<PAGE>
================================================================================
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, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- ---------------
Commission File 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)
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)
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.
13,652,029 shares of common stock, $.01 par value per share, were
outstanding on August 13, 1998
================================================================================
1
<PAGE>
SYNTELLECT INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets-
June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations-
Three Months and Six Months Ended
June 30, 1998 and June 30, 1997 4
Condensed Consolidated Statements of Cash Flows-
Six Months Ended June 30, 1998 and June 30, 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion & Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
EXHIBITS
Exhibit 27.1 - Financial Data Schedule - 1998 12
Exhibit 27.2 - Financial Data Schedule - 1997 13
</TABLE>
2
<PAGE>
SYNTELLECT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 3,922 $ 2,290
Marketable securities ($1.1 million restricted) 4,198 8,233
Trade receivables, net of allowance for
doubtful accounts 10,712 10,894
of $660 and $1,199, respectively
Note receivable - current portion 707 856
Inventories 2,761 2,593
Prepaid expenses 1,394 714
-------- --------
Total current assets 23,694 25,580
Property and equipment, net 5,638 5,813
Note receivable - noncurrent portion 3,000 3,361
Other assets 84 54
-------- --------
$ 32,416 $ 34,808
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,067 $ 2,160
Accrued liabilities 4,534 5,471
Customer deposits 1,614 1,081
Deferred revenue 3,689 3,197
Capital lease obligations - current portion 229 183
-------- --------
Total current liabilities 12,133 12,092
Capital lease obligations - noncurrent portion 554 530
-------- --------
Total liabilities 12,687 12,622
-------- --------
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. 136 136
Authorized 25,000,000 shares; issued and,
outstanding 13,630,898 and 13,576,761,
respectively
Additional paid-in capital 60,797 60,727
Deferred compensation ---- (33)
Accumulated deficit (40,064) (37,454)
Accumulated other comprehensive income (loss) 1 (49)
-------- --------
20,870 23,327
Treasury stock, at cost, 175,732 shares (1,141) (1,141)
-------- --------
Total shareholders' equity 19,729 22,186
-------- --------
$ 32,416 $ 34,808
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
SYNTELLECT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
Net revenues:
System sales $ 5,336 $ 5,047 $ 9,636 $13,773
Service bureau 2,294 2,446 4,514 5,010
Maintenance and other services 3,774 3,532 8,315 7,113
------- ------- ------- -------
Total net revenues 11,404 11,025 22,465 25,896
Cost of revenues:
System sales 3,198 3,999 6,065 8,530
Service bureau 1,291 1,561 2,662 3,244
Maintenance and other services 1,134 909 2,292 1,920
------- ------- ------- -------
Total cost of revenues 5,623 6,469 11,019 13,694
------- ------- ------- -------
Gross margin 5,781 4,556 11,446 12,202
Operating expenses:
Selling, marketing and
administrative 5,007 4,906 10,163 10,089
Research and development 1,405 1,479 2,854 2,937
Depreciation and amortization 712 1,021 1,389 1,971
------- ------- ------- -------
Total operating expenses 7,124 7,406 14,406 14,997
------- ------- ------- -------
Operating loss (1,343) (2,850) (2,960) (2,795)
Other income (expense), net
Interest income 170 76 366 149
Other (12) (24) (16) (46)
------- ------- ------- -------
Total other income 158 52 350 103
------- ------- ------- -------
Loss before income taxes (1,185) (2,798) (2,610) (2,692)
Income taxes -- -- -- --
------- ------- ------- -------
Net loss $(1,185) $(2,798) $(2,610) $(2,692)
======= ======= ======= =======
Net (loss) per common share - basic $ (.09) $ (.21) $ (.19) $ (.20)
======= ======= ======= =======
Net (loss) per common share - diluted $ (.09) $ (.21) $ (.19) $ (.20)
======= ======= ======= =======
Weighted average shares - basic 13,582 13,487 13,580 13,486
Weighted average shares - diluted 13,582 13,487 13,580 13,486
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustment (23) 73 42 (150)
Unrealized gain on marketable
securities 2 (4) 8 2
------- ------- ------- -------
Other comprehensive income (loss) (21) 69 50 (148)
------- ------- ------- -------
Comprehensive (loss) $(1,206) $(2,729) $(2,560) $(2,840)
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SYNTELLECT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1998 1997
----------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,610) $ (2,692)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 1,389 1,971
Provision for doubtful accounts 162 160
Provision for inventory obsolescence -- 20
Stock option compensation expense 16 19
Decrease in receivables 20 1,817
(Increase) decrease in inventories (168) 1,090
Increase (decrease) in accounts payable (93) 643
(Decrease) in accrued liabilities (937) (1,498)
Change in other assets and liabilities 325 282
------- --------
Net cash provided (used) by operating (1,896) 1,812
activities ------- --------
Cash flows from investing activities:
Purchase of marketable securities (7,757) (11,223)
Maturities of marketable securities 11,800 9,276
Proceeds from notes receivables 500 --
Purchase of property and equipment (1,048) (2,085)
------- --------
Net cash provided (used) in investing 3,495 (4,032)
activities ------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 87 72
Principal payments on long-term debt (96) (276)
------- --------
Net cash (used) in financing activities (9) (204)
------- --------
Effect of exchange rates on cash 42 (150)
------- --------
Net increase (decrease) in cash and cash equivalents 1,632 (2,574)
Cash and cash equivalents at beginning of period 2,290 4,928
------- --------
Cash and cash equivalents at end of period $ 3,922 $ 2,354
======= ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 34 $ 54
======= ========
Cash paid for income taxes $ -- $ 21
======== ========
</TABLE>
Noncash Investing and Financing Activities:
The Company entered into two capital lease obligations of $61 and $105
during the three months ended June 30,1998 for additions to its existing
telephone system.
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
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 Corp.
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. 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 1997 annual report on Form 10-K. The results of
operations for the six months ended June 30, 1998 are not necessarily indicative
of the results to be expected for the full year.
REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, Software Revenue Recognition. On
January 1, 1998, the Company adopted SOP 97-2 which is effective for financial
statements for fiscal years beginning after December 15, 1997. The
implementation of this statement did not have a material impact on the Company's
unaudited consolidated financial statements for the six month period ended June
30, 1998.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income. On January 1, 1998, the Company adopted SFAS No. 130 which is effective
for fiscal years beginning after December 15, 1997. Comprehensive income
includes all changes in equity during a period except those resulting in
investments by owners and distribution to owners.
OTHER
The Company continues to evaluate the requirements of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which was
issued in June 1997. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997 but does not apply to interim financial statements in
the initial year of application.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
Finished goods $ 1,022 $ 913
Purchased components 3,035 2,742
Repair, warranty and maintenance inventory 2,122 2,346
------- -------
6,179 6,001
Less allowances for obsolescence (3,418) (3,408)
------- -------
$ 2,761 $ 2,593
======= =======
</TABLE>
6
<PAGE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NET REVENUES
Net revenues for the quarter ended June 30, 1998 were $11.4 million, an
increase of 3%, from the $11.0 million reported for the second quarter of 1997.
For the six month period ended June 30, 1998, net revenues were $22.5 million, a
decrease of 13% from $25.9 million for the corresponding period in 1997. Net
revenues consist of SYSTEM SALES, SERVICE BUREAU REVENUES and MAINTENANCE AND
OTHER SERVICES REVENUES, which represented 47%, 20% and 33% of net revenues,
respectively, for the quarter ended June 30, 1998, and 43%, 20%, and 37% of net
revenues, respectively, for the six month period ended June 30, 1998.
Revenues from SYSTEM SALES increased $289,000, or 6%, between the
comparable quarters and decreased $4.1 million, or 30%, between the
corresponding six month periods. Core product sales include the Company's
primary inbound product line, VocalPoint, and 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.
SYSTEM SALES revenues from the Company's core products, as described
above, increased $879,000, or 24%, to $4.6 million in the quarter ended June 30,
1998, from $3.7 million in the comparable prior year period, and represented
86% and 74% of total system sales in the respective quarters. This increase
was primarily due to a 55% increase in the VocalPoint product while non-core
revenues continue to decline quarter-over-quarter.
For the six month period ended June 30, 1998, core product revenues
decreased $1.6 million, or 16%, to $8.2 million from $9.8 million in the
comparable year ago period and represented 85% and 71% of total system sales,
respectively. SYSTEM SALES from the Company's non-core products decreased $2.6
million, or 64%, to $1.4 million for the six month period ended June 30, 1998,
from $4.0 million in the comparable year ago period.
SERVICE BUREAU REVENUES decreased by $152,000, or 6%, quarter-over-
quarter and $496,000, or 10%, between the comparable six month periods. The
cable TV industry has experienced a decline in consumer purchases of pay-per-
view events which resulted in lower than historical transaction processing fees
by the Company.
MAINTENANCE AND OTHER SERVICE REVENUES increased by $242,000 between
the comparable quarters and $1.2 million as compared to the prior six month
periods. The increase is primarily due to settlements of patent lawsuits for
which the Company retained economic rights after the sale of the patent
portfolio in October 1997.
INTERNATIONAL REVENUES for the second quarter of 1998 were $2.6
million, or 23% of total revenues, compared to $2.1 million, or 19%, for the
second quarter of 1997. International revenues typically consist of a small
number of larger orders and are subject to quarter-to-quarter fluctuations. For
the six month period ended June 30, 1998, international revenues were $4.7
million, or 21% of total revenues, as compared to $6.1 million, or 24%, for
the prior comparable period.
GROSS MARGIN
The gross margin percentage for the quarter ended June 30, 1998 was 51%
of net revenues as compared with 41% in the comparable prior year quarter.
Gross margins for SYSTEM SALES increased to 40% from 21% between comparable
quarters as a result of the mix in products and controlling fixed costs in cost
of sales. Gross margins for the SERVICE BUREAU increased to 44% from 36%
between the comparable quarters as a result of lower fixed costs. Gross
margins on MAINTENANCE AND OTHER SERVICES decreased to 70% from 74% between the
comparable quarters. 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
8
<PAGE>
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 1998 are not necessarily indicative of the
results to be expected for the full year.
The gross margin percentage for the six months ended June 30, 1998 was
51% of net revenues as compared to 47% in the comparable year ago period.
Gross margins on SYSTEM SALES decreased to 37% from 38%, SERVICE BUREAU
increased to 41% from 35%, and MAINTENANCE AND OTHER SERVICES decreased to 72%
from 73% for the comparable six month periods. Gross margins for the six
months ended June 30, 1998 were positively impacted primarily by cost control of
fixed costs.
OPERATING EXPENSES
Operating expenses for the second quarter of 1998 were $7.1 million, a
decrease of $282,000 from the prior year quarter. For the six month period
ended June 30, 1998, operating expenses were $14.4 million, a decrease of
$591,000, or 4%, over the prior year period. This decrease is primarily due to
the fixed asset write-down of $1.3 million in 1997 causing depreciation and
amortization expense to decrease $309,000, or 30%, and $582,000, or 30%, between
comparable three month and six month periods. Selling, marketing and
administrative expenses increased $101,000, or 2%, between the comparable
quarters and $74,000, or 1%, between the corresponding six month periods.
Research and development expenses for the second quarter of 1998 decreased
$74,000, or 5%, over the prior year quarter and by $83,000, or 3%, over the
comparable six month period.
NET INCOME (LOSS)
Syntellect reported a net loss of $1.2 million, or $(.09) per share
for the second quarter of 1998, compared to a net loss of $2.8 million, or
$(.21) per share for the prior year quarter. For the six month period ended
June 30, 1998, the Company reported a net loss of $2.6 million, or $(.19) per
share, compared to a net loss of $2.7 million, or $(.20) per share for the
comparable prior year period.
LIQUIDITY AND CAPITAL RESOURCES
Syntellect had working capital of $11.6 million at June 30, 1998, as
compared with $13.5 million at December 31, 1997. The current ratio was 2.0:1
and 2.1:1, respectively. Cash, cash equivalents and marketable securities at
the end of the second quarter totaled $8.1 million as compared with $10.5
million at year end. Syntellect used $1.9 million in cash flows from operating
activities during the first six months of 1998, received $87,000 in proceeds
from the issuance of common stock, and added $166,000 in long-term debt related
to capital leases for additional telephone equipment. Cash used during the six
month period consisted of $1 million in capital expenditures and $96,000 in
principal payments on long-term debt. Receivables, net of reserves, were $10.7
million at June 30, 1998, a decrease of $182,000 from the $10.9 million reported
at December 31, 1997.
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 1998. 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.
This report on Form 10-Q 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. 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, 1997 for a discussion of important
factors that could affect the validity of any such forward-looking statements.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule-1998
Exhibit 27.2 - Financial Data Schedule-1997
(b) Reports on Form 8-K
No current reports on Form 8-K were filed during the three months ended
June 30, 1998.
10
<PAGE>
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 13, 1998 By /S/ Peter W. Pamplin
------------------------
Peter W. Pamplin
Vice President, Chief Financial Officer,
Secretary and Treasurer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF SYNTELLECT, INC. AND SUBSIDIARIES AS OF JUNE 30,
1998, AND THE CONSOLIDATED STATEMENT OF OPERATIONS OF SYNTELLECT, INC. AND
SUBSIDIARIES FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,922
<SECURITIES> 4,198
<RECEIVABLES> 11,372
<ALLOWANCES> 660
<INVENTORY> 2,761
<CURRENT-ASSETS> 23,694
<PP&E> 13,363
<DEPRECIATION> 7,725
<TOTAL-ASSETS> 32,416
<CURRENT-LIABILITIES> 12,133
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 19,593
<TOTAL-LIABILITY-AND-EQUITY> 32,416
<SALES> 9,636
<TOTAL-REVENUES> 22,465
<CGS> 6,065
<TOTAL-COSTS> 11,019
<OTHER-EXPENSES> 14,406
<LOSS-PROVISION> 162
<INTEREST-EXPENSE> 54
<INCOME-PRETAX> (2,610)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,610)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,610)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF SYNTELLECT, INC. AND SUBSIDIARIES AS OF JUNE 30,
1997 AND THE CONSOLIDATED STATEMENT OF OPERATIONS OF SYNTELLECT, INC. AND
SUBSIDIARIES FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,354
<SECURITIES> 3,222
<RECEIVABLES> 12,897
<ALLOWANCES> 1,130
<INVENTORY> 2,975
<CURRENT-ASSETS> 21,748
<PP&E> 27,117
<DEPRECIATION> 18,730
<TOTAL-ASSETS> 30,970
<CURRENT-LIABILITIES> 11,074
<BONDS> 0
0
0
<COMMON> 135
<OTHER-SE> 19,138
<TOTAL-LIABILITY-AND-EQUITY> 30,970
<SALES> 13,773
<TOTAL-REVENUES> 25,896
<CGS> 8,530
<TOTAL-COSTS> 13,694
<OTHER-EXPENSES> 14,997
<LOSS-PROVISION> 160
<INTEREST-EXPENSE> 54
<INCOME-PRETAX> (2,692)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,692)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,692)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
