any rent from such substitute tenant. The proceeds of any such reletting shall be applied as follows: 1. First, to the payment of any indebtedness other than rent due hereunder from Lessee to Lessor, including but not limited to storage charges air brokerage commissions owing from Lessee to Lessor as the result of such reletting; 2. Second, to the payment of the costs and expenses of reletting the Premises, including alterations and repair's which Lessor, in its sole discretion, deems reasonably necessary and advisable and reasonable attorneys' fees incurred by Lessor in connection with the retaking of the Premises and such reletting; 3. Third, to the payment of rent and other charges due and unpaid hereunder; and 4. Fourth, to the payment of future rent and other damages payable by Lessee under this Lease- Lessor shall not be deemed to have terminated this Lease and the Lessee's right to possession of the leasehold or the liability of Lessee to pay rent thereafter to accrue air its liability for damages under any of the provisions hereof, unless Lessor shall have notified Lessee in writing that it has so elected to terminate this Lease. Lessee covenants that the retaking of possession by Lessor or the service by Lessor of any notice pursuant to the applicable unlawful detainer statutes of the state in which the Complex is located and Lessee's surrender of possession pursuant to such notice shall not (unless Lessor elects to the contrary at the time of, or at any time subsequent to the service of, such notice, and such election be evidenced by a written notice to Lessee) be deemed to be a termination of this Lease or of Lessee's right to possession thereof. All rights, options and remedies of Lessor contained in this Lease shall be construed and held to be cumulative, and no one of them shall be exclusive of the other, and Lessor shall have the right to pursue any one or all of such remedies or any other -21- 22 remedy or relief which may be provided by law whether or not stated in this Lease. No waiver by Lessor of a breach of any of the terms, covenants or conditions of this Lease by Lessee shall be construed or held to be a waiver of any succeeding or preceding breach of the same or any other term, covenant or condition therein contained. No waiver of any default of Lessee hereunder shall be implied from any omission by Lessor to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect default other than as specified in said waiver. The consent or approval by Lessor to or of any act by Lessee requiring Lessor's consent or approval shall not be deemed to waive or vender unnecessary Lessor's consent to or approval of any subsequent similar acts by Lessee. Lessee shall reimburse Lessor, upon demand, for any costs or expenses incurred by Lessor in connection with any breach or default of Lessee under this Lease, whether or not suit is commenced or judgment entered. Such costs shall include, but not be limited to: legal fees and costs incurred for the negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if any action for breach of or to enforce the provisions of this Lease is commenced, the court in such action shall award to the party in whose favor a judgment is entered a reasonable sum as attorneys' fees and costs. Such attorneys' fees and costs shall be paid by the losing party in such action. Lessee shall also indemnify Lessor against and hold Lessor harmless from all costs, expenses, demands and liability incurred by Lessor if Lessor becomes or is made a party to any claim or action (a) instituted by Lessee, or by any third party against Lessee (unless Lessor is adjudged to have been culpable, and liable in regard to the basis for the claim); (b) for foreclosure of any lien for labor or material furnished to or for Lessee; (c) otherwise arising out of or resulting from any act or transaction of Lessee (unless Lessor is adjudged to have been culpable, and liable in regard to the basis for the claim); or (d) necessary to protect Lessor's interest under this Lease in a bankruptcy proceeding or other proceeding under Title 11 of the United States Code, as amended. Lessee shall defend Lessor against any such claim or action at Lessee's expense with counsel reasonably acceptable to Lessor or, at Lessor's election, Lessee shall reimburse Lessor for any legal fees or costs incurred by Lessor in any such claim or action. In addition, Lessee shall pay a portion (as determined by the next sentence) of Lessor's reasonable attorneys' fees incurred in connection with Lessee's request for Lessor's consent in connection with any act which Lessee proposed to do and which requires Lessor's consent. For these purposes, Lessee shall be responsible to pay the first $500.00 of fees incurred, and 50% of the fees in excess of $500, for each requested consent. Lessee hereby waives all claims by Lessor's lawful reentering and taking possession of the Premises or removing and storing the property of Lessee as permitted under this Lease and will save Lessor harmless from all losses, costs or damages occasioned Lessor thereby. No such reentry shall be considered or construed to be a forcible entry by Lessor. Lessor shall use commercially reasonable efforts to mitigate its reasonably foreseeable damages which result from Lessee's default hereunder- ARTICLE XVI. SUBORDINATION: This Lease shall be subject and subordinate to any mortgage, deed of trust or ground lease now or hereafter placed upon the Premises, the Complex, the Property or any portion thereof by Lessor or its successors or assigns, and to amendments, replacements, renewals and extensions thereof. Lessee agrees at any time hereafter, upon demand to execute and deliver any instruments, releases or other documents that may be -22- 23 reasonably required for the purpose of subjecting and subordinating this Lease, as above provided, to the lien of any such mortgage, deed of trust or ground lease. It is agreed, nevertheless, that as long as Lessee is not in default in the payment of Base Rent, Additional Rent, and other charges to be paid by Lessee under this Lease and the performance of all covenants, agreements and conditions to be performed by Lessee under this Lease, then neither Lessee's right to quiet enjoyment under this Lease, nor the right of Lessee to continue to occupy the Premises and to conduct its business thereon, in accordance with the Terms of this Lease as against any lessor, lessee, mortgagee, trustee or their successors or assigns shall be interfered with. The above subordination shall be effective without the necessity of the execution and delivery of any further instruments on the part of Lessee to effectuate such subordination. Notwithstanding anything hereinabove contained in this Article XVI, in the event the holder of any mortgage, deed of trust or ground lease shall at any time elect to have this Lease constitute a prior and superior lien to its mortgage, deed of trust or ground lease, then, and in such event, upon any such holder or landlord notifying Lessee to that effect in writing, this Lease shall be deemed prior and superior in lien to such mortgage, deed of trust or ground lease, whether this Lease is dated prior to or subsequent to the date of such mortgage, deed of trust or ground lease, and Lessee shall execute such attornment agreement as may be reasonably requested by said holder. Lessee agrees, provided the mortgagee, ground lessor or trust deed holder under any mortgage, ground lease, deed of trust or other security instrument shall have notified Lessee in writing (by the way of a notice of assignment of lease or otherwise) of its address, that Lessee shall give such mortgagee, ground lessor, trust deed holder or other secured party ("Mortgagee"), simultaneously with delivery of notice to Lessor, by registered or certified mail, a copy of any such notice of default served upon Lessor. Lessee further agrees that said Mortgagee shall have the right to cure any alleged default during the same period that Lessor has to cure such default. Lessor agrees that it shall obtain prior to the commencement of the term of this Lease a subordination, attornment and non-disturbance agreement from any Mortgagee holding any mortgage, ground lease, deed of trust or other security instrument encumbering the Premises as of the date of this Lease. ARTICLE XVII- MISCELLANEOUS: A. Lessee represents that Lessee has dealt directly with and only with CB Commercial Real Estate Group, Inc. (Kit Tiedemann) and Cushman & Wakefield of Arizona, Inc. (Mike Beall/Jim Wilson) (the "Brokers"), as brokers, in connection with this Lease and insofar as Lessee knows, no other broker negotiated or participated In negotiations of this Lease or submitted or showed the Premises or is entitled to any commission in connection therewith. Lessor shall be responsible for paying the commission due the Brokers on account of this Lease pursuant to a separate agreement between Lessor and the Brokers. Lessor and Lessee agree that no broker shall be entitled to any commission with any renewal of the term of this Lease or any expansion of the Premises. B. Lessee agrees from time to time, upon not less than fifteen (15) days prior written request by Lessor, to deliver to Lessor a statement in writing certifying (i) this Lease is unmodified and in full force and effect (or if there have been modifications that the Lease as modified is in full force and -23 - 24 effect and stating the modifications); (ii) the dates to which the rent and other charges have been paid; (iii) Lessor is not in default in any provision of this Lease or, if in default, the nature thereof specified in detail; (iv) the amount of monthly rental currently payable by Lessee; (v) the amount of any prepaid rent, and (vi) such other matters as may be reasonably requested by Lessor or any Mortgagee or prospective purchaser of the Complex. If Lessee does not deliver such statement to Lessor within such fifteen (15) day period, Lessor and any prospective purchaser or encumbrancer of the Premises or the Complex may conclusively presume and rely upon the following facts: (i) that the terms and provisions of this Lease have not been changed except as otherwise represented by Lessor; (ii) that this Lease has not been cancelled or terminated and is in full force and effect, except as otherwise represented by Lessor; (iii) that the current amounts of the Base Rent and security deposit are as represented by Lessor and that any charges made against the security deposit are uncontested and valid; (iv) that there have been no subleases or assignments of the Lease; (v) that not more than one month's Base Rent or other charges have been paid in advance; and (vi) that Lessor is not in default under the Lease. in such event, Lessee shall be stopped from denying the truth of such facts. C. All notices, demands and requests shall be in writing, and shall be effectively served by forwarding such notice, demand or request by certified or registered mail, postage prepaid, or by commercial overnight courier service addressed as follows: (i) If addressed to Lessee: By forwarding such notice, demand or request by certified or registered mail, postage prepaid, addressed to Lessee at: Syntellect Inc. [address of Premises] ------------------------------ ------------------------------ Attention: Paul Mehlhorn With a copy to: Syntellect Inc. 1000 Holcomb Woods Parkway Building 410-A Roswell, Georgia 30076-2585 Attn: Chief Financial Officer or at such other address as Lessee may hereafter designate by written notice to Lessor, in which case said notice shall be effective at the time of mailing such notice. (ii) If addressed to Lessor: By forwarding such notice, demand or request by certified or registered mail, postage prepaid, addressed to Lessor at: Opus Southwest Corporation c/o Normandale Properties Southwest Corporation 4742 North 24th Street, Suite 100 Phoenix, Arizona 85016 With copy to: Opus Southwest Corporation 4742 North 24th Street Suite 100 -24- 25 Phoenix, Arizona 85016 Attn: Thomas W. Roberts, President With copy to: Opus U.S. Corporation P. 0. Box 59110 Minneapolis, Minnesota 55440 Attention: Law Department or at such other address as Lessor and Lessee may hereafter designate by written notice. The effective date of all notices shall be the time of mailing such notice or the date of delivery to a commercial overnight courier service. D. All rights and remedies of Lessor under this Lease or that may be provided by law may be executed by Lessor in its own name, individually, or in the name of its agent, and all legal proceedings for the enforcement of any such rights or remedies, including those set forth in Article XV, may be commenced and prosecuted to final judgment and execution by Lessor in its own name or in the name of its agent. E. Lessor covenants and agrees that Lessee, upon paying the Base Rent, Additional Rent and other charges herein provided for and observing and keeping the covenants, agreements and conditions of this Lease on its part to be kept and performed, shall lawfully and quietly hold, occupy and enjoy the Premises during the term of this Lease. Time is of the essence of this Lease and each and every provision contained herein, and any extension of time granted by Lessor to Lessee for the performance of any obligation of Lessee under this Lease shall not be considered an extension of time for the performance of any subsequent obligation of Lessee under this Lease. F. The covenants and agreements herein contained shall bind and inure to the benefit of Lessor and its successors and assigns and Lessee and its permitted successors and assigns. All obligations of each party constituting Lessee hereunder shall be the joint and several obligations of each such party. G. If any term or provision of this Lease shall to any extent be held invalid or unenforceable, the remaining terms and provisions of this Lease shall not be affected thereby, but each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law. This Lease shall be construed and enforced in accordance with the laws of the state in which the Premises are located. H. Lessee covenants not to do or suffer any waste or damage or disfigurement or injury to the Premises or the Complex and Lessee further covenants that it will not vacate or abandon the Premises during the term of this Lease. I. The term "Lessor" as used in this Lease so far as covenants or obligations on the part of Lessor are concerned shall be limited to mean and include only the owner or owners of the Complex at the time in question, and in the event Lessee is given notice of any transfer or transfers or conveyances the then grantor shall be automatically freed and released from all personal liability accruing from and after the date of such transfer or conveyance as respects the performance of any covenant or obligation on the part of Lessor contained in this Lease to be performed, it being intended hereby that the covenants and obligations contained in this Lease on the part of Lessor shall be binding on the Lessor, its successors and assigns, only during and in respect to their respective successive periods of ownership. -25- 26 In the event of a sale or conveyance by Lessor of the Complex or any part of the Complex, the same shall operate to release Lessor from any future liability upon any of the covenants or conditions herein contained and in such event Lessee agrees to look solely to the responsibility of the successor in interest of Lessor in and to this Lease, who by accepting title to the Complex, shall be deemed to have assumed the obligations of "Lessor" hereunder. This Lease shall not be affected by any such sale or conveyance, and Lessee agrees to attorn to the purchaser or grantee, which purchaser or grantee shall be personally obligated on this Lease only so long as it is the owner of Lessor's interest in and to this Lease. J. The marginal or topical headings of the several Articles are for convenience only and do not define, limit or construe the contents of said Articles. K. All preliminary negotiations are merged into and incorporated in this Lease, except for written collateral agreements executed contemporaneously herewith. L. This Lease can only be modified or amended by an agreement in writing signed by the parties hereto. No receipt of money by Lessor from Lessee or any other person after termination of this Lease or after the service of any notice or after the commencement of any suit, or after final judgment for possession of the Premises shall reinstate, continue or extend the term of this Lease or affect any such notice, demand or suit, or imply consent for any action for which Lessor's consent is required, unless specifically agreed to in writing by Lessor. Any amounts received by Lessor may be allocated to any specific amounts due from Lessee to Lessor as Lessor determines. M. Lessor shall have the right to close any portion of the building area or land area to the extent as may, in Lessor's reasonable opinion, be necessary to prevent a dedication thereof or the accrual of any rights to any person or the public therein. Lessor shall at all times have full control, management and direction of the Complex, subject to the rights of Lessee in the Premises, the parking areas and access thereto, and Lessor reserves the right at any time and from time to time to reduce, increase, enclose or otherwise change the size, number and location of buildings, layout and nature of the Complex and the other tenancies, premises and buildings included in the Complex, to construct additional buildings and additions to any building, and to create additional rentable areas through use and/or enclosure of common areas, or otherwise, and to place signs on the Complex, and to change the name, address, number or designation by which the Complex is commonly known. No implied easements are granted by this Lease. Lessor shall in no event be liable for any lack of security in respect to the Complex. N. Upon forty-eight (48) hours notice, Lessee shall permit Lessor (or its designees) to erect, use, maintain, replace and repair pipes, cables, conduits, plumbing, vents, and telephone, electric and other wires or other items, in, to and through the Premises, as and to the extent that Lessor may now or hereafter deem necessary or appropriate for the proper operation and maintenance of the Complex. O. Employees or agents of Lessor have no authority to make or agree to make a lease or other agreement or undertaking in connection herewith. The submission of this document for examination does not constitute an offer to lease, or a reservation of, or option for, the Premises. This document becomes effective and binding only upon the execution and delivery hereof by the proper officers of Lessor and by Lessee. Lessee confirms that Lessor and its agents have made no representations or promises with respect to the Premises or the making of or entry into this -26- 27 Lease except as in this Lease expressly set forth, and Lessee agrees that no claim or liability shall be asserted by Lessee against Lessor for, and Lessor shall not be liable by reason of, breach of any representations or promises not expressly stated in this Lease. This Lease, except for the Complex Rules and Regulations, in respect to which subparagraph P of this Article shall prevail, can be modified or altered only by agreement in writing between Lessor and Lessee, and no act or omission of any employee or agent of Lessor shall alter, change or modify any of the provisions hereof. P. Lessee shall perform, observe and comply with the Complex Rules and Regulations of the Complex as set forth on Exhibit B attached hereto and by this reference incorporated herein, with respect to the safety, care and cleanliness of the Premises and the Complex, and the preservation of good order thereon, and, upon written notice thereof to Lessee, Lessee shall perform, observe and comply with any changes, amendments or additions thereto as from time to time shall be established and deemed advisable by Lessor for tenants of the Complex. Lessor shall not be liable to Lessee for any failure of any other tenant or tenants of the Complex to comply with such Complex Rules and Regulations. Q. Lessee shall not use the Premises or permit anything to be done in or about the Premises which will, in any way, conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Lessee shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental rules and regulations now in force or which may hereafter be in force, and with the requirements of any fire insurance underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises. Lessee shall use the Premises and comply with any recorded covenants, conditions, and restrictions affecting the Premises and the Complex as of the commencement of the Lease or which are recorded during the lease term. R. Lessee shall at all times during the term of this lease and in all respects comply with all federal, state and local laws, ordinances and regulations ("Hazardous Materials Laws") relating to the industrial hygiene, environmental protection or the use, analysis, generation, manufacture, storage, presence, disposal or transportation of any oil, petroleum products, flammable explosives, asbestos, urea formaldehyde, polychlorinated biphenyls, radioactive materials or waste, or other hazardous, toxic, contaminated or polluting materials, substances or wastes, including without limitation any "hazardous substances", "hazardous wastes", "hazardous materials" or "toxic substances" under any such laws, ordinances or regulations (collectively, "Hazardous Materials"). Lessee shall at its own expense procure, maintain in effect and comply with all conditions of any and all permits, licenses and other governmental and regulatory approvals required for Lessee's use of the Premises, including, without limitation, discharge of (appropriately treated) materials or waste into or through any sanitary sewer system serving the Premises. Except as discharged into the sanitary sewer in conformity with all applicable Hazardous Materials Laws, Lessee shall cause any and all Hazardous Materials brought or permitted on the Premises by Lessee to be removed from the Premises and transported solely by duly licensed haulers to duly licensed facilities for final disposal of such Hazardous Materials and wastes. Lessee shall in all respects handle, treat, deal with and manage any and all Hazardous Materials brought or permitted on the Premises by Lessee in conformity with all applicable Hazardous Materials Laws and prudent industry practices regarding the management of such - 27 - 28 Hazardous Materials. All reporting obligations relating to such Hazardous Materials to the extent imposed upon Lessee by Hazardous Materials Laws are solely the responsibility of Lessee. Upon expiration or earlier termination of this lease, Lessee shall cause all Hazardous Materials (to the extent such Hazardous Materials are generated, stored, released or disposed of during the term of this lease by Lessee) to be removed from the Premises and transported for use, storage or disposal in accordance and in compliance with all applicable Hazardous Materials Laws. Lessee shall not take any remedial action in response to the presence of any Hazardous Materials in, on, about or under the Premises or in any improvements situated on the Complex, nor enter into any settlement agreement, consent, decree or other compromise in respect to any claims relating to or in any way connected with the Premises or the Complex without first notifying Lessor of Lessee's intention to do so and affording Lessor ample opportunity to appear, intervene or otherwise appropriately assert and protect Lessor's interest with respect thereto. In addition, at Lessor's request, at the expiration of the term of this lease, Lessee shall remove all tanks or fixtures which were placed on the Premises during the term of this lease by or for Lessee and which contain, have contained or are contaminated with, Hazardous Materials. Lessee shall immediately notify Lessor in writing of (a) any enforcement, clean-up, removal or other governmental or regulatory action instituted, completed or threatened pursuant to any Hazardous Materials Laws; (b) any claim made or threatened by any person against Lessor, or the Premises, relating to damage, contribution, cost recovery, compensation, loss or injury resulting from or claimed to result from any Hazardous Materials; and (c) any reports made to any environmental agency arising out of or in connection with any Hazardous Materials in, on or about the Premises or with respect to any Hazardous Materials removed by Lessee from the Premises, including, any complaints, notices, warnings, reports or asserted violations in connection therewith. Lessee shall also provide to Lessor, as promptly as possible, and in any event within five business days after Lessee first receives or sends the same, copies of all claims, reports, complaints, notices, warnings or asserted violations relating in any way to the Premises or Lessee's use thereof. Upon written request of Lessor (to enable Lessor to defend itself from any claim or charge related to any Hazardous Materials Law), Lessee shall promptly deliver to Lessor notices of hazardous waste manifests reflecting the legal and proper disposal of all such Hazardous Materials removed or to be removed from the Premises. To Lessor's knowledge, Lessor is not aware of any Hazardous Materials which exist or are located on or in the Premises, except as may be disclosed in that certain Environmental Site Assessment prepared by Geotechnical and Environmental Consultants, Inc., dated July 14, 1995. Further, Lessor represents to Lessee that: (x) to the best of its knowledge, Lessor has not caused the generation, storage or release of Hazardous Materials upon the Premises, except in accordance with Hazardous Materials Laws; and (y) during the term of this Lease, Lessor shall not knowingly cause the generation, storage or release of Hazardous Materials upon the Premises, except in accordance with Hazardous Materials Laws. In the event (a) Hazardous Materials are discovered upon the Premises, (b) Lessor has been given written notice of the discovery of such Hazardous Materials, and (c) pursuant to the provisions of the preceding paragraphs of this Article XVII.R., neither Lessor nor Lessee is obligated to pay the cost of compliance with Hazardous Materials Laws, then and in that event Lessor may voluntarily but shall not be obligated to agree with Lessee to take all action necessary to bring the Premises into compliance with Hazardous Materials Laws at Lessor's sole cost. In the event Lessor fails to notify Lessee in writing within 30 days of the notice to Lessor of the discovery of such Hazardous Materials that Lessor -28- 29 intends to voluntarily take such action as is necessary to bring the Premises into compliance with Hazardous Materials Laws, then Lessee may (i) bring the Premises into compliance with Hazardous Materials Laws at Lessee's sole cost or (ii) provided such Hazardous Materials endanger persons or property in, on or about the Premises or interfere with Lessee's use of the Premises, terminate this lease on a date not less than ninety days following written notice of such intent to terminate. Lessor shall indemnify, defend (with counsel reasonably acceptable to Lessee), protect and hold Lessee and each of Lessee's officers, directors, partners, employees, agents, attorneys, successors and assigns free and harmless from and against any and all claims, liabilities, damages, costs, penalties, forfeitures, losses or expenses (including attorneys' fees) for death or injury to any person or damage to any property whatsoever (including water tables and atmosphere) arising or resulting in whole or in part, directly or indirectly, from the presence or discharge of Hazardous Materials, in, on, under, upon or from the Premises, including materials used during construction of the Premises and the Complex or from the transportation or disposal of Hazardous Materials to or from the Premises to the extent caused by Lessor. Lessor's obligations hereunder shall include, without limitation, and whether foreseeable, all cost of any required or necessary repairs, clean-up or detoxification or decontamination of the Premises, and the presence and implementation of any closure, remedial action or other required plans in connection therewith, and shall survive the expiration of or early termination of the term of this lease. For purposes of the indemnity provided herein, any acts or omissions of Lessor or its employees, agents, customers, assignees, contractors or sub-contractors (whether or not they are negligent, intentional, willful or unlawful) shall be strictly attributable to Lessor. Lessee shall indemnify, defend (with counsel reasonably acceptable to Lessor), protect and hold Lessor and each of Lessor's officers, directors, partners, employees, agents, attorneys, successors and assigns free and harmless from and against any and all claims, liabilities, damages, costs, penalties, forfeitures, losses or expenses (including attorneys' fees) for death or injury to any person or damage to any property whatsoever (including water tables and atmosphere) arising or resulting in whole or in part, directly or indirectly, from the presence or discharge of Hazardous Materials, in, on, under, upon or from the Premises or from the transportation or disposal of Hazardous Materials to or from the Premises to the extent caused by Lessee. Lessee's obligations hereunder shall include, without limitation, and whether foreseeable, all cost of any required or necessary repairs, clean-up or detoxification or decontamination of the Premises, and the presence and implementation of any closure, remedial action or other required plans in connection therewith, and shall survive the expiration of or early termination of the term of this lease. For purposes of the indemnity provided herein, any acts or omissions of Lessee or its employees, agents, customers, sub-lessees, assignees, contractors or sub-contractors (whether or not they are negligent, intentional, willful or unlawful) shall be strictly attributable to Lessee. For purposes of the covenants and agreements contained in this Article XVII.R., inclusive, any acts or omissions of Lessee, its employees, agents, customers, sublessees, assignees, contractors or sub-contractors (except Opus Southwest Corporation and its contractors and subcontractors) shall be strictly attributable to Lessee; any acts or omissions of Lessor, its employees, agents, customers, assignees, contractors or sub-contractors shall be strictly attributable to Lessor. -29- 30 S. All obligations of Lessee hereunder not fully performed as of the expiration or earlier termination of the term of this Lease shall survive the expiration or earlier termination of the term hereof, including, without limitation, all payment obligations with respect to Operating Expenses and Real Estate Taxes and all obligations concerning the condition of the Premises. T. Lessee agrees to look solely to Lessor's interest in the Complex for the recovery of any judgment from Lessor, it being agreed that Lessor, or if Lessor is a partnership, its partners whether general or limited, or if Lessor is a corporation, its directors, officers or shareholders, shall never be personally liable for any such judgment. U. Lessee shall furnish to Lessor promptly upon demand, a corporate resolution, proof of due authorization of partners, or other appropriate documentation reasonably requested by Lessor evidencing the due authorization of Lessee to enter into this Lease. Lessor shall furnish to Lessee promptly upon demand, a copy of Lessor's title policy or a title commitment which indicates that Lessor owns insurable title to the Complex. V. This Lease shall not be deemed or construed to create or establish any relationship or partnership or joint venture or similar relationship or arrangement between Lessor and Lessee hereunder. W. Lessee shall in all respects comply with the Americans With Disabilities Act Of 1990 (42 U.S.C. Section 12101 et seq.), as the same may be amended from time to time (as amended, the "ADA"), and Lessee agrees to indemnify and save Lessor and its managing agent harmless against and from any and all claims, loss, damage and expense by or on behalf of any person or persons, firm or firms, corporation or corporations, arising from any failure or alleged failure of Lessee to comply with the ADA or arising from any claim made under the ADA in connection with the Premises, and from and against all costs, reasonable attorneys' fees, expenses and liabilities incurred in or about any such claim or action or proceeding brought thereon; in case any action or proceeding be brought against Lessor or its managing agent by reason of any such claim, Lessee, upon notice from Lessor, covenants to resist or defend such action or proceeding by counsel reasonably satisfactory to Lessor. Lessor represents and warrants that as of the commencement of the term of the Lease, the Premises shall be in compliance with the ADA, as the same is existing, interpreted and enforced as of such date. X. Lessor shall in all respects comply with the ADA, and Lessor agrees to indemnify and save Lessee and its managing agent harmless against and from any and all claims, loss, damage and expense by or on behalf of any person or persons, firm or firms, corporation or corporations, arising from any failure or alleged failure of Lessor to comply with the ADA or arising from any claim made under the ADA in connection with the Complex (exclusive of the Premises or any other leasable area within the Complex), and from and against all costs, reasonable attorneys' fees, expenses and liabilities incurred in or about any such claim or action or proceeding brought thereon; in case any action or proceeding be brought against Lessee by reason of any such claim, Lessor, upon notice from Lessee, covenants to resist or -30- 31 defend such action or proceeding by counsel reasonably satisfactory to Lessee. Y. Lessee shall not place, or permit to be placed or maintained, on any exterior door, wall or window of the Premises any sign, awning or canopy, or advertising matter or other thing of any kind, and will not place or maintain any decoration, lettering or advertising matter on the glass of any window or door, or that can be seen through the glass, of the Premises except as specifically approved in writing by Lessor. Lessee further agrees to maintain such sign, awning, canopy, decoration, lettering, advertising matter or thing as may be approved, in good condition and repair at all times. Lessee agrees at Lessee's sole cost, that any Lessee sign will be maintained in strict conformance with Lessor's sign criteria, if any, as to design, material, color, location, size, letter style, and method of installation. Lessor shall not unreasonably withhold its consent to the placement of Lessee's sign on the southern portion of the east face of the building in which the Premises are located. Z. Lessee acknowledges that this Lease is contingent on Lessor acquiring the fee simple title to substantially all the land depicted on Exhibit "A", which land is necessary to construct the Office Complex. If Lessor has not acquired such land on or before JULY 31, 1996, then this Lease shall automatically terminate and neither Lessor nor Lessee shall have any rights or obligations thereunder. ARTICLE XVIII. MISCELLANEOUS TAXES: Lessee shall pay, prior to delinquency, all taxes assessed or levied upon its occupancy of the Premises, or upon the trade fixtures, furnishings, equipment and all other personal property of Lessee located in the Premises, and when possible, Lessee shall cause such trade fixtures, furnishings, equipment and other personal property to be assessed and billed separately from the property of Lessor. In the event any or all of Lessee's trade fixtures, furnishings, equipment or other personal property, or Lessee's occupancy of the Premises, shall be assessed and taxed with the property of Lessor, Lessee shall pay to Lessor its share of such taxes within ten (10) days after delivery to Lessee by Lessor of a statement in writing setting forth the amount of such taxes applicable to Lessee's personal property. ARTICLE XIX. OTHER PROVISIONS: The following are made a part hereof, with the same force and effect as if specifically set forth herein; A. Site Plan - Exhibit A. B. Complex Rules and Regulations - Exhibit B. C. Rider to Lease - Exhibit C. D. Space Plan/Building Elevation - Exhibit D. E. Project Specifications- Exhibit E. IN WITNESS WHEREOF, the parties have executed this Lease as of the day and year first above written. LESSOR: LESSEE: OPUS SOUTHWEST CORPORATION, SYNTELLECT INC., a Delaware a Minnesota corporation corporation By By /s/ DAVID C. PHILLIPS ---------------------------- ----------------------------- Thomas W. Roberts David C. Phillips Its President Its Vice President - Operations -31- 32 EXHIBIT A* *conceptual and subject to change [MAP OF BUILDING SITE] SYNTELLECT I-17 & BEARDSLEY PHOENIX, ARIZONA [OPUS LOGO] - ---------------------------------------------------------------------- [MAP LEGEND] SITE DATA TOTAL SITE AREA : 786,801.00 SQ. FT. ZONING : C-2 MR TOTAL BLDG. AREA : 122,226 SQ. FT. % BLDG. COVERAGE : 15.50% PARKING REQUIRED (1:300) : 408 SPS. PARKING PROVIDED : 669 SPS. (1:183) - ------------------------------------------------------------------------------ VICINITY MAP DATE: 6-26-96 JOB: 96012 [BDG LOGO] 5112 N. 40th St. Suite 202 Phoenix, Arizona 85018 Butler Design Group 602-957-1800 Phone 602-957-7722 Fax Architects & Planners 33 EXHIBIT A-1* *conceptual and subject to change [MAP OF FLOOR PLAN] SYNTELLECT I-17 & BEARDSLEY PHOENIX, ARIZONA DATE: 6-26-96 JOB: 96012 - ------------------------------------------------------------------------------ [OPUS LOGO] [BDG LOGO] 5112 N. 40th St. Suite 202 Phoenix, Arizona 85018 Butler Design Group 602-957-1800 Phone 602-957-7722 Fax Architects & Planners 34 EXHIBIT B COMPLEX RULES AND REGULATIONS 1. Any sign, lettering, picture, notice or advertisement installed on or in any part of the Premises and visible from the exterior of the Complex, or visible from the exterior of the Premises, shall be installed at Lessee's sole cost and expense, and in such manner, character and style as Lessor may approve in writing. In the event of a violation of the foregoing by Lessee, Lessor may remove the same without any liability and may charge the expense incurred by such removal to Lessee. 2. No awning or other projection shall be attached to the outside walls of the Complex. No curtains, blinds, shades or screens visible from the exterior of the Complex or visible from the exterior of the Premises shall be attached to or hung in, or used in connection with, any window or door of the Premises without the prior written consent of Lessor. Such curtains, blinds, shades, screens or other fixtures must be of a quality, type, design and color, and attached in the manner, approved by Lessor. 3. Lessee and its servants, employees, customers, invitees and guests shall not obstruct sidewalks, entrances, passages, corridors, vestibules, halls, elevators or stairways in and about the Complex which are used in common with other tenants and their servants, employees, customers, guests and invitees and which are not a part of the Premises of Lessee. Lessee shall not place objects against glass partitions or doors or windows which would be unsightly from the Complex corridors or from the exterior of the Complex and will promptly remove any such objects upon notice from Lessor. 4. Lessee shall not make excessive noises, cause disturbances or vibrations or use or operate any electrical or mechanical devices that emit excessive sound or other waves or disturbances, and Lessee shall not create obnoxious odors (including cigarette, cigar and pipe smoke), any of which may be offensive to the other tenants and occupants of the Complex, or that would interfere with the operation of any device, equipment, radio, television broadcasting or reception from or within the Complex or elsewhere and shall not place or install any projections, antennas, aerials or similar devices inside or outside of the Premises or on the Complex. 5. Lessee shall not waste electricity, water or air conditioning and shall cooperate fully with Lessor to insure the most effective operation of the Complex's heating and air conditioning systems and shall refrain from attempting to adjust any controls other than unlocked room thermostats, if any, installed for Lessee's use. Lessee shall keep corridor doors closed. 6. Lessee assumes full responsibility for protecting its space from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed and secured after normal business hours. 7. No person or contractor not employed by Lessor shall be used to perform janitorial work, window washing, cleaning, maintenance, repair or similar work in the Premises without the written consent of Lessor. 8. In no event shall Lessee bring into the Complex inflammables, such as gasoline, kerosene, naphtha and benzine, or explosives or any other article of intrinsically dangerous nature. If, by reason of the failure of Lessee to comply with the provisions of this subparagraph, any insurance premium for Exhibit B (Page 1 of 4) 35 all or any part of the Complex shall at any time be increased, Lessee shall make immediate payment of the whole of the increased insurance premium, without waiver of any of Lessor's other rights at law or in equity for Lessee's breach of this Lease. 9. Lessee shall comply with all applicable federal, state and municipal laws, ordinances and regulations and building rules and shall not directly or indirectly make any use of the Premises which may be prohibited by any of the foregoing or which may be dangerous to persons or property or may increase the cost of insurance or require additional insurance coverage. 10. Lessor shall have the right to prohibit any advertising by Lessee which in Lessor's reasonable opinion tends to impair the reputation of the Complex or its desirability as a warehouse complex for warehouse use and other uses, and upon written notice from Lessor, Lessee shall refrain from or discontinue such advertising. 11. The Premises shall not be used for cooking, lodging, sleeping or for any immoral or illegal purpose. The foregoing prohibition on cooking shall not preclude the use of small kitchen appliances as typically found in projects comparable to the Complex. 12. Lessee and Lessee's servants, employees, agents, visitors and licensees shall observe faithfully and comply with the foregoing rules and regulations and such other and further appropriate rules and regulations as Lessor or Lessor's agent may from time to time adopt. Reasonable notice of any additional rules and regulations shall be given in such manner as Lessor may reasonably elect. 13. Unless expressly permitted by Lessor, no additional locks or similar devices shall be attached to any door or window and no keys other than those provided by Lessor shall be made for any door. If more than two keys for one lock are desired by Lessee, Lessor may provide the same upon payment by Lessee. Upon termination of this Lease or of the Lessee's possession, Lessee shall surrender all keys of the Premises and shall explain to Lessor all combination locks on safes, cabinets and vaults. 14. Any carpeting cemented down by Lessee shall be installed with a releasable adhesive. In the event of a violation of the foregoing by Lessee, Lessor may charge the expense incurred by such removal to Lessee. 15. The water and wash closets, drinking fountains and other plumbing fixtures shall not be used for any purpose other than those for which they were constructed, and no sweepings, rubbish, rags, coffee grounds or other substances shall be thrown therein. All damages resulting from any misuse of the fixtures shall be borne by the lessee who, or whose servants, employees, agents, visitors or licensees, shall have caused the same. No person shall waste water by interfering or tampering with the faucets or otherwise. 16. No electric circuit for any purpose shall be brought into the leased premises without Lessor's written permission specifying the manner in which same may be done. 17. No motorized vehicle, and no dog or other animal shall be allowed in offices, halls, corridors or elsewhere in the Complex. l8. Lessee shall not throw anything out of the door or windows or down any passageways or elevator shafts. Exhibit B (Page 2 of 4) 36 19. All loading, unloading, receiving or delivery of goods, supplies or disposal of garbage or refuse shall be made only through entryways and freight elevator provided for such purposes and indicated by Lessor. Lessee shall be responsible for any damage to the Complex or the property of its employees or others and injuries sustained by any person whomsoever resulting from the use or moving of such articles in or out of the leased premises, and shall make all repairs and improvements required by Lessor or governmental authorities in connection with the use of such articles. 20. All safes, equipment or other heavy articles shall be carried in or out of the Premises only in a manner which will not interfere with or cause damage to the Premises or the Complex, or to the other tenants or occupants of the Complex. Lessee shall be responsible for any damage to the Complex or the property of its employees or others and injuries sustained by any person whomsoever resulting from the use or moving of such articles in or out of the leased premises, and shall make all repairs and improvements required by Lessor or governmental authorities in connection with the use or moving of such articles. 21. Canvassing, soliciting and peddling In the Complex is prohibited and all tenants of the Complex shall cooperate to prevent the same. 22. Vending machines shall not be installed without permission of Lessor; provided, however, Lessor consents to the installation of vending machines in the pantry or kitchen area of the Premises for the dispensing of soda and other similar drinks to Lessee's employees and guests. 23. Canvassing, soliciting and peddling in the Complex is prohibited and each Lessee shall cooperate to prevent the same. 24. Wherever in these Complex Rules and Regulations the word "Lessee" occurs, it is understood and agreed that it shall mean Lessee and Lessee's associates, agents, clerks, servants and visitors. Wherever the word "Lessor" occurs, it is understood and agreed that it shall mean Lessor and Lessor's assigns, agents, clerks, servants and visitors. 25. Upon twenty-four (24) hours notice, Lessor shall have the right to enter upon the leased premises at all reasonable hours for the purpose of inspecting the same. 26. Upon twenty-four (24) hours' notice, Lessor shall have the right to enter the leased premises at hours convenient to Lessee for the purpose of exhibiting the same to prospective tenants within the sixty (60) day period prior to the expiration of this Lease, and Lessor may place signs advertising the leased premises for rent on the windows and doors of said Premises at any time within said sixty (60) day period. 27. Lessee and its servants, employees, customers, invitees and guests shall, when using the common parking facilities, if any, in and around the Complex, observe and obey all signs regarding fire lanes and no parking zones, and when parking always park between the designated lines. Lessor reserves the right to tow away, at the expense of the owner, any vehicle which is improperly parked or parked in a no parking zone. All vehicles shall be parked at the sole risk of the owner, and Lessor assumes no responsibility for any damage to or loss of vehicles. No vehicles shall be parked overnight. 28. In case of invasion, mob, riot, public excitement, or other commotion, Lessor reserves the right to prevent access to the Complex during the continuance of the same by closing the doors or otherwise, for the safety of the tenants or the Exhibit B (Page 3 of 4) 37 protection of the Complex and the property therein. Lessor shall in no case be liable for damages for any error or other action taken with regard to the admission to or exclusion from the Complex of any person. 29. All entrance doors to the Premises shall be locked when the Premises are not in use. All corridor doors shall also be closed during times when the air conditioning equipment in the Complex is operating so as not to dissipate the effectiveness of the system or place an overload thereon. 30. Lessor reserves the right at any time and from time to time to rescind, alter or waive, in whole or in part, any of these Rules and Regulations when it is deemed necessary, desirable, or proper, in Lessor's judgment, for its beat interest or for the best interest of the tenants of the Complex. 31. Smoking shall be permitted only in the smoking areas located outside of the building, as designated and redesignated from time to time by Lessor, and Lessee and its servants, employees, customers, invitees and guests shall not smoke anywhere at the Complex (other than the smoking areas designated by Lessor), including without limitation Lessee's Premises and the sidewalks, entrances, passages, corridors, halls, elevators and stairways of the Complex. Initials: Lessor ---------------------- Lessee /s/ DAVID C. PHILLIPS ---------------------- 6/28/96 Exhibit B (Page 4 of 4) 38 EXHIBIT C RIDER TO LEASE ARTICLE XX. SECURITY DEPOSIT: Within thirty (30) days of the date hereof, Lessee shall deposit with Lessor in cash the sum of Nine Hundred Thirty-Four Thousand, Two Hundred and no/100th Dollars ($934,200.00), the receipt of which is hereby acknowledged, as and for a security deposit for the full and faithful performance by Lessee of each and every terms, covenant and condition of this Lease. Upon determination of the total rentable square footage of the Premises, the amount of security deposit shall thereupon be adjusted (and the parties shall immediately make adjusting payments, as appropriate), so that the security deposit shall equal the Base Rent for eighteen (18) months, without regard to any rights of abatement. At Lessee's election, said security deposit may be provided in the form of an unconditional, irrevocable letter of credit, drawable by Lessor merely upon presentation, issued by a federally insured banking institution reasonably acceptable to Lessor and having an expiration date (at all times during the Lease term) of not less than thirty (30) days (i.e. so that it is therefore required hereby, to be replaced or renewed from time to time, during the Lease term). In the event that an Event of Default exists, Lessor may use, apply or retain the whole or any part of the security so deposited for the payment of any such rentals in default or for any other sum which Lessor may expend or be required to expend by reason of Lessee's default, including, but not limited to, any damages or deficiency in the reletting of the Premises, whether such damages or deficiency may accrue before or after reentry by Lessor. Lessee shall not be entitled to any interest on the security deposit. It is expressly understood and agreed that such deposit is not an advance rental deposit or a measure of Lessor's damages in case of Lessee's default. Upon application of any part of the deposit by Lessor as provided herein, Lessee shall pay to Lessor on demand the amount so applied in order to restore the security deposit to its original amount. Any application of the deposit by Lessor shall not be deemed to have cured Lessee's default by reason of which the application is made. In the event of a bona fide sale of the Complex of which the Premises are a part, Lessor shall have the right to transfer the security deposit to its vendee for the benefit of Lessee and thereafter Lessor shall be released of all liability for the return of such deposit and Lessee agrees to look to said vendee for the return of its security deposit. It is agreed that this provision shall apply to every transfer or assignment made of the security deposit to any new landlord. This security deposit shall not be assigned or encumbered by Lessee. It is expressly understood that the reentry of the Premises by Lessor for any default on the part of Lessee prior to the expiration of the term of this Lease shall not be deemed a termination of this Lease so as to entitle Lessee to recover the security deposit, and the security deposit shall be retained and remain in the possession of Lessor until the end of the term of this Lease. Actions by Lessor against Lessee for breach of this Lease shall in no way be limited or restricted by the amount of the security deposit and resort to such deposit shall not waive any other rights or constitute and election of remedies which Lessor may have. Exhibit C Page 1 of 8 39 The requirement for Lessor to provide the security deposit shall be suspended upon Lessee's demonstration to Lessor's reasonable satisfaction that Lessee has a "Tangible Net Worth" of not less than $35,000,000.00, pursuant to Lessee's then most recent annual financial statements, prepared in accordance with generally accepted accounting principles ("GAAP") and audited and certified by a nationally recognized public accounting firm in accordance with generally accepted auditing standards. The security deposit requirement shall be reinstated subsequently, in the event Lessee's "Tangible Net Worth" is less than $35,000,000.00, based upon any financial statement prepared by Lessee and/or its accounts. Throughout the term of this Lease, Lessee shall cause copies of all its press releases and filings with the Securities and Exchange Commission (the "SEC") (including without limitation all Form 1OK's, Form 10Q's, Form 8K's and proxy statements), or if Lessee is no longer required to file statements with the SEC, then copies of its annual and quarterly financial statements, each in a timely fashion after issuance or filing. For purposes hereof, "Tangible Net Worth", shall mean equity of Lessee and its subsidiaries on a consolidated basis determined in accordance with GAAP, minus the net book value of all intangible assets including, without limitation, good will, trademarks, trade names, service marks, brand names, copyrights, patents and unamortized debt discount and expense, organizational expenses and the excess of the equity in any subsidiary over the cost of the investment in such subsidiary. ARTICLE XXI. LOCK BOX: Lessor may from time to time designate a lock box collection agent for the collection of rents or other charges due Lessor. In such event, the payment made by Lessee to the lock box shall be the date of receipt by the lock box collection agent of such payment (or the date of collection of any such sum if payment is made in the form of a negotiable instrument thereafter dishonored upon presentment); however, for the purpose of this Lease, no such payment or collection shall be deemed a waiver by Lessor of any breach by Lessee of any term, covenant or condition of this Lease nor a waiver of any of Lessor's rights or remedies and any payment of amounts other than that deemed due and proper by Lessor shall not prejudice Lessor in any manner nor constitute a waiver and Lessor shall hereby be authorized to retain the proceeds of any payments by Lessee, whether restrictively endorsed or otherwise, and apply same to the amounts due and payable from Lessee under this Lease without waiver. ARTICLE XXII. PRIOR PROPOSALS: All prior proposals in respect to this Lease are hereby terminated. ARTICLE XXIII. TENANT IMPROVEMENTS: Lessor is providing the existing base building and a tenant improvement allowance of approximately $990,000.00 (to be adjusted to equal $16.50 per rentable square foot determined for the Premises, as adjusted, the "ITT Allowance") for the tenant improvements to be constructed by Lessor at the Premises, which tenant improvements are depicted on the space plan described on the outline specifications attached hereto and incorporated herein as Exhibit D (the "Tenant Improvements"). The Tenant Improvements will be installed by Lessor and paid for by Lessee subject to Lessor providing an allowance in the aforesaid amount. In the event Lessee desires and Lessor approves any tenant improvements in addition to the Tenant Improvements, then, at Lessee's election (to be determined within five (5) days of Lessor's demand thereof) either: (i) Lessee shall pay Lessor therefor in cash upon substantial completion thereof; or (ii) the Base Rent otherwise payable annually by Lessee shall be increased by $120.00 for each $1,000.00 incremental increase in the cost of Tenant Improvements. Option (ii), above, shall only be allowed in regard to the first (approximately) $180,000.00 (to be adjusted Exhibit C Page 2 of 8 40 to equal $3.00 per rentable square foot determined for the Premises) in Tenant Improvement costs after the amount of the TI Allowance. Lessee shall have the responsibility to select a layout and to reach agreement with Lessor as to quality and type on or before September 15, 1996. Anything herein to the contrary notwithstanding, Lessee shall be responsible for all of Lessor's increased costs or damages (including lost rent) arising out of any failure of Lessee to select its layout and reach agreement with Lessor as above required on or before September 15, 1996. Lessor shall be entitled to include as a Tenant Improvement cost a general contractor's fee, contingency and general conditions amounts as reasonably charged for comparable projects. On or before September 15, 1996. Lessee shall have approved a space plan acceptable to Lessor for the Tenant Improvements, which space plan shall have received final approval of Lessee, shall be adequate for preparation by Lessor of working drawings for construction of such Tenant Improvements, shall show in reasonable detail the design and appearance of the tenant finishing materials to be used in the construction thereof (and such other detail or description as may be necessary to adequately outline the scope of the Tenant Improvements) and shall be in substantial conformance with the Project Specification, attached as Exhibit E. Lessee shall be responsible for Lessor's costs (including lost rent) arising out of delays in completing the Tenant Improvements caused by Lessee, whether by Lessee's failure to approve the aforesaid space plan on or before September 15, 1996 or to respond to within a reasonable time to Lessor's inquiries or requests in connection with the Tenant Improvements or otherwise. Lessee also agrees to refrain from ordering long lead time items which would delay substantial completion of the Tenant Improvements. Lessor agrees to cause the Tenant Improvements to be constructed in accordance with the public accommodations provisions of Title III of the Americans With Disabilities Act of 1990 (42 U.S.C. Section 12-101 et seq.), as presently interpreted and enforced as of the date of this Lease by the governmental bodies having jurisdiction thereof. Lessor shall also, at its sole cost and expense, install along the perimeter of the shell building in which the Premises is located additional glass as depicted in the building elevation contained in Exhibit D attached hereto. Lessor shall also provide an allowance of approximately $90,000.00 (subject to adjustment at the rate of $1.50 per rentable square foot for the Premises) to reimburse Lessee for its actual, out-of-pocket costs incurred in engaging a space planning consultant for design and review of the preliminary working drawings for the Tenant Improvements to be constructed by Lessor. Said allowance shall be paid upon the Commencement Date, subject to the submission by Lessee of reasonable evidence of such costs so incurred. ARTICLE XXIV. PARKING: Lessor shall construct not less than five (5) standard, and, in accordance with applicable building codes, compact vehicular parking spaces on the Property for every 1,000 square feet of rentable area in the Complex. Lessee shall be entitled to use, on a non-exclusive basis, up to five (5) of such spaces for every 1,000 rentable square feet determined for the Premises. Neither party shall unreasonably withhold its consent to the identification of parking spaces required by law (e.g., handicapped spaces, carpool spaces, etc.), ARTICLE XXV. OPTION TO EXTEND: Lessee shall have the right, subject to the provisions hereinafter provided, to extend the term of this Lease for one (1) period of five (5) years on the terms and provisions of this Article. Such five-year renewal Exhibit C Page 3 of 8 41 period is sometimes herein referred to as the "Renewal Term". The conditions of such Renewal Term shall be as follows: (a) That this Lease is in full force and effect and Lessee is not in default in the performance of any of the terms, covenants and conditions herein contained, in respect to which notice of default has been given hereunder which has not been or is not being remedied in the time limited in this Lease, at the time of exercise of the right of renewal, but Lessor shall have the right at its sole discretion to waive the non-default conditions herein. (b) That such Renewal Term shall be on the same terms, covenants and conditions as in this Lease; provided, however, the annual Base Rent for such Renewal Term shall be an amount equal to ninety-five percent (95%) of the fair market rental rate for such space on the date such renewal term shall commence in relation to comparable (in quality, location and size) space located within a five (5) mile radius of the Property. The determination of such fair market rental rate for the Premises shall be made by Lessor and Lessee no later than the date that is eight (8) months prior to commencement of the Renewal Term. Provided Lessee has properly elected to renew the term of this Lease, and if Lessor and Lessee fail to agree at least eight (8) months prior to commencement of the Renewal Term upon the fair market rental rate of the Premises, the fair market rental rate of the Premises shall be determined by appraisal in accordance with the provisions of Article XXXII ("Appraisal") hereof. Notwithstanding anything to the contrary contained in this Article, in no event shall the Base Rent of the Premises for the Renewal Term be less than the Base Rent payable by Lessee under the terms of this Lease immediately prior to commencement of such Renewal Term. (c) That Lessee shall exercise its right to the Renewal Term provided herein, if at all, by notifying Lessor in writing of its election to exercise the right to renew the term of this Lease no later than nine (9) months prior to the end of the initial ten-year term. Upon notification with respect to such renewal, and for one month thereafter, the parties hereto shall make a good faith effort to agree upon the fair market rental rate of the Premises for the Renewal Term. In the event that Lessor and Lessee fail to agree within the one month time period set forth in this subparagraph (c), the fair market rental rate of the Premises for such Renewal Term shall be determined by appraisal in the manner set forth in Article XXXII hereof. Any determination by appraisal or any agreement reached by the parties hereto with respect to such fair market rental rate and the resulting Base Rent of the Premises for the Renewal Term shall be expressed in writing and shall be executed by the parties hereto, and a copy thereof delivered to each of the parties. ARTICLE XXVI. SEPARATE METERING: Notwithstanding anything to the contrary contained in Article II ("Additional Rent") of the Lease, the water, gas, heat, light, power, electricity, telephone and other utilities and services supplied to the Premises, if separately metered, shall be paid for by Lessee upon receipt of invoice therefor. Any such separately metered cost paid for by Lessee in accordance with this Article shall be excluded from the definition of "Operating Expenses" set forth in Article II, it being agreed that this Article shall govern and control as to the payment thereof by Lessee. Exhibit C Page 4 of 8 42 ARTICLE XXVII. CONFIDENTIALITY: Lessee agrees to keep this Lease and the terms hereof in confidence, and not to publish or disclose, in whole or in part, the same without Lessor's prior written consent, which consent may be withheld in Lessor's sole discretion. ARTICLE XXVIII. CONSTRUCTION WARRANTY: Notwithstanding anything to the contrary contained in this paragraph, Lessor shall guarantee the Tenant Improvements against defective workmanship and/or materials for a period of one (1) year from the date of substantial completion of the Tenant Improvements and shall guarantee the shell building, the parking area and other improvements surveying the Premises that have been constructed by Lessor on the Property against defective workmanship and/or materials for a period of one (1) year from the date on which the City of Phoenix issues its Letter of Compliance for such shell building and other improvements and Lessor agrees to repair or replace any defective item in the Tenant Improvements or such other improvements occasioned by poor workmanship and/or materials during the applicable one-year period, and Lessor's performance of such one-year guarantee shall be the sole and exclusive obligation of Lessor with respect to such defective workmanship and/or materials, and Lessee's rights to enforce such one-year guarantee against Lessor shall be Lessee's sole and exclusive remedy with respect to such defective workmanship and/or materials in limitation of any contract, warranty or other rights, whether express or implied, that Lessee may otherwise have under applicable law. To the extent warranties of any of Lessor's subcontractors or suppliers remain enforceable after the expiration of Lessor's one (1) year guarantee described above, Lessor shall cooperate with Lessee to enforce same for the parties mutual benefit. Subject to Articles II, XII and XIII hereof and to Lessee's obligations hereunder, except to the extent of any damage caused by the fault or negligence of Lessee, Lessor shall maintain and keep in good order, condition and repair the structural components of the shell building in which the Premises is located. All costs and expenses incurred in connection therewith shall be included in Operating Expenses, except for any capital improvements that are excluded pursuant to Article II, which excluded capital improvements shall not be included in Operating Expenses. ARTICLE XXIX. MEASUREMENT: On or before the sixtieth (60th) day after Lessor delivers the Premises, Lessor shall cause the Premises to be measured and the square footage thereof determined in accordance with the Building Owners and Managers Association (BOMA) Standard Method of Measurement. In the event the square footage of the Premises as determined by Lessor's architect shall differ from 60,000, the Base Rent, Lessee's Pro Rata Share of Operating Expenses and Real Estate Taxes, and the TI Allowance, the Relocation Allowance and the space planning consultant allowance shall be equitably adjusted. ARTICLE XXX. RENT ABATEMENT: Notwithstanding anything contained in Article I ("Base Rent") or Article II ("Additional Rent") hereof to the contrary, the Base Rent to be paid by Lessee under Article I during the first three (3) months of the initial ten-year term of this Lease shall be abated as a concession to Lessee by Lessor. ARTICLE XXXI. RELOCATION ALLOWANCE: Lessor will reimburse Lessee for relocation costs incurred by Lessee in an aggregate amount of approximately $120,000.00 (subject to adjustment at the rate of $2.00 per rentable square foot for the Premises). Any relocation costs submitted to Lessor for reimbursement must be supported by reasonable documentation, such as an invoice. Lessor agrees to reimburse Lessee for submitted relocation costs Exhibit C Page 5 of 8 43 within thirty (30) days after Lessee's occupancy of the Premises and Lessor's receipt of such documentation. ARTICLE XXXII. APPRAISAL: Within seven (7) days after the expiration of the period within which Lessor and Lessee were to reach agreement on the fair market rental rate as provided in Article XXV, Lessor and Lessee shall mutually appoint an appraiser that has at least five (5) years full-time commercial appraisal experience and is a member of the American Institute of Real Estate Appraisers. If Lessor and Lessee are unable to agree upon an appraiser, either of the parties to this Lease, after giving five (5) days prior written notice to the other party, may apply to the then president of the Phoenix Board of Realtors for the selection of an appraiser who meets the foregoing qualifications, which selection shall be made within fifteen (15) days. The appraiser selected by the president of the Board of Realtors shall be a person who has not previously acted in any capacity for either party, its affiliates or leasing agents and who meets the above experience qualifications. Lessor and Lessee shall each, within seven (7) days of the appointment (either by agreement or selection) of the appraiser, submit to the appraiser such parties' determination of the fair market rental rate for purposes of Article XXV. Within twenty (20) days after the conclusion of the above-referenced seven-day period, the appraiser shall review each of the Lessor's and Lessee's submittals and shall review such other information as such appraiser shall deem necessary (a party may furnish the appraiser with any information it deems relevant) and shall determine which of the two submittals is the more reasonable. The appraiser shall immediately notify the parties of his or her selection, and such selection shall be multiplied by ninety-five percent (95%) to determine the Base Rent of the Premises for the Renewal Term; provided, however, that the Base Rent of the Premises for the Renewal Term shall in no event be less than the Base Rent payable by Lessee under the terms of this Lease immediately prior to the commencement of the Renewal Term. If, upon the expiration of the above-referenced seven-day period, the appraiser shall have received one of the party's submittals as to the fair market rental rate, but not both, the appraiser shall designate the submitted item as the fair market rental rate to be used to calculate the Base Rent for the Premises for the Renewal Term in the manner provided in the previous sentence, and the appraiser shall immediately notify the parties of same. Notwithstanding the foregoing two sentences, in no event shall the Base Rent of the Premises for the Renewal Term be less than the Base Rent payable by Lessee under the terms of this Lease immediately prior to commencement of the Renewal Term. ARTICLE XXXIII. FIRST RIGHT OF OFFER: Subject to the terms and conditions set forth in this Article XXXIII, Lessor hereby grants to Lessee the first right ("First Right") to be offered by Lessor the opportunity to lease the approximately rentable square feet of space shown as designated on Exhibit attached hereto and incorporated herein by this reference. If, at any time while this First Right is in effect, Lessor should intend to lease such space to a third party tenant, then Lessor shall first offer to lease such space to Lessee. In the event Lessor offers to Lease such space to Lessee pursuant to this Article XXXIII, Lessee shall notify Lessor in writing within five (5) days of its receipt of Lessor's notice whether Lessee desires to offer to lease such space from Lessor. If Lessee notifies Lessor in writing within such five-day period that Lessee does not desire to lease such space, or if Lessee does not respond in writing to Lessor's notice within such five-day period, then, in either of the above instances, Lessor's obligations under this Article XXXIII shall automatically terminate and be of no further force or effect and Lessor shall thereafter be entitled to lease such space. If Lessee notifies Lessor in writing within such two-day period that Lessee desires to lease such space from Lessor, the Exhibit C Page 6 of 8 44 parties shall thereafter negotiate for Lessee's lease of the space from Lessor; provided, however, that if Lessor and Lessee fail to mutually agree upon the terms of Lessee's lease of such space and to execute a written amendment to this Lease within ten (10) business days of the date of Lessee's receipt of written notice (which amendment shall contain the terms mutually agreed to by the parties for Lessee's lease of such space), then Lessor's obligations under this Article XXXIII shall automatically terminate and be of no further force or effect at the end of such ten (10) business days period. Notwithstanding anything to the contrary contained in this Article XXXIII, in the event Lessee's First Right as set forth in this Article XXXIII is still in effect at the end of the initial ten-year term of this Lease, such First Right shall automatically terminate on the last day of the initial ten-year term of this Lease. The purpose of this Article is to provide notice to Lessee so that Lessee may be in a position to offer to lease such space on a competitive basis with others, and, notwithstanding anything to the contrary contained in this Article XXXIII, nothing in this Article XXXIII shall be deemed to be an option or right of first refusal. ARTICLE XXXIV. OPTION TO EXPAND: Between the end of the 60th month and the end of the 72nd month of the Lease term, Lessor shall notify Lessee in writing of the location in the Office Complex of approximately 20,000 rentable square feet of space into which Lessee shall have an option to expand adjacent to the Premises and of an effective date for the expansion area (which effective date shall be approximately months after Lessor's notice), and such addition to the Premises shall be governed by the provisions of this Lease (including provisions relating to renewals), to the extent the same are not inconsistent with the following terms of this Article. In the event Lessee needs such additional expansion space in the Complex, Lessee shall notify Lessor on or before fifteen (15) days after Lessor's notice that Lessee exercises its expansion rights to such space designated by Lessor. In the event Lessee so notifies Lessor, Lessor shall deliver to Lessee an amendment of this Lease adding such additional space to the Premises demised hereunder, such space being added on the effective date designated therefor in Lessor's notice, for the balance of the term of this Lease (as the same may be extended pursuant to Article XXV ("Option to Extend") hereof. Additional annual Base Rent shall be payable for the additional area in the amount of said area multiplied by the then current (as of the effective date) fair market annual Base Rent (considering tenant improvements and duration of term) for such Premises payable monthly, in advance, at the rate of one-twelfth (1/12th) of said annual fair market Base Rent per month. The "percent" for Lessee's Pro Rata Share of Excess Operating Expenses for such additional space shall be a "percent" equal to the rentable area of the additional space and divided by the rentable office area of the Complex subject to adjustment as provided in Article II ("Additional Rent") hereof. Such change in the Base Rent and such percent shall be applicable from and after the effective date as to the additional area as designated by Lessor. All redecorating of each respective space shall be done after the effective date and shall be Lessee's responsibility. If any portion thereof has not been theretofore fitted up for occupancy, Lessor will install therein (at Lessor's sole cost and expense) Lessor's then building standard improvements. Lessee shall designate its layout for same so as not to delay occupancy of such space by the said effective date. Lessee shall execute and redeliver to Lessor the appropriate amendment of Lease promptly after receipt and so as to not delay any tenant improvements. The fair market Base Rent for such applicable space shall be determined in relation to comparable (in quality and location) office space located in the relevant market area (considering tenant improvements and duration of term). The fair market Base Rent of the additional space shall be determined as of the effective date of the expansion. If Exhibit C Page 7 of 8 45 Lessor and Lessee fail to agree within thirty (30) days after exercise by Lessee of its rights to expand the Premises, upon the fair market Base Rent for such expansion area, the amount of the fair market Base Rent for such area shall be determined by appraisal in accordance with the provisions of Article XXXII ("Appraisal") hereof. The fair market Base Rent shall be based on the assumption that the use of said expansion area shall be comparable to Lessee's then existing use of the Premises and to the use of the other leasable area in the Complex. ARTICLE XXXV. MEMORANDUM. At the request of either party after the execution hereof, the parties shall agree on a form of a memorandum of Lease for the purpose of providing constructive notice of Lessee's leasehold interest, and shall cause the same to be executed and recorded in the Maricopa County Recorder's Office. Initials: Lessor ---------------------- Lessee /s/ DAVID C. PHILLIPS ---------------------- 6/28/96 Exhibit C Page 8 of 8 46 EXHIBIT D [To be added upon approval pursuant to Article XXIII of Exhibit C] 47 EXHIBIT E Project Specifications 48 EXHIBIT E PROJECT SPECIFICATIONS SYNTELLECT, INC. JUNE 28, 1996 GENERAL BUILDING Total Square Feet: Approximately 66,000 square feet, (125,000 square feet total building). Site Area: 11.9 acres (approximately). SCHEDULE Occupancy Date: Upon substantial completion, on or before March 3, 1997. PARKING Parking Required: 5:1000. WARRANTY Warranty: One (1) year. ADA/Americans with Building to be designed and constructed to meet Disabilities Act: ADA codes. SITE WORK SUE PREPARATION Soils report by a registered Arizona Soils Engineer. Building pad to be built according to soils report recommendations, with soils engineer providing on-site monitoring during construction. SITE DEVELOPMENT Exterior Concrete: Sidewalks to all parking areas and at all exits. Concrete curbs around all paved areas and planters. 49 SYNTELLECT, INC. June 28, 1996 PROJECT SPECIFICATIONS Page 2 - -------------------------------------------------------------------------------- Sidewalks: 4" thick minimum. Curbs: MAG standard vertical curb or curb & gutter (8" thick concrete). Curbs around entire paved perimeter. Paving/Auto: Standard bituminous paving in accordance with geotechnical report. All paved areas: To be bound with concrete curbs and v-gutters, if required, to assist sheet drainage. Water Service: Yard hydrants located around facility. 2" domestic service (minimum). Sewage: Hook up to include all governmental costs and fees. Storm Drainage: As required by city. Exterior Lighting: 1 foot Candle minimum in all areas. (Parking Area) BASE BUILDING ELECTRICAL 2500 amps of 277/480 three phase with K-13 rated transformers for all 120/208 stepdown for computer loads. HVAC HEATING/COOLING Rooftop gas or electrical package units per the requirements of the office build-out to maintain 74 degrees in all areas during summer and 68 degrees during winter (tenant to approve). All office roof-top mechanical equipment will be screened from view by exterior parapet wall. BUILDING STRUCTURE AND EXTERIOR ENVELOPE Building Exterior: Split face block or architecturally enhanced concrete tilt panel. Reflective, double-pane glass. Mini-blinds (Levelor brand) on all exterior windows. R-11 insulated dry wall, finished for paint on interior of all exterior walls. 50 SYNTELLECT, INC. June 28, 1996 PROJECT SPECIFICATIONS Page 3 - -------------------------------------------------------------------------------- Structural Concrete: Typical 4" slab in office areas, 6" in shipping and configuration areas, or per tenant's requirements within reason. 98% compaction sub base. Contraction Joints: 15' both ways minimum, caulked in all configuration and shipping areas. Bay Size: 40' x 40' with steel pipe columns minimum. Roof Insulation: R-30 minimum. Wall Insulation: R-11 minimum. Glass Insulation: R-2 minimum. Loading Dock: One (1) cut in dock high loading areas with one (1) 9 x 12 electric insulated sectional overhead doors. Windows: Fixed - double pane. Roofing: Four-ply built-up roof with a 25 lb. base, two (2) 15 lb. plys, and a 90 lb, fiberglass cap sheet minimum (or equal). All rooftop mechanical equipment shall be properly flashed and equipped with an insulated curb no less than 12". Metal roof deck shall be 1.5", 22 gauge plywood system acceptable. All roof areas shall slope to exterior roof drains. Ten (10) year unlimited labor and material warranty. INTERIOR FINISHES 2' x' 4' T-bar grid with acoustic tile at 10' height; sheetrocked metal framed walls taped, textured, and painted with two (2) coats of interior semi-gloss paint; stain grade doors with commercial hardware. Interior Clearance Height: 10 feet floor to ceiling grid in office area, 15 feet floor to ceiling grid in configuration and shipping areas. Lighting: 50 F.C. of 2' x 4' lay-in lighting with prismatic lens and electronic ballast in configuration and shipping area, and office areas to accommodate 25 workstations per 40 x 40 bay. Battery pack exit signs and lighting. 51 SYNTELLECT, INC. June 28, 1996 PROJECT SPECIFICATIONS Page 4 - -------------------------------------------------------------------------------- Open Office Areas: Within offices, outlets provided every eight (8) lineal feet of wall with a telephone and data conduits and outlet in each. J-boxes above the ceiling tile on an approximately 15' x 15' grid for power distribution, to accommodate 25 workstations per 40 x 40 bay. Washrooms: Washroom partitions shall be ceiling hung, metal. Washrooms shall receive a plastic laminate vanity for recessed sinks. Ceramic tile walls and floors. Fans: Six (6) exhaust fans in restrooms and lunchrooms ducted roof. Fire Extinguishers: Fire extinguishers to be provided as code requires. Flooring: Fifteen and No/100 Dollars ($15.00) per yard installed allowance (see note*). Fire Protection System: A complete fire protection sprinkler system shall be provided to meet all city codes, with semi-recessed heads. Walls: Walls to be slab to slab surrounding the configuration and shipping area (see note*). Doors & Frame: Provide rated doors and hardware for Tenant's exits. Provide double glass entrance doors, structural support, frame and all hardware with sidelights. Hardware: Provide coat hooks behind office doors (see note*). Install locks on all interior office doors. Provide Tenant with two sets of keys for each door (see note*). Painting: Landlord shall paint all interior surface of exterior walls and columns. Security: Provide a facility access control system, including all hardware and software with electronic numeric cypher readers at each entrance (see note*). *Note: Items included in Tenant Improvement Allowance. 52 SYNTELLECT, INC. June 28, 1996 PROJECT SPECIFICATIONS Page 5 - -------------------------------------------------------------------------------- ARCHITECTURAL WORK Complete architectural working drawings prepared by a registered Arizona Architect. Included shall be all necessary architectural, structural, mechanical, electrical, civil and landscape drawings. Topographic survey from a registered Arizona Civil Engineer. City required building permits and plan check fees. CONCRETE WORK 4" thick concrete 3,500 psi floor slab, 6" in shipping and configuration areas, over 3" of A.B.C. designed to provide 3,500 psi at 28 days and a crack free surface with saw cutting of control joints a maximum of 1 5' by 15'. Concrete cured after placing and sealed with two (2) coats of seater at completion of project. Sidewalks at street frontages. 7 and 28 day strength tests for each 50 cubic yards of concrete poured. PLUMBING Six (6) restrooms [3 men, 3 women] for office personnel with (2) 30-gallon water heaters and a total of twenty-eight (28) wall hung water closets, twenty-four (24) lavatories, and eight (8) urinals. Bathrooms complete with ceramic tile on walls, ceiling hung toilet partitions, urinal screens, mirrors, paper holders, soap dispensers, towel dispensers and ceramic tile flooring. Four (4) drinking fountains, three (3) lunchrooms sinks, two (2) utility sinks, four (4) floor drains, four (4) hose bibs. INSULATION 3.5" batt insulation for sound deadening around bathrooms. MISCELLANEOUS Each 40 x 40 bay to be able to provide power, data and telephone to 25 workstations per bay. Painting of exterior walls one (1) coat exterior block fillprimer, two (2) cost of exterior poly-vinyl paint. Power company charges for design of electrical service paid by developer. 53 SYNTELLECT, INC. June 28, 1996 PROJECT SPECIFICATIONS Page 6 - -------------------------------------------------------------------------------- Masonry trash enclosure with concrete stab to match building. Telephone conduits and US West main trunks brought to central phone room with telephone mounting boards. Final cleanup. Sales tax. Fire hydrant per fire department. CONSTRUCTION REQUIREMENTS Interior Floors: To be level within 1/8" in 10' to accommodate furniture systems. With survey. MASONRY 8" x 8" x 16" CMU exterior block walls with a 20' overall height utilizing split-face only. TILT PANELS Architecturally enhanced. TENANT IMPROVEMENTS ALLOWANCE See lease. MISCELLANEOUS ALLOWANCE SUMMARY Any allowance not fully utilized will accrue to the benefit of the tenant in the form of a rental credit. Landscaping: One Hundred Thousand and No/100 Dollars ($1 00,000.00). Signage: Five Thousand and No/I 00 Dollars ($5,000.00). Interior Architecture/ One and 50/1 00 Dollars ($1.50) per square foot. Engineering/Construction Management: GENERAL REQUIREMENTS Environmental Study: Included. 54 SYNTELLECT, INC. June 28, 1996 PROJECT SPECIFICATIONS Page 7 - -------------------------------------------------------------------------------- Project Engineers/ Included in Base Building cost. Architect Fees: Geotechnical Investigation: Included. Taxes/Fees: Included in Base Building cost. Temporary Facilities: Included in Base Building cost. Insurance Coverage: Included in Base Building cost. GC and Fee: Not to exceed ten percent (10%). 55 FIRST AMENDMENT TO LEASE This First Amendment To Lease dated as of this 16th day of October, 1996, by and between Opus Southwest Corporation, a Minnesota corporation ("Lessor") and Syntellect, Inc., a Delaware corporation ("Lessee"). RECITALS WHEREAS, pursuant to that Lease dated June 28, 1996, the Lessor and Lessee agreed upon the lease of certain premises of approximately 60,000 rentable square feet located in the office and warehouse complex known and described as Northgate Center, located northwest of the intersection of Beardsley Road and Intersection 17, Phoenix, Arizona; and WHEREAS, the parties intend to modify the Lease pursuant to the express provisions below; THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. The parties by this Amendment intend to increase the approximate rentable size of the Premises from 60,000 square feet to 70,564 square feet in those places in the Lease where it appears. The agreement to measure the Premises within sixty (60) days of its delivery, pursuant to Article XXIX shall not be affected hereby. 2. Article XX. Security Deposit, is hereby amended so that the amount of the security deposit is increased from $934,200.00 to $1,100,000.00. 3. Article XXIII. Tenant Improvements, is hereby amended as follows: a. The reference to "$990,000.00" (i.e., the "TI Allowance") is hereby changed to $1,164,306.00. b. The reference to "$180,000.00" (i.e. the additional cost of Tenant Improvements which may be factored into the Base Rent rate) is hereby changed to $211,692.00. C. The reference to "$90,000.00" (i.e., the space planning allowance) is hereby changed to $105,846.00. 4. Article XXIV. Parking, is amended to replace the second sentence with the following: "Lessee shall be entitled to use, on a non-exclusive basis, up to 350 parking spaces." 5. Article XXIX. Measurement, is amended to change the reference from "60,000" to "70,564" square feet. 56 6. Article XXXI. Relocation Allowance, is hereby amended to change the reference from "$120,000.00" to "$141,128.00". 7. Article XXXIII. First Right of Offer, is hereby amended to specify that the First Right applies to the approximately 10,000 rentable square feet of space shown as designated on Exhibit A-1 attached hereto and incorporated herein by this reference. 8. Article XXXIV. Option to Expand, is hereby amended to insert, in the blank located on the seventh line, the number "two (2)" as the number of months after Lessor's notice for which the effective date of the expansion area lease shall occur. 9. Exhibit "A" and Exhibit "A-1" attached hereto are hereby substituted for the same exhibits in the Lease. 10. Article 2.d is hereby changed so that the reference to "49.06%" is changed to "51.66%". Except as expressly modified, the parties agree that the Lease remains enforceable in accordance with its terms. IN WITNESS WHEREOF, the parties have executed this First Amendment to Lease as of the day and year first above written. LESSOR: OPUS SOUTHWEST CORPORATION a Minnesota corporation By: /s/ Thomas W. Roberts --------------------- Thomas W. Roberts Its: President LESSEE: SYNTELLECT INC. a Delaware corporation By: /s/ Neal L. Miller ------------------ Neal L. Miller Its: Vice President- Chief Financial Officer 57 EXHIBIT "A" Site Plan Total Square Footage 136,602 [MAP OF SITE PLAN] NORTHGATE BUSINESS CENTER PHOENIX, ARIZONA [OPUS LOGO] [SITE PLAN MAP LEGEND] DATE: JOB: 96012 - ------------------------------------------------------------------------------- [BDG LOGO] 5112 N. 40th St., Suite 202 Phoenix, Arizona 85018 Butler Design Group 602-957-1800 Phone 602-957-7222 Fax Architects & Planners 58 EXHIBIT "A-1" Floor Plan [MAP OF FLOOR PLAN] NORTHGATE BUSINESS CENTER SYNTELLECT INC. NORTHGATE 20401 NORTH 29TH AVENUE PHOENIX, ARIZONA 85027 [LOGO] EX-10.8.F 5 AMENDMENT #5 TO IBM AGREEMENT 1 EXHIBIT 10.8(f) AMENDMENT NUMBER FIVE (5) TO AGREEMENT FOR THE LICENSING OF IBM TECHNOLOGY AGREEMENT NUMBER JWQ9308 WHEN EXECUTED, this document shall become Amendment Number Five (5) (hereinafter referred to as "Amendment") to Agreement for the Licensing of IBM Technology Number JWQ9308 (hereinafter referred to as "Agreement") dated February 3, 1993 by and between Syntellect, Inc. (hereinafter referred to as "Syntellect") and International Business Machines Corporation (hereinafter referred to as "IBM"). WHEREAS, Syntellect and IBM hereby agree to modify and amend the Agreement as set forth herein. All other terms and conditions of the Agreement not expressly modified by this Amendment, or any other previous Amendments not superseded, shall remain unchanged and shall remain in full force and effect. Supplement Number 01 dated February 3, 1993, for the licensing of IBM's CallPath DirectTalk/2 Object Code, is hereby amended to incorporate the LICENSED WORK called IBM CallPath DirectTalk/2 Version 2 Voice Processing System. Therefore Supplement Number 01 is hereby modified as follows: 1. Refer to Section 1.1, Description of Licensed Work, after "...DirectTalk/2" and before "under" in line 2 insert "and IBM CallPath DirectTalk/2 Version 2 Voice Processing System". 2. Refer to Section 5.1 LICENSED CODE and add the following: One copy of Golden Diskettes containing CallPath DirectTalk/2 Version 2 Voice Processing System Object Code......... 60 DAC 3. Section 5.2 LICENSED DOCUMENTATION and add the following: DirectTalk/2 General Information and Planning Guide ....... D DirectTalk/2 Application Programmers Guide ................ D DirectTalk/2 Installation Guide ........................... S DirectTalk/2 Administrator's Guide ........................ S DirectTalk/2 Application Development Guide ................ S DirectTalk/2 DirectTalk/2 User's Quick Reference .......... S LANGUAGE PUBLICATIONS DT/2 Language Pub for Afrikaans ........................... S DT/2 Language Pub for Arabic .............................. S DT/2 Language Pub for Belgian French ...................... S DT/2 Language Pub for Catalan ............................. S DT/2 Language Pub for Danish .............................. S DT/2 Language Pub for Dutch ............................... S DT/2 Language Pub for Finnish ............................. S DT/2 Language Pub for Flemish ............................. S 2 DT/2 Language Pub for French..................................S DT/2 Language Pub for German..................................S DT/2 Language Pub for Italian.................................S DT/2 Language Pub for Norwegian...............................S DT/2 Language Pub for Portuguese..............................S DT/2 Language Pub for Spanish.................................S DT/2 Language Pub for Swedish.................................S DT/2 Language Pub for Swiss French............................S DT/2 Language Pub for Swiss German............................S DT/2 Language Pub for Swiss Italian...........................S DT/2 Language Pub for UK English..............................S DT/2 Language Pub for US English..............................S DT/2 Language Pub for Brazil Portuguese.......................S DT/2 Language Pub for Mexican Spanish.........................S DT/2 Language Pub for Canadian French.........................S DT/2 Language Pub for Bahasa Malaysian........................S DT/2 Language Pub for Cantonese...............................S DT/2 Language Pub for Japanese................................S DT/2 Language Pub for Korean..................................S DT/2 Language Pub for Traditional Chinese.....................S NOTE: D = Available on Demand S = Shipped with LICENSED WORK 4. Refer to Attachment 1 and add the following: CallPath DirectTalk/2 Version 2 Program Names and Part Numbers PROGRAM NUMBER: 5871-AAA Program Name Part Number ------------ ----------- DirectTalk/2 Version 2 - 2 Line System............. 97G5591 DirectTalk/2 Version 2 - 4 Line System............. 97G5592 DirectTalk/2 Version 2 - 8 Line System............. 97G5593 DirectTalk/2 Version 2 - 12 Line System............. 97G5594 DirectTalk/2 Version 2 - 16 Line system............. 97G5595 DirectTalk/2 Version 2 - 24 Line System............. 97G5596 DirectTalk/2 Version 2 - 32 Line System............. 97G5597 DirectTalk/2 Version 2 - 48 Line System............. 97G5598 DirectTalk/2 Version 2 Communication Feature........ 97G5583 DirectTalk/2 Version 2 Voice Messaging Option....... 97G5584 DirectTalk/2 Version 2 Voice Recognition Option..... 97G5585 DirectTalk/2 Version 2 Text-to-Speech Option........ 97G5586 DirectTalk/2 Version 2 Telecomm. Dev. for the Deaf.. 97G5587 DirectTalk/2 Version 2 US English Language Package.. 97G5588 DirectTalk/2 Version 2 Canadian French Language Pkg. 97G5589 DirectTalk/2 Version 2 Mexican Spanish Language Pkg. 97G5590 3 PROGRAM NUMBER: 5873-AAA Line Upgrade DirectTalk/2 Version 2 - 2 to 4 Line Upgrade .......... 97G5599 DirectTalk/2 Version 2 - 2 to 8 Line Upgrade .......... 97G5600 DirectTalk/2 Version 2 - 2 to 12 Line Upgrade .......... 97G5601 DirectTalk/2 Version 2 - 2 to 16 Line Upgrade .......... 97G5602 DirectTalk/2 Version 2 - 2 to 24 Line Upgrade .......... 97G5603 DirectTalk/2 Version 2 - 2 to 32 Line Upgrade .......... 97G5604 DirectTalk/2 Version 2 - 2 to 48 Line Upgrade .......... 97G5605 DirectTalk/2 Version 2 - 4 to 8 Line Upgrade .......... 97G5606 DirectTalk/2 Version 2 - 4 to 12 Line Upgrade .......... 97G5607 DirectTalk/2 Version 2 - 4 to 16 Line Upgrade .......... 97G5608 DirectTalk/2 Version 2 - 4 to 24 Line Upgrade .......... 97G5609 DirectTalk/2 Version 2 - 4 to 32 Line Upgrade .......... 97G5610 DirectTalk/2 Version 2 - 4 to 48 Line Upgrade .......... 97G5611 DirectTalk/2 Version 2 - 8 to 12 Line Upgrade .......... 97G5612 DirectTalk/2 Version 2 - 8 to 16 Line Upgrade .......... 97G5613 DirectTalk/2 Version 2 - 8 to 24 Line Upgrade .......... 97G5614 DirectTalk/2 Version 2 - 8 to 32 Line Upgrade .......... 97G5615 DirectTalk/2 Version 2 - 8 to 48 Line Upgrade .......... 97G5616 DirectTalk/2 Version 2 -12 to 16 Line Upgrade .......... 97G5617 DirectTalk/2 Version 2 -12 to 24 Line Upgrade .......... 97G5618 DirectTalk/2 Version 2 -12 to 32 Line Upgrade .......... 97G5619 DirectTalk/2 Version 2 -12 to 48 Line Upgrade .......... 97G5620 DirectTalk/2 Version 2 -16 to 24 Line Upgrade .......... 97G5621 DirectTalk/2 Version 2 -16 to 32 Line Upgrade .......... 97G5622 DirectTalk/2 Version 2 -16 to 48 Line Upgrade .......... 97G5623 DirectTalk/2 Version 2 -24 to 32 Line Upgrade .......... 97G5624 DirectTalk/2 Version 2 -24 to 48 Line Upgrade .......... 97G5625 DirectTalk/2 Version 2 -32 to 48 Line Upgrade .......... 97G5626 PROGRAM NUMBER: 5783-AAA Program Package Upgrades From Version 1.x DirectTalk/2 Version 2 - 2 to 4 Line Program Upgrade 97G5627 DirectTalk/2 Version 2 - 2 to 8 Line Program Upgrade 97G5628 DirectTalk/2 Version 2 - 2 to 12 Line Program Upgrade 97G5629 DirectTalk/2 Version 2 - 2 to 16 Line Program Upgrade 97G5630 DirectTalk/2 Version 2 - 2 to 24 Line Program Upgrade 97G5631 DirectTalk/2 Version 2 Communications Upgrade ...... 97G5632 DirectTalk/2 Version 2 Voice Messaging Upgrade ..... 97G5633 DirectTalk/2 Version 2 Voice Recognition Upgrade ... 97G5634 DirectTalk/2 Version 2 Text-to-Speech Upgrade ...... 97G5635 4 DirectTalk/2 Version 2 US English Language Upgrade 97G5636 DirectTalk/2 Version 2 Canadian French Language Upgrade 97G5637 DirectTalk/2 Version 2 Mexican Spanish Language Upgrade 97G5638 IN WITNESS WHEREOF, Syntellect and IBM have caused this Amendment to be executed by their duly authorized representatives as set forth above. Accepted and Agreed To: INTERNATIONAL BUSINESS SYNTELLECT, INC. MACHINES CORPORATION By: /s/ William T. Maxwell By: /s/ Thomas R. Mayer ---------------------------- ------------------------- NAME: William T. Maxwell NAME: Thomas R. Mayer TITLE: Director OEM Marketing TITLE: President & CEO DATE: 2/13/1995 DATE: 2/8/95 EX-10.8.G 6 AMENDMENT #6 TO IBM AGREEMENT 1 EXHIBIT 10.8(g) AMENDMENT NUMBER SIX (6) TO AGREEMENT FOR THE LICENSING OF IBM TECHNOLOGY AGREEMENT NUMBER JWQ9308 WHEN EXECUTED, this document shall become Amendment Number Six (6) (hereinafter referred to as "Amendment") to Agreement for the Licensing of IBM Technology Number JWQ9308 as amended (hereinafter referred to as "Agreement") dated February 3, 1993 by and between Syntellect, Inc. (hereinafter referred to as "Syntellect") and International Business Machines Corporation (hereinafter referred to as "IBM"). WHEREAS, Syntellect and IBM hereby agree to modify and amend the Agreement as set forth herein. All other terms and conditions of the Agreement not expressly modified by this Amendment, or any other previous Amendments, shall remain unchanged and shall remain in full force and effect. 1. SECTION 5.0, CONTRACT PERIOD, Subsections 5.1 and 5.2 are modified to read as follows: 5.1 The term of any supplement under this Agreement, excluding Supplement Number 04 which term remains five (5) years, shall begin on its Commencement Date and shall expire seven (7) years thereafter, unless terminated earlier in accordance with section 6.0 below. 5.2 The term of this Agreement shall commence on the date signed by the last signatory hereto and shall expire seven (7) years from such date unless terminated earlier in accordance with section 6.0 below. IN WITNESS WHEREOF, Syntellect and IBM have caused this Amendment to be executed by their duly authorized representatives as set forth above. Accepted and Agreed To: INTERNATIONAL BUSINESS SYNTELLECT, INC. MACHINES CORPORATION BY: /s/ William T. Maxwell BY: /s/ Thomas R. Mayer --------------------------- ------------------------------ NAME: William T. Maxwell NAME: Thomas R. Mayer TITLE: Director, Networking OEM TITLE: President & CEO DATE: May 23, 1995 DATE: 6 June, 1995 Page 1 of 1 EX-10.8.H 7 AMENDMENT #7 TO IBM AGREEMENT 1 EXHIBIT 10.8(h) AMENDMENT NUMBER SEVEN (7) TO AGREEMENT FOR THE LICENSING OF IBM TECHNOLOGY AGREEMENT NUMBER JWQ9308 WHEN EXECUTED, this document shall become Amendment Number Seven (7) (hereinafter referred to as "Amendment") to Agreement for the Licensing of IBM Technology Number JWQ9308 (hereinafter referred to as "Agreement") dated February 3, 1993 by and between Syntellect, Inc. (hereinafter referred to as "Syntellect") and International Business Machines Corporation (hereinafter referred to as "IBM"). WHEREAS, Syntellect and IBM hereby agree to modify and amend the Agreement as set forth herein. All other terms and conditions of the Agreement not expressly modified by this Amendment, or any other previous Amendments not superseded, shall remain unchanged and shall remain in full force and effect. Supplement Number 01 dated February 3, 1993, for the licensing of IBM's CallPath DirectTalk/2 Object Code, is hereby amended to incorporate the LICENSED WORK called IBM CallPath DirectTalk/2 Version 2.1 Voice Processing System. Therefore Supplement Number 01 is hereby modified as follows: 1. Refer to Section 1.1, Description of Licensed Work, after "...DirectTalk/2" and before "under" in line 2 insert "and IBM CallPath DirectTalk/2 Version 2.1 Voice Processing System". 2. Refer to Section 5.1 LICENSED CODE and add the following: One copy of Golden Diskettes containing CallPath DirectTalk/2 Version 2.1 Voice Processing System Object Code . . . . 60 DAC 3. Section 5.2 LICENSED DOCUMENTATION and add the following softcopy publications: - DirectTalk/2 General Information and Planning Manual - DirectTalk/2 Installation Guide - DirectTalk/2 Application Programmer's Guide - DirectTalk/2 Administrator's Guide - DirectTalk/2 Application Development User's Guide - DirectTalk/2 Problem Solving Guide - CallPath DirectTalk/2 ADSI Programmer's Guide - CallPath DirectTalk/2 National Language Information 2 4. Refer to Attachment 1 and add the following: PART DESCRIPTION NUMBER Base package (CD-ROM) 63H9564 OPTIONAL FUNCTIONAL FEATURES V2.1 TTS Support 63H9593 V2.1 VR Support 63H9594 V2.1 Comms. Support 63H9595 V2.1 Voice Messaging Feature 63H9596 V2.1 TDD Feature 63H9597 V2.1 ADSI Feature 63H9598 OPTIONAL RUN TIME SYSTEM (RTS) LICENSE FEATURES V2.1 1 Line (RTS) 63H9565 V2.1 2 Line (RTS) 63H9566 V2.1 4 Line (RTS) 63H9567 V2.1 8 Line (RTS) 63H9569 V2.1 12 Line (RTS) 63H9571 V2.1 16 Line (RTS) 63H9573 V2.1 24 Line (RTS) 63H9574 V2.1 30 Line (RTS) 63H9575 V2.1 32 Line (RTS) 63H9576 V2.1 36 Line (RTS) 63H9577 V2.1 48 Line (RTS) 63H9578 V2.1 60 Line (RTS) 63H9579 V2.1 72 Line (RTS) 63H9580 V2.1 90 Line (RTS) 63H9581 V2.1 96 Line (RTS) 63H9582 V2.1 120 Line (RTS) 63H9583 V2.1 240 Line (RTS) 63H9584 V2.1 360 Line (RTS) 63H9585 V2.1 480 Line (RTS) 63H9586 V2.1 600 Line (RTS) 63H9587 V2.1 720 Line (RTS) 63H9588 V2.1 840 Line (RTS) 63H9589 V2.1 960 Line (RTS) 63H9590 V2.1 1080 Line (RTS) 63H9591 V2.1 1200 Line (RTS) 63H9592 3 IN WITNESS WHEREOF, Syntellect and IBM have caused this Amendment to be executed by their duly authorized representatives as set forth above. ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO: INTERNATIONAL BUSINESS MACHINES SYNTELLECT, INC. CORPORATION BY: /s/ Dominic Cavalucci BY: /s/ W. Scott Coleman --------------------------- ------------------------- (Signature) (Signature) NAME: Dominic Cavalucci NAME: W. Scott Coleman ---------------------- TITLE: Software Contract Administrator (Print or Type) DATE: Sept. 6, 1996 TITLE: Sr. Vice President ------------- ---------------------- General Manager DATE: Sept. 9, 1996 ------------- EX-10.8.I 8 AMENDMENT #8 TO IBM AGREEMENT 1 EXHIBIT 10.8 (i) AMENDMENT NUMBER EIGHT (8) TO AGREEMENT FOR THE LICENSING OF IBM TECHNOLOGY AGREEMENT NUMBER JWQ9308 WHEN EXECUTED, this document shall become Amendment Number Eight (8) (hereinafter referred to as "Amendment") to Agreement for the Licensing of IBM Technology Number JWQ9308 (hereinafter referred to as "Agreement") dated February 3, 1993 by and between Syntellect, Inc. (hereinafter referred to as "Syntellect") and International Business Machines Corporation (hereinafter referred to as "IBM"). WHEREAS, Syntellect and IBM hereby agree to modify and amend the Agreement as set forth herein. All other terms and conditions of the Agreement not expressly modified by this Amendment, or any other previous Amendments not superseded, shall remain unchanged and shall remain in full force and effect. Supplement Number 01 dated February 3, 1993, for the licensing of IBM's CallPath DirectTalk/2 Object Code, is hereby amended to revise the royalty payment structure. Therefore, Section 3.0. ROYALTY PAYMENTS, is hereby modified as follows: 1. Section 3.1 and Table 1 Royalty Schedule is replaced in its entirety with the following: "As consideration for IBM furnishing the LICENSED WORKS under this Supplement, the royalty to be paid IBM for any PRODUCT delivered to a Syntellect CUSTOMER (including internal CUSTOMERS) shall be 34% effective 12/01/96 of the IBM US List Price for CallPath DirectTalk/2 Programs and Features specified in Attachment 1. The applicable List Price shall be the current IBM United States List Price (USLP). An increase in the USLP shall be effective ninety (90) days from the date of notice of the increase by IBM. A decrease in the applicable USLP shall be immediately effective in computing the royalties accruing after the date of the decrease. "The above royalty is not applicable to the national language packages or country packages. The applicable license fees for these items is specified in Section 3.7." IN WITNESS WHEREOF, Syntellect and IBM have caused this Amendment to be executed by their duly authorized representatives as set forth above. Accepted and Agreed To: INTERNATIONAL BUSINESS SYNTELLECT, INC. MACHINES CORPORATION By: /s/ Ron K. Owen By: /s/ Steve Nussuallah ----------------------------- ----------------------------- Name: Ron K. Owen Name: Steve Nussuallah ----------------------------- ----------------------------- Title: Contract Administrator Title: President ----------------------------- ----------------------------- Date: 3/3/97 Date: 3/11/97 ----------------------------- ----------------------------- EX-10.15.A 9 LOAN AGREEMENT DATED JULY 25, 1996 1 EXHIBIT 10.15(a) NATIONSBANK, N.A. (SOUTH) LOAN AGREEMENT This Loan Agreement (the "Agreement") dated as of July 25, 1996, by and between NationsBank, N.A. (South), a national banking association ("Bank") and the Borrower described below. In consideration of the Loans described below and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, Bank and Borrower agree as follows: 1. DEFINITIONS AND REFERENCE TERMS. Capitalized terms not otherwise defined herein are used herein as defined in the Promissory Note. In addition to any other terms defined herein, the following terms shall have the meaning set forth with respect thereto: A. BORROWER: Syntellect Inc., a Delaware corporation B. BORROWER'S ADDRESS: 1000 Holcomb Woods Parkway Suite 410A Roswell, Georgia 30076 C. CURRENT ASSETS. "Current Assets" means the aggregate amount of all of Borrower's assets which would, in accordance with GAAP, properly be defined as current assets. D. CURRENT LIABILITIES. "Current Liabilities" means the aggregate amount of all current liabilities as determined in accordance with GAAP, but in any event shall include all liabilities except those having a maturity date which is more than one year from the date as of which such computation is being made. E. HAZARDOUS MATERIALS. "Hazardous Materials" include all materials defined as hazardous materials or substances under any local, state or federal environmental laws, rules or regulations, and petroleum, petroleum products, oil and asbestos. F. LIQUID ASSETS. "Liquid Assets" means, at any time, the sum of the Borrower's (i) cash, (ii) securities readily convertible into cash, and (iii) accounts receivable not more than 30 days overdue. G. LOAN. "Loan" means any loan described in Section 2 hereof and any subsequent loan which states that it is subject to this Loan Agreement. H. LOAN DOCUMENTS. "Loan Documents" means this Loan Agreement and any and all promissory notes executed by Borrower in favor of Bank and all other documents, instruments, guarantees, certificates and agreements executed and/or delivered by Borrower, any guarantor or third party in connection with any Loan. I. NET WORTH. "Net Worth" means the amount by which total assets exceed total liabilities in accordance with GAAP. 2 J. SUBSIDIARIES. "Subsidiaries" means, collectively, all of the subsidiaries of the Borrower. K. ACCOUNTING TERMS. All accounting terms not specifically defined or specified herein shall have the meanings generally attributed to such terms under generally accepted accounting principles ("GAAP"), as in effect from time to time, consistently applied, with respect to the financial statements referenced in Section 3.H. hereof. 2. LOANS. A. LOAN. Bank hereby agrees to make one or more loans to Borrower in the aggregate principal face amount of $2,000,000, The obligation to repay the loans is evidenced by a promissory note of even date herewith (the promissory note together with any and all renewals, extensions or rearrangements thereof being hereafter collectively referred to as the "Promissory Note") having a maturity date (as such date may be amended or extended from time to time, the "Maturity Date"), repayment terms and interest rate as set forth in the Promissory Note. i. REVOLVING CREDIT FEATURE. The Loan provides for a revolving line of credit under which Borrower may from time to time, borrow, repay and re-borrow funds. ii. USAGE FEE. Borrower will pay hereafter on the last business day of each month for the period from and including the date the Loan was established to and including the Maturity Date of the Loan, a usage fee at a rate per annum of 0.45% of the average daily unused portion of the Loan during such period. The Borrower may at any time upon written notice to the Bank permanently reduce the amount of the Loan at which time the obligation of the Borrower to pay a usage fee shall thereupon correspondingly be reduced. iii. LETTER OF CREDIT SUBFEATURE. (a) As a subfeature under the Loan, Bank may from time to time issue letters of credit for the account of Borrower (each, a "Letter of Credit" and collectively, "Letters of Credit"); provided, however, that the form and substance of each Letter of Credit shall be subject to approval by Bank in its sole discretion; and provided further that the aggregate undrawn amount of all outstanding Letters of Credit shall not at any time exceed $2,000,000. Each Letter of Credit shall be issued for a term not to exceed 360 days, as designated by Borrower. The undrawn amount of all Letters of Credit plus any and all amounts paid by Bank in connection with drawings under any Letter of Credit for which the Bank has not been reimbursed shall be reserved under the Loan and shall not be available for advances thereunder. Each draft paid by Bank under a Letter of Credit shall be deemed an advance under the Loan and shall be repaid in accordance with the terms of the Loan; provided however, that if the Loan is not available for any reason whatsoever, at the time any draft is paid by Bank, or if advances are not available under the Loan in such amount due to any limitation of borrowing set forth herein, then the full amount of such drafts shall be immediately due and payable, together with interest -2- 3 thereon, from the date such amount is paid by Bank to the date such amount is fully repaid by Borrower, at the Default Rate. In such event, Borrower agrees that Bank, at Bank's sole discretion may debit Borrower's deposit account with Bank for the amount of such draft. (b) In the event there should remain outstanding any undrawn Letter of Credit on the Maturity Date with an expiration date later than the Maturity Date, then, notwithstanding the Borrower's inability to obtain further advances under the Loan and the Borrower's repayment of any other amounts outstanding under the Loan, (i) the Borrower's obligations under this Agreement shall remain in full force and effect until (A) such Letter of Credit either expires or is returned to the Bank undrawn and (B) all other Obligations of the Borrower are repaid or performed in full, and (ii) the Borrower shall promptly deposit with the Bank cash collateral in an amount not less than the aggregate undrawn face amounts of all such Letters of Credit, upon such terms and conditions as may be acceptable to the Bank. 3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Bank as follows: A. GOOD STANDING. Borrower is a corporation, duly organized, validly existing and in good standing under the laws of the state of its incorporation and has the power and authority to own its property and to carry on its business in each jurisdiction in which Borrower does business. B. AUTHORITY AND COMPLIANCE. Borrower has full power and authority to execute and deliver the Loan Documents and to incur and perform the obligations provided for therein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body of Borrower. No consent or approval of any public authority or other third party is required as a condition to the validity of any Loan Document other than any such consent or approval that has already been obtained, and Borrower is, to the best of its knowledge, in compliance with all laws and regulatory requirements to which it is subject. C. BINDING AGREEMENT. This Agreement and the other Loan Documents executed by Borrower constitute valid and legally binding obligations of Borrower, enforceable in accordance with their terms, subject to limitations imposed by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally or the application of general equitable principles. D. LITIGATION. There is no proceeding involving Borrower pending or, to the knowledge of Borrower, threatened before any court or governmental authority, agency or arbitration authority, except as set forth on Schedule 3 D hereto. E. NO CONFLICTING AGREEMENTS. There is no charter, bylaw, stock provision, partnership agreement or other document pertaining to the organization, power or authority of Borrower and no provision of any existing agreement, mortgage, indenture or contract binding on Borrower or affecting its property, which would conflict with or in any way prevent the execution, delivery or carrying out of the terms of this Agreement and the other Loan Documents. -3- 4 F. OWNERSHIP OF ASSETS. Borrower has good title to its assets, and its assets are free and clear of liens, except those granted to Bank or as set forth on Schedule 3 F hereto. G. TAXES. All taxes and assessments due and payable by Borrower have been paid or are being contested in good faith by appropriate proceedings and the Borrower has filed all tax returns which it is required to file. H. FINANCIAL STATEMENTS. The financial statements of Borrower heretofore delivered to Bank have been prepared in accordance with GAAP applied on a consistent basis throughout the period involved and fairly present Borrower's financial condition as of the date or dates thereof, and there has been no material adverse change in Borrower's financial condition or operations since December 31, 1995. All factual information furnished by Borrower to Bank in connection with this Agreement and the other Loan Documents is and will be materially accurate and complete on the date as of which such information is delivered to Bank and is not and will not be incomplete by the omission of any material fact necessary to make such information not misleading. I. PLACE OF BUSINESS. Borrower's chief executive office is located at 1000 Holcomb Woods Parkway, Suite 410A, Roswell, Georgia 30076. J. ENVIRONMENTAL. The conduct of Borrower's business operations and the condition of Borrower's property does not and will not, to the best of its knowledge, violate any federal laws, rules or ordinances for environmental protection, regulations of the Environmental Protection Agency, any applicable local or state law, rule, regulation or rule of common law or any judicial interpretation thereof relating primarily to the environment or Hazardous Materials. K. CONTINUATION OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made under this Agreement shall be deemed to be made at and as of the date hereof and at and as of the date of any advance under any Loan. 4. AFFIRMATIVE COVENANTS. Until full payment and performance of all obligations of Borrower under the Loan Documents, Borrower will, unless Bank consents otherwise in writing (and without limiting any requirement of any other Loan Document): A. FINANCIAL CONDITION. Maintain Borrower's financial condition as follows, determined in accordance with GAAP applied on a consistent basis throughout the period involved: i. Maintain a ratio of Liquid Assets to Current Liabilities of not less than 1.1 to 1.0 as of the last day of any calendar quarter. ii. Maintain Net Worth as of the last day of any calendar quarter of not less than (a) $22,000,000 for the calendar quarter ending September 30, 1996, and (b) the sum of (i) the minimum Net Worth required by this Section to have been maintained by the Borrower as of the last day of the immediately preceding calendar quarter plus, (ii) an amount equal to 80% of the Borrower's consolidated net income (but only if such is greater than zero) for the calendar quarter then ended. -4- 5 iii. Maintain a ratio of total liabilities to Net Worth of not more than 0.75 to 1.0 as of the last day of any calendar quarter. B. FINANCIAL STATEMENTS AND OTHER INFORMATION. Maintain a system of accounting satisfactory to Bank and in accordance with GAAP applied on a consistent basis throughout the period involved, permit Bank's officers or authorized representatives to visit and inspect Borrower's books of account and other records at such reasonable times and as often as Bank may desire, and pay the reasonable fees and disbursements of any accountants or other agents of Bank selected by Bank for the foregoing purposes. Unless written notice of another location is given to Bank, Borrower's books and records will be located at Borrower's chief executive office set forth above or at the Borrower's office in Phoenix, Arizona. Except as otherwise provided below, financial statements called for below shall be prepared in form and content acceptable to Bank and by independent certified public accountants acceptable to Bank. In addition, Borrower will: i. Within 90 days of the close of each fiscal year, furnish to Bank audited financial statements of Borrower on a consolidated basis with its Subsidiaries for such fiscal year, together with a consolidating financial statement of Borrower and its Subsidiaries; provided, however, that such consolidating financial statement shall not be required to be covered by the audit opinion of Borrower's certified public accountants. ii. Within 45 days of the close of each fiscal quarter, furnish to Bank unaudited financial statements (including a balance sheet and profit and loss statement) of Borrower, on a consolidated basis with its Subsidiaries, for such fiscal quarter. iii. Furnish to Bank a compliance certificate for (and executed by an authorized representative of) Borrower concurrently with and dated as of the date of delivery of each of the financial statements as required in paragraphs i and ii above, containing (a) a certification that the financial statements of even date are true and correct and that the Borrower is not in default under the terms of this Agreement, and (b) computations and conclusions, in such detail as Bank may request, with respect to compliance with this Agreement, and the other Loan Documents, including computations of all quantitative covenants. iv. Furnish to Bank promptly such additional information, reports and statements respecting the business operations and financial condition of Borrower and its Subsidiaries, respectively, from time to time, as Bank may reasonably request. C. INSURANCE. Maintain insurance with responsible insurance companies on such of its properties, in such amounts and against such risks as is customarily maintained by similar businesses operating in the same vicinity, specifically to include fire and extended coverage insurance covering all assets, business interruption insurance, workers compensation insurance and liability insurance, all to be with such companies and in such amounts as are satisfactory to Bank, for the benefit of Borrower and Bank, as their interests may appear, payable to Bank as loss payee, and providing for at least 30 days prior notice to Bank of any -5- 6 cancellation thereof. Satisfactory evidence of such insurance will be supplied to Bank prior to funding under the Loan(s) and 30 days prior to each policy renewal. D. EXISTENCE AND COMPLIANCE. Maintain its existence, good standing and qualification to do business, where required and comply with all laws, regulations and governmental requirements including, without limitation, environmental laws applicable to it or to any of its property, business operations and transactions, except where the failure to do so would not materially impair the Borrower's operations or impair in any manner the Borrower's ability to perform its obligations under this Agreement and the other Loan Documents. E. ADVERSE CONDITIONS OR EVENTS. Promptly advise Bank in writing of (i) any condition, event or act which comes to its attention that would or might reasonably he expected to materially adversely affect Borrower's financial condition or operations or Bank's rights under the Loan Documents, (ii) any litigation filed by or against Borrower having an amount in controversy, in the aggregate, greater than $100,000, (iii) any event that has occurred that would constitute a Default and (iv) any uninsured or partially uninsured loss through fire, theft, liability or property damage in excess of an aggregate of $100,000. F. TAXES AND OTHER OBLIGATIONS. Pay all of its taxes, assessments and other obligations, including, but not limited to taxes, costs or other expenses arising out of this transaction, as the same become due and payable, except to the extent the same are being contested in good faith by appropriate proceedings in a diligent manner. G. MAINTENANCE. Maintain all of its tangible property in good condition and repair and make all necessary replacements thereof, and preserve and maintain all licenses, trademarks, privileges, permits, franchises, certificates and the like necessary for the operation of its business. H. ENVIRONMENTAL. Immediately advise Bank in writing of (i) any and all enforcement, cleanup, remedial, removal, or other governmental or regulatory actions instituted, completed or threatened pursuant to any applicable federal, state, or local laws, ordinances or regulations relating to any Hazardous Materials affecting Borrower's business operations; and (ii) all claims made or threatened by any third party against Borrower relating to damages, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials. Borrower shall immediately notify Bank of any remedial action taken by Borrower with respect to Borrower's business operations. Borrower will not use or permit any other party to use any Hazardous Materials at any of Borrower's places of business or at any other property owned by Borrower except such materials as are incidental to Borrower's normal course of business, maintenance and repairs and which are handled in compliance with all applicable environmental laws. Borrower agrees to permit Bank, its agents, contractors and employees to enter and inspect any of Borrower's places of business or any other property of Borrower at any reasonable times upon three (3) days prior notice for the purposes of conducting an environmental investigation and audit (including taking physical samples) to insure that Borrower is complying with this covenant and Borrower shall reimburse Bank on demand for the costs of any such environmental investigation and audit. Borrower shall provide Bank, its agents, contractors, employees and representatives with access to and copies of any and all data and documents relating to or dealing with any Hazardous Materials used, generated, manufactured, stored or disposed of by Borrower's business operations within five (5) days of the request therefore. -6- 7 5. NEGATIVE COVENANTS. Until full payment and performance of all obligations of Borrower under the Loan Documents, Borrower will not, without the prior written consent of Bank (and without limiting any requirement of any other Loan Documents): A. TRANSFER OF ASSETS OR CONTROL. Sell, lease, assign or otherwise dispose of or transfer any of its or its Subsidiaries' assets, except in the normal course of business, or enter into any merger or consolidation, or transfer control or ownership of the Borrower or any Subsidiary or form or acquire any new subsidiary; provided, however, that the Borrower may (i) transfer assets from time to time to its Subsidiary, Telecorp Systems, Inc., and (ii) transfer assets from time to time to its other Subsidiaries (excluding Telecorp Systems, Inc.), or sell assets, so long as such transfers and sales do not exceed, in the aggregate in any calendar year, an amount exceeding five percent (5%) of the Net Worth of the Borrower, as determined by the Borrower's most recently provided financial statements. B. LIENS. Grant, suffer or permit any contractual or noncontractual lien on or security interest in its assets or in the assets of any of its Subsidiaries, except in favor of Bank, or fail to promptly pay when due all lawful claims, whether for labor, materials or otherwise. Notwithstanding the foregoing, the Borrower may grant, or permit any Subsidiary to grant, Liens on its assets (excluding the Collateral) securing indebtedness or other obligations permitted under Section 5 D. below. C. EXTENSIONS OF CREDIT. Make or permit any Subsidiary to make, any loan or advance to any person or entity, or purchase or otherwise acquire, or permit any subsidiary to purchase or otherwise acquire, any capital stock, assets, obligations, or other securities of, make any capital contribution to, or otherwise invest in or acquire any interest in any entity, or participate as a partner or joint venturer with any person or entity, except for the purchase of direct obligations of the United States or any agency thereof with maturities of less than one year. Notwithstanding the foregoing, the Borrower may (i) make loans to its employees not exceeding, in the aggregate at any time outstanding, $100,000, (ii) make loans to its Subsidiary, Telecorp Systems, Inc., and (iii) make loans to its Subsidiaries (other than Telecorp Systems, Inc.) not exceeding, in the aggregate during any calendar year, $1,000,000. D. BORROWINGS. Create, incur, assume or become liable in any manner for, or permit any of its Subsidiaries to create, incur, assume or become liable in any manner for, any indebtedness (for borrowed money, deferred payment for the purchase of assets, payments in respect of capital leases, as surety or guarantor for the debt for another, or otherwise) other than to Bank, except for normal trade debts incurred in the ordinary course of business, and except for additional indebtedness disclosed to Bank in writing and not exceeding, in the aggregate, $250,000 at any time. E. CHARACTER OF BUSINESS. Change the general character of business of the Borrower and its Subsidiaries as conducted at the date hereof, or engage in any type of business not reasonably related to its business as presently conducted. F. MANAGEMENT CHANGE. Make any substantial change in its present executive or management personnel, including without limitation Larry Bradner and Steve Nussallah. G. LOCKBOX ACCOUNTS. The Borrower will establish one or more lockbox accounts with the Bank and will direct each of its account debtors to submit all payments owing -7- 8 the Borrower to such lockbox accounts. The Borrower will cause its Subsidiary, Telecorp. Systems, Inc., to establish one or more lockbox accounts with the Bank and will direct each of its account debtors to submit all payments owing such Subsidiary to such lockbox accounts. The Borrower hereby grants, and will cause such Subsidiary to grant, a first priority security interest in each such account to the Bank to secure the Obligations. The Bank will apply the net balance of each such lockbox account against the outstanding balance of the Loans each day. The Borrower will cause each lockbox account or deposit account open in its own name or in the name of Telecorp. Systems, Inc. with any institution other than the Bank to be closed before October 1, 1996. 6. DEFAULT. A "Default" shall exist under this Agreement if (a) any default shall exist under any other Loan Document and any applicable cure period shall have expired and any applicable notice shall have been given, or (b) Borrower shall default in the payment of any amounts due and owing under the Loan or should it fail to timely and property observe, keep or perform any term, covenant, agreement or condition in this Agreement or any other Loan Document or in any other loan agreement, promissory note, security agreement, deed of trust, deed to secure debt, mortgage, assignment or other contract securing or evidencing payment of any indebtedness of Borrower to Bank or any affiliate or subsidiary of NationsBank Corporation. 7. REMEDIES UPON DEFAULT. If a Default shall occur and be continuing, Bank shall have all rights, powers and remedies available under this Agreement and each of the other Loan Documents as well as all rights and remedies available at law or in equity. 8. NOTICES. All notices, requests or demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to the other party at the following address: Borrower: Syntellect Inc. 1000 Holcomb Woods Parkway, Suite 410A Roswell, Georgia 30076 Fax: (770) 587-0589 Bank: NationsBank, N.A. (South) 600 Peachtree Street, N.E., 18th Floor Atlanta, Georgia 30308 Attention: Michael Paulson Fax: (404) 607-6338 or to such other address as any party may designate by written notice to the other party. Each such notice, request and demand shall be deemed given or made (a) if sent by mail, upon the earlier of the date of receipt or five (5) days after deposit in the U.S. Mail, first class postage prepaid, and (b) if sent by any other means, upon delivery. 9. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all costs and expenses, including reasonable attorneys' fees (including outside counsel fees and all allocated costs of Bank's in-house counsel if permitted by applicable law), incurred by Bank in connection with (a) negotiation and preparation of this Agreement and each of the Loan Documents, and (b) all other costs and attorneys' fees incurred by Bank for which Borrower is obligated to reimburse Bank in accordance with the terms of the Loan Documents. -8- 9 10. MISCELLANEOUS. Borrower and Bank further covenant and agree as follows, without limiting any requirement of any other Loan Document: A. CUMULATIVE RIGHTS AND NO WAIVER. Each and every right granted to Bank under any Loan Document, or allowed it by law or equity shall be cumulative of each other and may be exercised in addition to any and all other rights of Bank, and no delay in exercising any right shall operate as a waiver thereof, nor shall any single or partial exercise by Bank of any right preclude any other or future exercise thereof or the exercise of any other right. Borrower expressly waives any presentment, demand, protest or other notice of any kind, including but not limited to notice of intent to accelerate and notice of acceleration. No notice to or demand on Borrower in any case shall, of itself, entitle Borrower to any other or future notice or demand in similar or other circumstances. B. APPLICABLE LAW. This Loan Agreement and the rights and obligations of the parties hereunder shall be governed by and interpreted in accordance with the laws of Georgia and applicable United States federal law. C. AMENDMENT. No modification, consent, amendment or waiver of any provision of this Loan Agreement, nor consent to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by an officer of Bank, and then shall be effective only in the specified instance and for the purpose for which given. This Loan Agreement is binding upon Borrower, its successors and assigns, and inures to the benefit of Bank, its successors and assigns; however, no assignment or other transfer of Borrower's rights or obligations hereunder shall be made or be effective without Bank's prior written consent, nor shall it relieve Borrower of any obligations hereunder. There is no third party beneficiary of this Loan Agreement. D. DOCUMENTS. All documents, certificates and other items required under this Loan Agreement to be executed and/or delivered to Bank shall be in form and content satisfactory to Bank and its counsel. E. PARTIAL INVALIDITY. The unenforceability or invalidity of any provision of this Loan Agreement shall not affect the enforceability or validity of any other provision herein and the invalidity or unenforceability of any provision of any Loan Document to any person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances. F. INDEMNIFICATION. Notwithstanding anything to the contrary contained in Section 10(G), Borrower shall indemnify, defend and hold Bank and its successors and assigns harmless from and against any and all claims, demands, suits, losses, damages, assessments, fines, penalties, costs or other expenses (including reasonable attorneys' fees and court costs) arising from or in any way related to any of the transactions contemplated hereby, including but not limited to actual or threatened damage to the environment, agency costs of investigation, personal injury or death, or property damage, due to a release or alleged release of Hazardous Materials, arising from Borrower's business operations, any other property owned by Borrower or in the surface or ground water arising from Borrower's business operations, or gaseous emissions arising from Borrower's business operations or any other condition existing or arising from Borrower's business operations resulting from the use or existence of Hazardous Materials, whether such claim proves to be true or false. Borrower further agrees that its indemnity obligations shall include, but are not limited to, liability for damages resulting from the personal -9- 10 injury or death of an employee of the Borrower, regardless of whether the Borrower has paid the employee under the workmen's compensation laws of any state or other similar federal or state legislation for the protection of employees. The term "property damage" as used in this paragraph includes, but is not limited to, damage to any real or personal property of the Borrower, the Bank, and of any third parties. The Borrower's obligations under this paragraph shall survive the repayment of the Loan and any deed in lieu of foreclosure or foreclosure of any deed to secure debt, deed of trust, security agreement or mortgage securing the Loan. G. SURVIVABILITY. All covenants, agreements, representations and warranties made herein or in the other Loan Documents shall survive the making of the Loan and shall continue in full force and effect so long as the Loan is outstanding or the obligation of the Bank to make any advances under the Loan shall not have expired or so long as any Letter of Credit issued by the Bank under this Agreement shall remain outstanding. 11. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY OF ANY BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT, AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. B. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT OR DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL -10- 11 PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. 12. NO ORAL AGREEMENT. THIS WRITTEN LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed under seal by their duly authorized representatives as of the date first above written. BORROWER: SYNTELLECT INC. BANK: NationsBank, N.A. (South) By: /s/ Neal Miller (Seal) By: /s/ Michael Paulson ----------------------- ----------------------------- Name: Neal Miller Name: Michael Paulson ----------------------- ----------------------------- Title: Chief Financial officer Title: Assistant Vice President ----------------------- ----------------------------- [Corporate Seal] Attest: /s/ J L Bradner (Seal) ---------------------- Name: J L Bradner ---------------------- Title: CEO ---------------------- -11- EX-10.15.B 10 LETTER OF CREDIT DATED FEBRUARY 7, 1997 1 [NATIONSBANK LOGO] EXHIBIT 10.15(b) ISSUING BANK: NATIONSBANK, N.A. (SOUTH) L/C NO: 020182 AMENDMENT NO: 01 AMENDMENT DATE: 07JAN97 BENEFICIARY: APPLICANT: OPUS SOUTHWEST CORPORATION SYNTELLECT INC. 4742 N. 24TH STREET, SUITE 100 1000 HOLCOMB WOODS PARKWAY PHOENIX, AZ 85016 BUILDING 410-A ATTN: THOMAS W. ROBERTS, PRESIDENT ROSWELL, GA 30076-2585 WE HEREBY AMEND THE ABOVE REFERENCED STANDBY LETTER OF CREDIT AS FOLLOWS: THE LETTER OF CREDIT AMOUNT IS INCREASED BY USD 165,800.00 TO A NEW AGGREGATE TOTAL OF USD 1,100,000.00 1. THIS LETTER OF CREDIT NO. SA20182096 IS CHANGED TO LETTER OF CREDIT NO. 020182. 2. THE PLACE OF EXPIRY AND PRESENTATION HAS BEEN CHANGED TO 901 MAIN STREET, 9TH FLOOR, DEPARTMENT OF TRADE SERVICE, NATIONSBANK PLAZA, DALLAS, TEXAS 75202. TELEPHONE NO. (214) 508-9735, FAX (214) 508-3928. ALL OTHER TERMS UNCHANGED. THIS IS THE OPERATIVE INSTRUMENT WHICH FORMS AN INTEGRAL PART OF LETTER OF CREDIT NO. 020182 AND SHOULD BE ATTACHED THERETO. FOR ASSISTANCE PLEASE CALL CYNTHIA YANG AT 214-508-9735. /s/ Ginger Downs - ------------------------------------ AUTHORIZED SIGNATURE NATIONSBANK, N.A. (SOUTH) IRREVOCABLE STANDBY LETTER OF CREDIT NO. 020182, PAGE 1 COPY - NOT NEGOTIABLE EX-11 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 SYNTELLECT INC. AND SUBSIDIARIES Schedule of Computation of Net Income (Loss) Per Share December 31, 1996, 1995 and 1994 (in thousands, except percentages, shares and per share amounts)
Years ended December 31, 1996 1995 1994 -------- -------- -------- Net income (loss) $ (2,780) $(16,258) $ 1,117 Weighted average shares: Common shares outstanding 13,256 13,159 13,078 Common equivalent shares representing shares issuable upon exercise of employee stock options (1) -- -- 390 -------- -------- -------- Total weighted average shares-primary 13,256 13,159 13,468 Incremental common equivalent shares (calculated using the higher of end of period or average fair market values) (2) -- -- -- -------- -------- -------- Total weighted average shares-fully diluted 13,256 13,159 13,468 Primary net income (loss) per common and equivalent share $ (0.21) $ (1.24) $ 0.08 Fully diluted net income (loss) per common and equivalent share (2) $ (0.21) $ (1.24) $ 0.08 Additional adjustment to fully diluted weighted average shares (3): Total weighted average shares-fully diluted 13,256 13,159 13,468 Common equivalent shares representing shares issuable upon exercise of employee stock options (1) -- -- -- -------- -------- -------- Total weighted average shares-fully diluted, as adjusted 13,256 13,159 13,468 Fully diluted net income (loss) per common and equivalent share, as adjusted (3) $ (0.21) $ (1.24) $ 0.08
Notes: (1) Amount calculated using the treasury stock method and fair market values. (2) The calculation is submitted in accordance with regulation S-K Item 601 (b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. (3) This calculation is submitted in accordance with Regulation S-K Item 601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result. EX-21 12 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT Pinnacle Investment Associates Inc., A Georgia Corporation Telecorp Systems, Inc., a Georgia Corporation Syntellect Canada Inc., an Ontario Corporation Syntellect Europe Limited, a Corporation formed under the laws of the United Kingdom Syntellect Deutschland GmbH Syntellect Technology Corp. Syntellect Interactive Services, Inc. EX-23 13 INDEPENDENT AUDITORS' CONSENT 1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Syntellect Inc. We consent to incorporation by reference in the Registration Statements (Nos. 33-35974, 33-48637, 33-63642, 333-02362 and 333-02368) on Form S-8 of our report dated February 5, 1997, relating to the consolidated balance sheets of Syntellect Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the 1996 Annual Report on Form 10-K of Syntellect Inc. KPMG PEAT MARWICK LLP Atlanta, Georgia March 26, 1997 2 INDEPENDENT AUDITORS' CONSENT We consent to incorporation by reference in the Registration Statements (Nos. 33-35974, 33-48637, 33-63642, 333-02362 and 333-02368) on Form S-8 of Syntellect Inc. of our report dated February 9, 1996, except as to Note 20 which is dated as of March 14, 1996, relating to the consolidated balance sheets of Pinnacle Investment Associates, Inc. and subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended (which are not presented separately herein) appearing in the Annual Report on Form 10-K of Syntellect Inc. for the year ended December 31, 1996. DELOITTE & TOUCHE LLP Atlanta, Georgia March 28, 1997 EX-27 14 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheet of Syntellect Inc. and subsidiaries as of December 31, 1996 and the consolidated statements of operations of Syntellect Inc. and subsidiaries for the year ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 US DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 4,928 1,275 14,977 (1,233) 4,085 26,235 24,492 (16,816) 34,808 12,558 0 0 0 135 21,886 34,808 31,811 55,305 18,645 27,783 30,555 480 32 (2,780) 0 (2,780) 0 0 0 (2,780) (.21) (.21)
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