-----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, R75fkY3qiRzw/vW2H2MJwvigwo+e2SpAvF1BxIudRGtrt8maSr+TRUKznApvCqzx QVO+GeA1OGFkmiKbzOVVCQ== 0000950153-99-001075.txt : 19990817 0000950153-99-001075.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950153-99-001075 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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-Q SEC ACT: SEC FILE NUMBER: 000-18323 FILM NUMBER: 99691292 BUSINESS ADDRESS: STREET 1: 1000 HOLCOMB WOODS PARKWAY STREET 2: SUITE 410A CITY: ROSWELL STATE: GA ZIP: 30076 BUSINESS PHONE: 7705870700 MAIL ADDRESS: STREET 1: 1000 HOLCOMB WOODS PARKWAY STREET 2: SUITE 410A CITY: ROSWELL STATE: GA ZIP: 30076 10-Q 1 10-Q 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------------------------------- FORM 10-Q (Mark One) [X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________to ____________________ Commission File Number: 0 - 18323 SYNTELLECT INC. (Exact name of registrant as specified in its charter) Delaware 86-0486871 -------- ---------- (State or other jurisdiction of (IRS employer identification number) incorporation)
20401 North 29th Avenue, Phoenix, Arizona 85027 (Address of principal executive office) (Zip Code) (602) 789-2800 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 13,477,546 shares of common stock, $.01 par value per share, were outstanding on August 5, 1999 ================================================================================ 1 2 SYNTELLECT INC. AND SUBSIDIARIES INDEX
Page ---- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Unaudited Condensed Consolidated Balance Sheets- June 30, 1999 and December 31, 1998 3 Unaudited Condensed Consolidated Statements of Operations - Three Months and Six Months Ended June 30, 1999 and June 30, 1998 4 Unaudited Condensed Consolidated Statements of Cash Flows- Six Months Ended June 30, 1999 and June 30, 1998 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 13 ITEM 4. Submission of Matters to a Vote of Security Holders 13 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 EXHIBITS Exhibit 27.1 - Financial Data Schedule - 1999 16
2 3 ITEM 1. FINANCIAL STATEMENTS SYNTELLECT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except shares and per share amounts) (unaudited)
June 30, December 31, 1999 1998 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 3,993 $ 3,236 Marketable securities ($1,100 restricted) 4,309 8,298 Trade receivables, net of allowance for doubtful accounts of $1,049 and $932, respectively 11,715 11,202 Inventories 2,559 2,973 Prepaid expenses 727 963 ------- -------- Total current assets 23,303 26,672 Property and equipment, net 5,139 5,429 Other assets 28 32 --------- ----------- Total Assets $28,470 $32,133 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $2,443 $2,560 Accrued liabilities 3,306 3,278 Customer deposits 3,510 3,080 Deferred revenue 3,474 2,717 Capital lease obligations - current portion 207 240 --------- --------- Total current liabilities 12,940 11,875 Capital lease obligations - non-current portion 348 445 --------- --------- Total liabilities 13,288 12,320 ------ ------ 530 Shareholders' equity: Preferred stock, $.01 par value per share. Authorized 2,500,000 shares; no shares issued or outstanding - - Common stock, $.01 par value per share. Authorized 25,000,000 shares; issued, 13,760,196 and 13,699,095, respectively 138 137 Additional paid-in capital 60,980 60,917 Accumulated deficit (44,400) (40,072) Accumulated other comprehensive income (loss) (193) (21) ----- ---------- 16,525 20,961 Treasury stock, at cost, 264,232 and 179,232 shares, respectively (1,343) (1,148) --------- -------- Total shareholders' equity 15,182 19,813 -------- -------- Total liabilities and shareholders' equity $28,470 $32,133 ======= =======
See accompanying notes to condensed consolidated financial statements. 3 4 SYNTELLECT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------- -------- 1999 1998 1999 1998 -------- -------- -------- -------- Net revenues: System sales $ 5,979 $ 5,336 $ 11,866 $ 9,636 Service bureau 1,960 2,294 4,171 4,514 Maintenance and other services 3,073 3,774 6,223 8,315 -------- -------- -------- -------- Total net revenues 11,012 11,404 22,260 22,465 Cost of revenues: System sales 3,935 3,198 7,511 6,065 Service bureau 1,386 1,291 2,794 2,662 Maintenance and other services 1,184 1,134 2,350 2,292 -------- -------- -------- -------- Total cost of revenues 6,505 5,623 12,655 11,019 -------- -------- -------- -------- Gross margin 4,507 5,781 9,605 11,446 Operating expenses: Selling, marketing and administrative 5,542 5,007 10,522 10,163 Research and development 1,191 1,405 2,367 2,854 Depreciation and amortization 612 712 1,223 1,389 -------- -------- -------- -------- Total operating expenses 7,345 7,124 14,112 14,406 -------- -------- -------- -------- Operating loss (2,838) (1,343) (4,507) (2,960) Other income (expense), net: Interest income 76 170 177 366 Other 23 (12) 2 (16) -------- -------- -------- -------- Total other income 99 158 179 350 -------- -------- -------- -------- Loss before income taxes (2,739) (1,185) (4,328) (2,610) Income taxes -- -- -- -- -------- -------- -------- -------- Net loss $ (2,739) $ (1,185) $ (4,328) $ (2,610) ======== ======== ======== ======== Net loss per common share - basic $ (.20) $ (.09) $ (.32) $ (.19) ======== ======== ======== ======== Net loss per common share - diluted $ (.20) $ (.09) $ (.32) $ (.19) ======== ======== ======== ======== Weighted average shares - basic 13,448 13,582 13,476 13,580 Weighted average shares - diluted 13,448 13,582 13,476 13,580 Other comprehensive income (loss), net of tax: Foreign currency translation adjustment (118) (23) (165) 42 Unrealized gain (loss) on marketable securities (2) 2 (7) 8 -------- -------- -------- -------- Other comprehensive income (loss) (120) (21) (172) 50 -------- -------- -------- -------- Comprehensive loss $ (2,859) $ (1,206) $ (4,500) $ (2,560) ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements. 4 5 SYNTELLECT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Six Months Ended June 30, -------- 1999 1998 ---- ---- Cash flows from operating activities: Net loss $ (4,328) $ (2,610) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,223 1,389 Provision for doubtful accounts 701 162 Stock option compensation expense -- 16 (Increase) decrease in receivables (1,214) 20 Decrease (increase) in inventories 414 (168) (Decrease) in accounts payable (117) (93) Decrease (increase) in prepaid expenses 236 (680) Increase in customer deposits 430 533 Increase in deferred revenue 757 492 Increase (decrease) in accrued liabilities 28 (937) Change in other assets and liabilities 4 (30) -------- -------- Net cash used in operating activities (1,866) (1,906) -------- -------- Cash flows from investing activities: Purchase of marketable securities (6,545) (7,757) Maturities of marketable securities 10,534 11,800 Proceeds from notes receivables -- 510 Purchase of property and equipment (933) (1,048) -------- -------- Net cash provided by investing activities 3,056 3,505 -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock 64 87 Purchase of treasury stock (195) -- Principal payments on long-term debt (130) (96) -------- -------- Net cash used in financing activities (261) (9) -------- -------- Effect of exchange rates on cash (172) 42 -------- -------- Net increase in cash and cash equivalents 757 1,632 Cash and cash equivalents at beginning of period 3,236 2,290 -------- -------- Cash and cash equivalents at end of period $ 3,993 $ 3,922 ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest $ 35 $ 34 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 6 SYNTELLECT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except shares and per share amounts) (unaudited) (1) BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include the accounts of Syntellect Inc. ("Syntellect" or the "Company") and its wholly-owned subsidiaries, Telecorp Systems, Inc., Syntellect Canada Inc., Syntellect Europe Ltd., Syntellect Deutschland GmbH, Syntellect Technology Corporation and Syntellect Interactive Services, Inc. ("SIS"). All significant intercompany balances and transactions have been eliminated in consolidation. The financial statements have been prepared in accordance with generally accepted accounting principles, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the financial statements include all adjustments of a normal recurring nature which are necessary for a fair presentation of the results for the interim periods presented. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures are adequate to make information presented not misleading, it is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's 1998 Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 1999 are not necessarily indicative of the results to be expected for the full year. REVENUE RECOGNITION Syntellect recognizes revenue from sales of systems and services in accordance with Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"). (2) BUSINESS SEGMENTS Effective for financial statements for fiscal periods beginning after December 15, 1997, Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," requires that an enterprise disclose certain information about operating segments. An operating segment is defined as a component of an enterprise that engages in business activities which may earn revenues and incur expenses, whose results are regularly reviewed by a chief operating decision maker, and for which discrete financial information is available. The Company has three operating segments which are organized around differences in products and services: Systems, Service Bureau ("SB"), and Patents:
QUARTER ENDED JUNE 30, 1999 SYSTEMS SB PATENTS TOTAL - ---------------------------- ------- -- ------- ----- Revenues from customers $ 9,052 $ 1,960 $ - $ 11,012 Depreciation and amortization 496 116 - 612 Segment income (loss) (2,602) (137) - (2,739) Expenditures for segment assets 200 214 - 414 QUARTER ENDED JUNE 30, 1998 Revenues from customers $ 8,511 $ 2,294 $ 599 $ 11,404 Depreciation and amortization 487 225 - 712 Segment income (loss) (1,807) 171 451 (1,185) Expenditures for segment assets 492 35 - 527
6 7
SIX MONTHS ENDED JUNE 30, 1999 SYSTEMS SB PATENTS TOTAL - ------------------------------- ------- -- ------- ----- Revenues from customers $ 18,089 $ 4,171 $ - $ 22,260 Depreciation and amortization 990 233 - 1,223 Segment income (loss) (4,301) (27) - (4,328) Expenditures for segment assets 511 422 - 933 SIX MONTHS ENDED JUNE 30, 1998 Revenues from customers $ 16,277 $ 4,514 $ 1,674 $ 22,465 Depreciation and amortization 939 450 - 1,389 Segment income (loss) (3,947) 223 1,114 (2,610) Expenditures for segment assets 922 126 - 1,048
(3) INVENTORIES Inventories consist of the following:
June 30, December 31, 1999 1998 ---- ---- Finished goods $1,070 $ 795 Purchased components 1,344 1,746 Repair, warranty and maintenance inventory 2,274 2,695 ----- ----- 4,688 5,236 Less allowances for obsolescence (2,129) (2,263) ------- ------- $ 2,559 $ 2,973 ======= =======
7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NET REVENUES Net revenues for the quarter ended June 30, 1999 were $11 million, a decrease of 3%, from the $11.4 million reported for the second quarter of 1998. For the six month period ended June 30, 1999, net revenues were $22.3 million, a decrease of 1% from $22.5 million for the corresponding period in 1998. Net revenues consist of SYSTEM SALES, SERVICE BUREAU REVENUES and MAINTENANCE AND OTHER SERVICES REVENUES, which represented 54%, 18% and 28% of net revenues, respectively, for the quarter ended June 30, 1999, and 53%, 19%, and 28% of net revenues, respectively, for the six month period ended June 30, 1999. Revenues from SYSTEM SALES increased $643,000, or 12%, over the comparable quarter and increased $2.2 million, or 23%, over the corresponding six month period. Core product sales include Vista(TM), an open standards-based Interactive Communications Management (ICM) software platform for enterprise customer call centers; VocalPoint, an open architecture Interactive Voice Response ("IVR") platform; an outbound system, the VocalPoint Predictive Dialer; VocalPoint Interactive Services, providing computer telephony integration ("CTI") functionality; and Interactive Web Response ("IWR"). Non-core products include the Premier and Premier 030 proprietary IVR systems and the VocalPoint ARU (Audio Response Unit) for the cable television industry. The largest contributor to the increase in SYSTEM SALES revenues for the quarter was the Company's Vista IVR product with sales of $3.6 million, or 60% of System sales. For the six month period ended June 30, 1999, Vista IVR product sales were $6.5 million, or 55% of System sales. The Company announced the release of Vista in May of 1998 and began recognizing revenue for the Vista product in the third quarter of 1998. SERVICE BUREAU REVENUES decreased by $334,000, or 15%, quarter-over-quarter and $343,000, or 8%, between the comparable six month periods. The cable TV industry has experienced a decline in consumer purchases of pay-per-view events which has resulted in downward trend in transaction processing fees by the Company. MAINTENANCE AND OTHER SERVICE REVENUES decreased $701,000, or 19% from the same quarter of the prior year, and decreased $2.1 million, or 25% from the comparable six month period. For the quarter, the Maintenance component decreased $183,000, or 7% from the prior year, and for the six month period the Maintenance component decreased $375,000, or 7% from the prior year. This was consistent with Company expectations because the Company had earlier advised customers that certain products were not Year 2000 compliant and would not be made so, causing some maintenance contracts not to be renewed. For the quarter the Other Services Revenues component decreased $518,000, or 50% from the prior year, and for the six month period the Other Services Revenues component decreased $ 1.7 million or 66% from the prior year. The decreases were primarily due to the lack of any settlements of patent lawsuits in the current year. During the prior year's quarter and six month periods, the company had revenues of $0.6 million and $1.7 million, respectively, from settlements of patent lawsuits. These settlements related to economic rights maintained by the Company after the sale of a patent portfolio in 1997. The realization of any further revenues related to the Company's former patent portfolio is uncertain. INTERNATIONAL REVENUES for the second quarter of 1999 were $1.2 million, or 11% of total revenues, compared to $2.1 million, or 18%, for the second quarter of 1998. For the six month period ended June 30, 1999, international revenues were $3.3 million, or 15% of total revenues, as compared to $3.8 million, or 17%, for the prior comparable period. International revenues typically consist of a small number of larger orders and are subject to quarter-to-quarter fluctuations. 8 9 GROSS MARGIN The gross margin percentage for the quarter ended June 30, 1999 was 41% of net revenues as compared with 51% in the comparable prior year quarter. The gross margin percentage for the six months ended June 30, 1999 was 43% of net revenues as compared to 51% in the comparable year ago period. Gross margins for System Sales decreased to 34% from 40% between the comparable quarters due primarily to increased outside contractor costs which the Company believes will be less of a factor going forward. For the six month period gross margins on System Sales were flat at 37%. Gross margins for the Service Bureau decreased to 29% from 44% between the comparable quarters, and decreased to 33% from 41% between the comparable six-month periods. Service Bureau margins for the current three and six-month periods declined on reduced sales primarily due to the relatively fixed nature of Service Bureau costs. Gross margins on Maintenance and Other Services decreased to 61% from 70% between the comparable quarters, and decreased to 62% from 72% between the comparable six month periods. Maintenance and Other Services margins for the current three and six-month periods declined on reduced sales due to the relatively fixed nature of Maintenance and Other Services costs and the lack of relatively high margin patent revenue. The Company includes those costs directly associated with the generation of revenue in its computation of gross margin, including direct labor, application development, travel, maintenance, customer support, supplies and hardware. Gross margins will fluctuate on a quarterly basis due to changes in competitive pressures, sales volume, product mix, variations in the ratio of domestic versus international sales, or changes in the mix of direct and indirect sales activity. Accordingly, the gross margins reported for the second quarter and the first six months of 1999 are not necessarily indicative of the results to be expected for the full year. OPERATING EXPENSES Operating expenses for the second quarter of 1999 were $7.3 million, an increase of $221,000 over the prior year quarter. Contributing to the increase was an accrual of $640,000 for severance pay associated with employees who left during the quarter in part due to the consolidation of the corporate structure, and moving the corporate headquarters to Phoenix. Additionally, the Company added $500,000 to the reserve for doubtful accounts, primarily due to certain disputes with domestic accounts. For the six month period ended June 30, 1999, operating expenses were $14.1 million, a decrease of $294,000, or 2%, from the prior year period. Selling, marketing and administrative expenses increased $535,000, or 11%, over the comparable quarters and $359,000, or 4%, over the corresponding six month periods. The above mentioned expenses related to the severance pay accrual and the reserve for doubtful accounts were both classified as "selling, marketing and administrative" expenses. Research and development expenses for the second quarter of 1999 decreased $214,000, or 15%, from the prior year quarter and decreased by $487,000, or 17%, from the comparable six month period. The prior year periods were impacted by the development of the Vista product which was released in May of 1998. NET INCOME (LOSS) Syntellect reported a net loss of $2.7 million, or $(.20) per share for the second quarter of 1999, compared to a net loss of $1.2 million, or $(.09) per share for the prior year quarter. For the six month period ended June 30, 1999, the Company reported a net loss of $4.3 million, or $(.32) per share, compared to a net loss of $2.6 million, or $(.19) per share for the comparable prior year period. 9 10 LIQUIDITY AND CAPITAL RESOURCES For the first six months of 1999, the Company had negative cash flows from operations of $1.9 million which remained steady from the same period of 1998. The negative cash flows from operations was primarily due to the net loss for the quarter, increases in accounts receivable, and decreases in accounts payable; partially offset by the decrease in inventories and prepaid expenses, and the increases in the provision for doubtful accounts, customer deposits and deferred revenues. Cash flows from investing activities provided $3.1 million during the period. Net sales of marketable securities provided $4 million, while cash used in the acquisition of fixed assets totaled $933,000. Cash used in financing activities totaled $261,000 for the period. Proceeds from the issuance of common stock totaled $64,000, while the purchase of treasury stock used $195,000, and the repayment of long-term debt used $130,000. Syntellect had working capital of $10.4 million at June 30, 1999, as compared to $14.8 million at December 31, 1998. The current ratio was 1.8:1 and 2.2:1 on such dates, respectively. Cash, cash equivalents and marketable securities at the end of the first quarter totaled $8.3 million as compared with $11.5 million at year end. Syntellect expects that its current cash, cash equivalents and marketable securities, combined with future cash flows from operating activities, will be sufficient to support the Company's operations for the remainder of 1999. The Company has a $1.1 million letter of credit pledged as a security deposit for the Company's facility in Phoenix, Arizona. This $1.1 million letter of credit is secured by a U.S. Treasury security held in the Company's available-for-sale portfolio and accordingly, this marketable security is restricted as to the disposal by such letter of credit agreement. On November 13, 1998, the Board of Directors of Syntellect approved the stock buyback plan to purchase up to 1.5 million shares of the Company's common stock over the next two years. As of August 5, 1999, the Company had repurchased 106,900 shares. YEAR 2000 COMPLIANCE The Year 2000 issue is related to the date-sensitive computer programs and applications using two digits rather than four to designate the year. After January 1, 2000, these systems may incorrectly recognize the year as 1900 causing system failures or incorrect processing of financial information. The Company is addressing the Year 2000 compliance issues. The Company's state of readiness can be explained via three elements: (1) information technology ("IT") and non-IT systems, (2) external customers on maintenance, and (3) third party issues, as listed in the table below:
YEAR 2000 ISSUE DESCRIPTION COMPLIANT STATUS - ----- ----------- --------- ------ IT-internal financial system Production problems necessitated an upgrade to Yes Installed and in production new version of current software
10 11
YEAR 2000 ISSUE DESCRIPTION COMPLIANT STATUS - ----- ----------- --------- ------ IT-systems Internal hardware and In progress Plan in place to evaluate software, primarily desktop internal hardware and PC's, servers, and SIS software which is Transaction Center equipment currently being executed with deadline of completion by early fourth quarter of 1999. Purchase of new equipment requires vendors' warranty of being Year 2000 compliant. Non-IT systems Building and equipment In progress Completion by end of third quarter of 1999. External customers on Inform customers as to All maintenance customers Maintenance whether product have been informed via purchased is Year 2000 letter as to status of Compliant and options in Not applicable their product and options migrating to versions available. which are compliant Third party issues Assess third party risks - Ongoing assessment in primarily suppliers In progress place via accessing suppliers' WEB page via the Internet and direct contact with suppliers.
Costs related to remedying Year 2000 compliance issues are not fully known at this time. The Company is currently analyzing the issues as stated above. The following table provides the status as currently known:
ISSUE COSTS REASON - ----- ----- ------ IT-internal financial system None Production problems required the Company to upgrade to new version of current software regardless of Year 2000 compliance issue. IT-systems Unknown Evaluation of PC related hardware and software has been integrated into current staff's responsibilities and has not required additional assistance. At this time, the Company does not anticipate the costs to remedy this issue to be material. $490,000 (1998) Cost to upgrade equipment in the $700,000 (1999 estimate) Service Bureau Transaction Center to improve functionality and address Year 2000 compliance issues. Non-IT systems Not material Completion of projects has been integrated into current staff's responsibilities. Third party suppliers Not material Evaluation of suppliers has been integrated into current staff's responsibilities and has not required additional assistance. External customers $25,000 Administration of customer letters and coordination of project
11 12 Major risks caused by Year 2000 compliance are primarily related to customers. The Company has reviewed the current products available to customers and has determined that all are Year 2000 compliant. Of the products still supported under maintenance contracts, the ARU (Audio Response Unit) is not Year 2000 compliant and will not be made so. ARU customers have been notified of this issue and informed that maintenance contracts of this product will be discontinued by December 31, 1999. The Company will be extending services to these customers on a time and materials basis as their maintenance contracts expire. Total exposure for lost maintenance revenue from this product line is approximately $1.9 million annually based on 1998 revenues earned. The time and materials services plus any ARU customers who choose to migrate to a current product that is Year 2000 compliant will mitigate the exposure of lost ARU maintenance revenue. Other customers may also be on earlier versions of current products, which are not Year 2000 compliant. As described above, the Company has notified all customers on maintenance as to whether products purchased are Year 2000 compliant and options in migrating to the Company's current products which are on versions that are Year 2000 compliant. The risk of lost revenue is unknown at this time but the Company is in the process of assessing this risk and determining any possible contingency plans. Because costs related to this project are based on estimates by management of the Company, there is no assurance that actual costs will not differ materially from the current expectations which may cause an adverse effect on the Company's financial position or results of operations. OPERATING BUSINESS SEGMENTS An operating segment is defined as a component of an enterprise that engages in business activities which may earn revenues and incur expenses, whose results are regularly reviewed by a chief operating decision maker, and for which discrete financial information is available. The Company has three operating segments which are organized around differences in products and services: Systems; Service Bureau; and Patents (see Note 2). Systems is the operating segment which has products and services including IVR, IWR, CTI, predictive dialing technologies, and maintenance. Service Bureau is the operating segment which has products and services including Home Ticket pay-per-view, Hot Spots, Call Redirect, Cyberstats, and a variety of out-sourced electronic capabilities such as benefits enrollment and broadcast faxing. Patents is the operating segment which held the Company's patent portfolio. In October 1997, the Company sold the patent portfolio to a third party for $10 million. The Company received cash of $5 million at closing and a $5 million promissory note which was fully collected by September 1998. As additional consideration under the agreement, the Company retained certain economic rights, including the right to pursue certain litigation against third parties. Revenues from Customers include payments for settlement of patent lawsuits. The Company recognized $1.7 million in revenue in the six months ended June 30, 1998 from patent lawsuits, but has had no such revenue in the current year. The Company is still pursuing certain litigation against third parties, but the realization of revenue, if any, from potential settlements is uncertain. FORWARD LOOKING STATMENTS This report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Also see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 for a discussion of important factors that could affect the validity of any such forward-looking statements. 12 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK FOREIGN CURRENCY EXCHANGE RISK The Company invoices all international customers in U. S. dollars except customers of the Company's United Kingdom (U.K.) subsidiary which are invoiced in Sterling. The U.K. subsidiary's financials including balance sheet, revenue, and operating expenses are transacted in Sterling. Therefore, the Company's exposure to foreign currency exchange rate risk occurs when translating the financial results of the U.K. subsidiary to U.S. dollars in consolidation. At this time, the Company does not use instruments to hedge its foreign exposure in the U.K. because the effect of foreign exchange rate fluctuations are not material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company's Annual Meeting of Stockholders was held on May 20, 1999 (b) Not applicable (c) A proposal to elect one director was adopted by the stockholders of the Company. The vote on the matter was:
For Abstained --- --------- William P. Conlin 11,570,772 1,047,052
13 14 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27.1 - Financial Data Schedule-1999 (b) Reports on Form 8-K No current reports on Form 8-K were filed during the three months ended June 30, 1999. 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SYNTELLECT INC. Date: August 12, 1999 By: /s/ Peter W. Pamplin ------------------------------ Peter W. Pamplin Vice President, Chief Financial Officer, Secretary and Treasurer By: /s/ Keith A. Pekkala ------------------------------ Keith A. Pekkala Vice President and Controller, (Principal Accounting Officer) 15 16 EXHIBIT INDEX Exhibit 27.1 - Financial Data Schedule-1999 EX-27.1 2 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF SYNTELLECT, INC. AND SUBSIDIARIES AS OF JUNE 30, 1999, AND THE CONSOLIDATED STATEMENT OF OPERATIONS OF SYNTELLECT, INC. AND SUBSIDIARIES FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 3,993 4,309 12,764 1,049 2,559 23,303 15,266 10,127 28,470 12,940 0 0 0 138 16,387 28,470 11,866 22,260 7,511 12,655 14,112 701 0 (4,328) 0 (4,328) 0 0 0 (4,328) (0.32) (0.32)
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