<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21761
GEOTEL COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3194255
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization
900 CHELMSFORD STREET, TOWER II, 12TH FLOOR
LOWELL, MASSACHUSETTS 01851
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 275-5100
ADDRESS CHANGE SINCE LAST REPORT
(Former address - 25 Porter Road, Littleton, Massachusetts 01460)
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:
===================================================================
Class OUTSTANDING AT AUGUST 11, 1997
----------------------------- ------------------------------
Common Stock, $0.01 par value 13,136,171 shares
===================================================================
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GEOTEL COMMUNICATIONS CORPORATION
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996 3
Consolidated Statements of Operations for the three
and six months ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
Exhibit Index 17
Exhibit 11.1 18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GEOTEL COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $36,870 $33,263
Accounts receivable 2,428 2,121
Prepaid expenses and other current assets 956 524
------- -------
Total current assets 40,254 35,908
------- -------
Property and equipment, net 1,913 1,016
------- -------
Total assets $42,167 $36,924
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 575 $ 656
Accrued expenses 871 857
Accrued compensation and related accruals 957 685
Deferred revenue and deferred revenue-related party 5,209 2,289
------- -------
Total current liabilities 7,612 4,487
------- -------
Stockholders' equity:
Preferred stock -- --
Common stock 134 134
Additional paid-in capital 40,419 39,967
Accumulated deficit (4,749) (6,455)
Notes receivable from stockholders (12) (116)
Unearned compensation (1,193) (1,051)
------- -------
34,599 32,479
Less treasury stock, at cost (44) (42)
------- -------
Total stockholders' equity 34,555 32,437
------- -------
Total liabilities and stockholders' equity $42,167 $36,924
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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GEOTEL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software license $ 2,840 $ 1,745 $ 5,200 $ 3,063
Services and other 828 146 1,457 251
Related party licenses and services (Note 3) 340 158 538 574
------- ------- ------- -------
Total revenues 4,008 2,049 7,195 3,888
------- ------- ------- -------
Cost of Revenues:
Cost of software licenses 78 108 177 183
Cost of services and other 625 338 1,129 616
------- ------- ------- -------
Total cost of revenues 703 446 1,306 799
------- ------- ------- -------
Gross profit 3,305 1,603 5,889 3,089
------- ------- ------- -------
Operating Expenses:
Research and development 937 734 1,804 1,390
Sales and marketing 1,303 575 2,330 1,196
General and administrative 467 242 835 446
------- ------- ------- -------
Total operating expenses 2,707 1,551 4,969 3,032
------- ------- ------- -------
Income from operations 598 52 920 57
Interest income 483 45 907 85
------- ------- ------- -------
Income before income taxes 1,081 97 1,827 142
Provision for income taxes 100 -- 121 --
------- ------- ------- -------
Net income 981 97 1,706 142
Accretion of convertible preferred stock to -- (27) -- (54)
redemption value ------- ------- ------- -------
Net income available to common stockholders $ 981 $ 70 $ 1,706 $ 88
======= ======= ======= =======
Net income per common and common equivalent share $ 0.07 $ 0.01 $ 0.12 $ 0.01
======= ======= ======= =======
Weighted average number of common and common
equivalent shares outstanding 13,748 11,523 13,759 11,556
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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GEOTEL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,706 $ 142
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 348 224
Equity compensation 220 8
Changes in operating assets and liabilities:
Accounts receivable (307) (982)
Prepaid expenses and other current assets (432) 13
Accounts payable (81) 52
Accrued expenses and other current liabilities 286 611
Deferred revenue and deferred revenue - related party 2,920 933
------- ------
Net cash provided by operating activities 4,660 1,001
------- ------
Cash flows used in investing activities -
Purchases of property and equipment, net (1,245) (302)
------- ------
Cash flows from financing activities:
Proceeds from sale of common stock and option exercises 154 35
Offering costs of registering common stock (63) --
Proceeds from notes receivable for common stock 103 8
Proceeds from sale of convertible preferred stock -- 161
Acquisition of treasury stock (2) (7)
Proceeds from long-term debt -- 214
Principal payments under long-term debt -- (140)
------ ------
Net cash provided by financing activities 192 271
------- ------
Net increase in cash and cash equivalents 3,607 970
Cash and cash equivalents, beginning of period 33,263 4,537
------- ------
Cash and cash equivalents, end of period $36,870 $5,507
======= ======
</TABLE>
The accompanying footnotes are an integral part of these consolidated financial
statements.
5
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GEOTEL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements for the three and six month periods
ended June 30, 1997 and the related footnote information are unaudited and have
been prepared on a basis substantially consistent with the 1996 audited
consolidated financial statements, and in the opinion of management include all
adjustments (consisting of only normal recurring adjustments) necessary for fair
presentation of the results of this interim period. These statements should be
read in conjunction with the consolidated financial statements and related notes
for the year ended December 31, 1996 included in the Company's Form 10-K. The
results of operations for the three and six month periods ended June 30, 1997
are not necessarily indicative of the results to be expected for the entire
year.
GeoTel Communications Corporation (the "Company") develops and markets
telecommunications software solutions, consisting primarily of one product, that
enable enhanced call center applications. The Company currently derives
substantially all of its revenues from licenses of the Intelligent CallRouter
and related services.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. COMPUTATION OF INCOME PER SHARE
Net income per common share is computed based upon the weighted average
number of common and common equivalent shares outstanding (using the treasury
stock method) after certain adjustments described below. Common equivalent
shares consist of the Company's Series A, B and C Convertible Participating
Preferred Stock (collectively, the "Convertible Preferred Stock"). The
Convertible Preferred Stock converted to common stock upon the closing of
Company's initial public offering ("IPO") of common stock on November 20, 1996.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No.
83 (SAB No. 83), all Convertible Preferred Stock, common and common equivalent
shares issued during the twelve month period prior to the IPO have been included
in the calculation as if they were outstanding for all periods prior to the IPO,
using the treasury stock method at the IPO price of $12.00 per share. Fully
diluted net income per common share is not presented as the dilutive effect is
immaterial.
3. RELATED PARTY TRANSACTIONS
An investor, representing approximately 9% of the Company's total common
shares outstanding, is also a customer of the Company. This customer's purchases
from the Company represented 8.5% and 7.5% of total revenue for the second
quarter and six month periods ended June 30, 1997, respectively, and 7.7% and
14.8% for the second quarter and six month periods ended June 30, 1996,
respectively. Gross profit from these transactions approximated those realized
in similar transactions with unrelated parties.
4. INCOME TAXES
The Company's effective tax rate was 9.3% for the second quarter of 1997 and
6.6% for the six months ended June 30, 1997. The difference between the
statutory income tax rate and the Company's effective tax rate is due to the use
of capitalized start-up costs, net operating losses and tax credits. No income
tax provision was recorded for federal income tax purposes through the year
ended December 31, 1996 as the Company had not reported taxable income in that
period.
6
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GEOTEL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. NEWLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS 128"), "Earnings per Share."
SFAS 128 establishes a different method of computing net income per share than
is currently required under the provisions of Accounting Principles Board
Opinion No. 15. Under SFAS 128, the Company will be required to present both
basic net income per share and diluted net income per share. Basic net income
per share for the quarters ended June 30, 1997 and 1996 would have been $0.07
and $0.03 per share, respectively. Basic net income per share for the six months
ended June 30, 1997 and 1996 would have been $0.13 and $0.04 per share,
respectively. The Company is assessing the effect of SFAS 128 on a diluted basis
but believes the effect will not be material. The Company plans to adopt SFAS
128 in its quarter ending December 31, 1997 and at that time all historical net
income per share data presented will be restated to conform to the provisions of
SFAS No. 128.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying consolidated
financial statements for the periods specified and the associated notes. Further
reference should be made to Company's 1996 Form 10-K for the year ended December
31, 1996.
OPERATING RESULTS
The following table presents selected unaudited financial information from
the Company's income statement as a percentage of total revenue for the three
month and six month periods ended June 30, 1997 and 1996. The Company's
operating results for any one quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software license .................... 76.6% 89.7% 77.1% 91.1%
Services and other .................. 23.4 10.3 22.9 8.9
----- ----- ----- -----
Total revenues ...................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of Revenues:
Cost of software licenses ........... 1.9 5.3 2.5 4.8
Cost of services and other........... 15.6 16.5 15.7 15.8
----- ----- ----- -----
Total cost of revenues .............. 17.5 21.8 18.2 20.6
----- ----- ----- -----
Gross Profit ........................... 82.5 78.2 81.8 79.4
----- ----- ----- -----
Operating Expenses:
Research and development ............ 23.4 35.8 25.0 35.7
Sales and marketing ................. 32.5 28.1 32.4 30.7
General and administrative........... 11.7 11.8 11.6 11.5
----- ----- ----- -----
Total operating costs ............... 67.6 75.7 69.0 77.9
----- ----- ----- -----
Income from operations ................. 14.9 2.5 12.8 1.5
Interest income ........................ 12.1 2.2 12.6 2.2
----- ----- ----- -----
Income before income taxes ............. 27.0 4.7 25.4 3.7
Provision for income taxes ............. 2.5 -- 1.7 --
----- ----- ----- -----
Net income ............................. 24.5% 4.7% 23.7% 3.7%
===== ===== ===== =====
</TABLE>
REVENUES
Total revenues for the second quarter of 1997 increased by 95.6% to
$4,008,000 from $2,049,000 for the second quarter of 1996. Software license
revenue during these quarters increased 67.2% to $3,072,000 from $1,837,000.
Total revenues for the six months ended June 30, 1997 increased by 85.1% to
$7,195,000 from $3,888,000 for the six months ended June 30, 1996. Software
license revenue during these six month periods increased 56.6% to $5,546,000
from $3,542,000. The Company believes that the increase in revenue is
attributable to several factors, including the continued market acceptance of
the Company's product, an increase in the size of the Company's direct sales
force, expansion of the sales channels through the addition of selected
resellers and international partners and the increase in the Company's customer
base.
8
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Services and other revenue for the second quarter of 1997 increased by 341.5%
to $936,000 from $212,000 for the second quarter of 1996. Maintenance revenue,
installation services revenue and consulting and other revenue represented
69.8%, 29.3% and .9%, respectively, of services and other revenue for the second
quarter of 1997. Services and other revenue for the second quarter of 1996 was
derived primarily from installation services. Most of the Company's license
sales through the end of the second quarter of 1996 were in their warranty
period and therefore only nominal maintenance revenue was recognized. Services
and other revenue increased to 23.4% of total revenues in the second quarter of
1997 from 10.3% of total revenues in the second quarter of 1996. Services and
other revenue increased in dollars and as a percentage of total revenues in the
second quarter of 1997 as a result of the increase in the Company's customer
base. The Company anticipates that maintenance revenue will increase as a
percentage of total revenues as the Company's customer base increases.
Installation services revenue will vary based upon software license revenue.
Consulting and other revenue are non-recurring in nature and will fluctuate in
dollars and as a percentage of total revenues from quarter to quarter. The
Company performs consulting work primarily in situations where such work will
result in additional software license revenue.
Services and other revenue for the six months ended June 30, 1997 increased
by 376.6% to $1,649,000 from $346,000 for the six months ended June 30, 1996.
Maintenance revenue, installation services revenue and consulting and other
revenue represented 55.4%, 31.8% and 12.8%, respectively, of services and other
revenue for the six months ended June 30, 1997. Services and other revenue for
the six months ended June 30, 1996 was derived primarily from installation
services. Most of the Company's license sales through June 30, 1996 were in
their warranty period and therefore only nominal maintenance revenue was
recognized. Services and other revenue increased to 22.9% of total revenues in
the six months ended June 30, 1997 from 8.9% of total revenues in the six months
ended June 30, 1996. Services and other revenue increased in dollars and as a
percentage of total revenues in the six month period ended June 30, 1997, as a
result of the increase in the Company's customer base.
International revenues represented 25.6% of total revenues in the second
quarter of 1997 compared to no international revenue in the second quarter of
1996. The increase in dollars was due to the increase in the number of
international partners and the volume of business activity with these partners.
International revenues represented 21.9% of total revenues for the six months
ended June 30, 1997 compared to 12.9% for the six months ended June 30, 1996.
The Company believes that it will continue to derive a significant portion of
its total revenues from international revenues and that international revenues
will comprise a larger percentage of total revenues in the future. To date, the
Company's international revenues have been denominated in U.S. currency.
An investor, representing approximately 9% of the Company's total common
shares outstanding, is also a customer of the Company. This customer's purchases
from the Company represented 8.5% and 7.5% of total revenue for the second
quarter and six month periods ended June 30, 1997, respectively, and 7.7% and
14.8% for the second quarter and six month periods ended June 30, 1996,
respectively. Gross profit from these transactions approximated those realized
in similar transactions with unrelated parties.
A significant portion of the Company's total revenues to date has been
derived from a limited number of customers. Revenues attributable to the five
largest customers in each quarter accounted for 77.9% and 89.2% of the Company's
total revenues for the quarters ended June 30, 1997 and 1996, respectively.
Revenues attributable to the five largest customers for the six months ended
June 30, 1997 and 1996 were 63.6% and 68.4%, respectively. The Company expects
that it will continue to be dependent upon a limited number of customers for a
significant portion of its revenues in future periods.
9
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COST OF REVENUES
Cost of software licenses. Cost of software licenses consists principally of
product warranty costs and the costs of interface cards. Cost of software
licenses for the second quarter of 1997 decreased by $30,000 to $78,000 from
$108,000 for the second quarter of 1996. Cost of software licenses as a
percentage of software license revenue were 2.5% and 5.9% for the second
quarters of 1997 and 1996, respectively. The decrease in dollars and as a
percentage of software license revenue in 1997 was due to a decrease in hardware
costs. Cost of software licenses for the six months ended June 30, 1997 remained
stable in absolute dollars in comparison to the six month period ended June 30,
1996. Cost of software licenses as a percentage of software license revenue were
3.2% and 5.2% for the six month periods ended June 30, 1997 and 1996,
respectively. The decrease in percentage in 1997 was from a decrease in hardware
costs. The Company believes that in future periods, the percentage of cost of
software licenses will range from 3% to 5% of software license revenue.
Cost of services and other. Cost of services and other consists principally
of the costs incurred to provide installation, consulting, maintenance and
training services. The expenses incurred to provide these services are comprised
primarily of personnel, travel and facility costs. Cost of services and other
for the second quarter of 1997 increased by 84.9% to $625,000 from $338,000 for
the second quarter of 1996. Cost of services and other as a percentage of
services and other revenue were 66.8% and 159.4% for the second quarters of 1997
and 1996, respectively. Cost of services and other for the six months ended June
30, 1997 increased by 83.3% to $1,129,000 from $616,000 for the six months ended
June 30, 1996. Cost of services and other as a percentage of services and other
revenue were 68.5% and 178.0% for the six months ended June 30, 1997 and 1996,
respectively. The increase in dollars from the quarter and six month period
ended June 30, 1997 compared to the corresponding periods in 1996 were primarily
comprised of an increase in personnel and travel costs. These costs increased as
a result of the increase in the number of customers under maintenance contracts.
Cost of services and other on a quarterly basis has been increasing in absolute
dollars, while decreasing as a percentage of services and other revenue. The
Company believes that in future periods, the percentage of cost of services and
other to services and other revenue will fluctuate significantly based upon the
mix of the services provided, but in general the Company anticipates the
percentage will decrease as the Company experiences efficiencies from a growing
customer base.
OPERATING EXPENSES
Research and Development. Research and development expenses consist
principally of personnel and facility costs. Research and development expenses
for the second quarter of 1997 increased by 27.7% to $937,000 from $734,000 for
the second quarter of 1996. Research and development expenses as a percentage of
total revenues were 23.4% and 35.8% for the second quarters of 1997 and 1996,
respectively. Research and development expenses for the six months ended June
30, 1997 increased by 29.8% to $1,804,000 from $1,390,000 for the six months
ended June 30, 1996. Research and development expenses as a percentage of total
revenues were 25.0% and 35.7% for the six month periods ended June 30, 1997 and
1996, respectively. The decreases in research and development expenses as a
percentage of total revenues during the quarter and six month periods ended June
30, 1997 compared to the corresponding periods ended June 30, 1996 were
primarily the result of the Company's significant revenue growth. The increase
in absolute dollars for the quarter and six month periods ended June 30, 1997
compared to the corresponding periods ended June 30, 1996 was the result of
increases in personnel and related facility costs. The major product development
efforts in the second quarter of 1997 related to the development of version 2.0
of the Intelligent CallRouter ("ICR") and development of significant
enhancements to the ICR such as Computer Telephony Interface capabilities. The
Company anticipates that research and development expenses will continue to
increase in absolute dollars, while decreasing as a percentage of total revenues
to 20% to 25% in the foreseeable future.
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Sales and Marketing. Sales and marketing expenses consist principally of
personnel costs (salaries, commissions and fringe benefits), travel, trade
shows, promotional expenses and facility costs. Sales and marketing expenses for
the second quarter of 1997 increased by 126.6% to $1,303,000 from $575,000 for
the second quarter of 1996. Sales and marketing expenses as a percentage of
total revenues were 32.5% and 28.1% for the second quarters of 1997 and 1996,
respectively. Sales and marketing expenses for the six months ended June 30,
1997 increased by 94.8% to $2,330,000 from $1,196,000 for the six months ended
June 30, 1996. Sales and marketing expenses as a percentage of total revenues
were 32.4% and 30.7% for the six months ended June 30, 1997 and 1996,
respectively. The increase in dollars and as a percentage of total revenues from
the quarter and six month periods ended June 30, 1997 compared to the
corresponding periods in 1996 were primarily comprised of an increase in
personnel and travel costs. These costs increased due to the expansion of the
domestic sales staff, commissions attributable to higher revenues and increased
promotional costs. The Company anticipates that sales and marketing expenses
will continue to increase in absolute dollars but level off as a percentage of
total revenues ranging from 30% to 35% in the foreseeable future.
General and Administrative. General and administrative expenses consist
principally of personnel costs for administrative, finance, information systems,
human resources and general management personnel. General and administrative
expenses for the second quarter of 1997 increased by 93.0% to $467,000 from
$242,000 for the second quarter of 1996. General and administrative expenses as
a percentage of total revenues were 11.7% and 11.8% for the second quarters of
1997 and 1996, respectively. General and administrative expenses for the six
months ended June 30, 1997 increased by 87.2% to $835,000 from $446,000 for the
six months ended June 30, 1996. General and administrative expenses as a
percentage of total revenues were 11.6% and 11.5% for the six months ended June
30, 1997 and 1996, respectively. The increase in absolute dollars from the
quarter and six month period ended June 30, 1997 compared to the corresponding
periods in 1996 was due to an increase in personnel and legal costs. These costs
have increased due to the growth of the business and the incremental costs of
being a public company. The Company anticipates that general and administrative
expenses will increase in absolute dollars but level off as a percentage of
total revenues ranging from 10% to 12% in the foreseeable future.
INTEREST INCOME, NET
Interest income, net, of $483,000 and $45,000 for the second quarters of 1997
and 1996, respectively, resulted from investments of the Company's cash
balances, net of interest expense incurred on bank term notes in 1996. Interest
income, net, was $907,000 and $85,000 for the six month periods ended June 30,
1997 and 1996, respectively. In the fourth quarter of 1996, the Company raised
approximately $26,669,000 in cash from its initial public offering. The Company
used a portion of the proceeds from the offering to repay in full the Company's
outstanding debt and invested the remainder of the proceeds. Interest income
increased significantly in the quarter and six month periods ended June 30, 1997
in comparison to the corresponding periods in 1996 due to the increase in cash
available for investment in 1997.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 9.3% for the second quarter of 1997 and
6.6% for the six months ended June 30, 1997. The difference between the
statutory income tax rate and the Company's effective tax rate is due to the use
of capitalized start-up costs, net operating losses and tax credits. No income
tax provision was recorded for federal income tax purposes through the year
ended December 31, 1996 as the Company had not reported taxable income in that
period.
11
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LIQUIDITY AND CAPITAL RESOURCES
On November 20, 1996, the Company completed its initial public offering of
common stock, which generated net proceeds of approximately $26,669,000. The
Company used approximately $756,000 of the proceeds to repay borrowings under
its outstanding equipment lines of credit. At June 30, 1997, the Company had
cash and cash equivalents of $36,870,000 and accounts receivable of $2,428,000.
The Company's working capital increased to $32,642,000 at June 30, 1997 from
$31,421,000 at December 31, 1996. During the second quarter of 1997, the Company
received approximately $2,557,000 of a total $2,922,000 in advance payments
received to date under a software licensing agreement with Digital Equipment
Co., Ltd. (the "DEC Agreement") which the Company has included in deferred
revenue. The DEC Agreement provides, among other things, for the resale of a
specified number of software licenses and one year of maintenance support for a
total contract value of approximately $7,800,000. The Company anticipates
recognizing the revenue associated with the software licensing in this agreement
beginning in the third quarter of 1997 and into 1998 as the software licenses
are deployed.
The Company generated $4,660,000 from operations in the six months ended June
30, 1997 compared to $1,001,000 in the corresponding period of 1996. The
improvement in cash flow from operations is primarily the result of the increase
in advance customer payments (See discussion above regarding the DEC Agreement)
and an increase in profitability.
The Company used cash in investing activities of $1,245,000 and $302,000 in
the six months ended June 30, 1997 and 1996, respectively. Capital expenditures
in 1997 were made due to the increase in personnel, the Company's move to a new
corporate office and for product development related needs. The Company
generated cash in financing activities of $192,000 and $271,000 in the six month
periods ended June 30, 1997 and 1996, respectively. Financing activities
consisted primarily of sales of equity securities.
The Company believes that existing cash balances and funds generated from
operations will be sufficient to meet its anticipated liquidity and working
capital requirements for at least the next twelve months.
NEWLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS
No. 128 establishes a different method of computing net income per share than is
currently required under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS No. 128, the Company will be required to present both basic
net income per share and diluted net income per share. Basic net income per
share for the quarters ended June 30, 1997 and 1996 would have been $0.07 and
$0.03 per share, respectively. Basic net income per share for the six months
ended June 30, 1997 and 1996 would have been $0.13 and $0.04 per share,
respectively. The Company is assessing the effect of SFAS No. 128 on a diluted
basis but believes the effect will not be material. The Company plans to adopt
SFAS 128 in its quarter ending December 31, 1997 and at that time all historical
net income per share data presented will be restated to conform to the
provisions of SFAS No. 128.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of future financial performance of the
Company. However, from time to time, information provided by the Company or
statements made by its employees may contain "forward-looking" information that
involve risks and uncertainties. In particular, statements contained in this
Form 10-Q that are not historical facts (including, but not limited to,
statements concerning services and other revenue, international revenues,
anticipated cost of revenues levels, anticipated operating expense levels,
such expense levels relative to the Company's total revenues and anticipated
revenue recognition in connection with the DEC Agreement) constitute forward-
looking statements and are made under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The Company's actual results
of operations and financial condition have varied and may in the future vary
significantly from those stated in any forward-looking statements. Factors that
may cause such differences include, without limitation, the risks, uncertainties
and other information discussed below, as well as the accuracy of the Company's
internal estimates of revenue and operating expense levels. Each of these
factors, and others, are discussed from time to time in the filings made by the
Company with the Securities and Exchange Commission.
The Company's future results are subject to substantial risks and
uncertainties. The Company has experienced substantial revenue growth since the
ICR product introduction and first achieved profitability in the first quarter
of 1996. However, due to the Company's limited operating history there can be no
assurance that such revenue growth and profitability will continue in the future
on a quarterly or annual basis. Future operating results will depend on many
factors, including the demand for the Company's products, the level of product
and price competition, the Company's success in expanding its direct sales
force, indirect distribution channels, the rate of deployment of the software
licenses under the DEC Agreement, international sales and the ability of
the Company to develop and market new products and control costs. In order to
support the growth of its business, the Company plans to significantly expand
its level of operations. Due to the anticipated increase in the Company's
operating expenses caused by this expansion, the Company's operating results
will be adversely affected if revenues do not increase. The Company currently
expects to derive substantially all of its revenues from licenses of the ICR
product and related services and that it will continue to be dependent upon a
limited number of customers for a significant portion of its revenues in future
periods. Although demand for the ICR has grown in recent quarters, the call
center market is still an emerging market. The Company's future financial
performance will depend in large part on continued growth in the number of
organizations adopting software applications to enhance their responsiveness to
customers and the number of applications developed for use in these
environments.
The Company is dependent upon its ability to protect its proprietary
technology and relies upon a combination of patents, copyrights, trademarks,
trade secret laws and confidentiality procedures. There can be no assurance that
the protections put in place by the Company will be adequate. The Company
believes that international expansion is important to the Company's ability to
continue its growth. There can be no assurance that the Company will be
successful in integrating its product in international markets and such revenues
are subject to a number of risks including compliance with regulatory
requirements, export restrictions and controls, trade barriers, protection of
intellectual property rights, management of international operations, collection
of receivables, political instability, currency exchange rate fluctuation and
potentially adverse tax consequences. The Company depends on a single vendor for
the software and network adapter necessary for the ICR to interface with the
AT&T network. Although the Company has a perpetual, fully-paid license, with
access to the underlying source code for this software and the rights to
manufacture the network adapter, if for any reason the vendor does not make the
software or network adapter available to the Company, there can be no assurance
that the Company will be able to develop these products on a timely basis.
13
<PAGE> 14
The Company's quarterly operating results may in the future vary
significantly depending on factors such as increased competition from the
interexchange carriers, Automatic Call Distribution switching system vendors and
other companies, the timing of new product announcements and changes in pricing
policies by the Company and its competitors, market acceptance of new and
enhanced versions of the Company's products, the size and timing of significant
orders, order cancellations by customers, changes in operating expenses, changes
in Company strategy, personnel changes, the Company's ability to manage growth,
if any, including the continued improvement in its financial and management
controls and growth of its employee work force and general economic factors. The
Company's expense levels are based, in part, on its expectations of future
revenues and to a large extent are fixed in the short-term. If revenue levels
are below expectations, the Company's business, operating results and financial
condition are likely to be materially adversely affected. Net income may be
disproportionately affected by a reduction in revenues because a proportionately
smaller amount of the Company's expenses varies with its revenues. As a result,
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Additional information on the factors that
could affect the Company's financial results is included in the Company's 1996
Form 10-K, as amended, which has been filed with the Securities and Exchange
Commission.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's Annual Meeting of Stockholders held on May 29, 1997, the
following proposals were adopted by the vote specified below:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN WITHHOLD
--------- --------- --------- ---------
<S> <C> <C> <C>
1. To elect two directors to serve for a three year term
Gary Bowen 8,823,182 4,032
Wayne Andrews 8,822,982 4,232
2. To ratify the selection by the Board of
Directors of Coopers & Lybrand L.L.P. as
independent public accountants for the Company for 1997 8,823,064 3,450 700
</TABLE>
The other directors whose terms of office continued after the Annual Meeting of
Stockholders are Alexander V. d'Arbeloff, Gardner C. Hendrie, W. Michael
Humphreys and John C. Thibault.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
11.1 Weighted Shares Used in Computation of Earnings per Share
(b) Report on Form 8-K.
The Company did not file a Form 8-K during the quarter ended June 30, 1997.
15
<PAGE> 16
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.
GEOTEL COMMUNICATIONS CORPORATION
(Registrant)
August 13, 1997 /s/TIMOTHY J. ALLEN
-----------------------------------------------------
Timothy J. Allen
Vice President of Finance,
Chief Financial Officer,
Treasurer and Assistant Secretary
(principal financial and chief accounting officer)
16
<PAGE> 17
EXHIBIT INDEX PAGE NO.
11.1 Weighted Shares Used in Computation of
Earnings Per Share 18
17
<PAGE> 1
EXHIBIT 11.1
GEOTEL COMMUNICATIONS CORPORATION
STATEMENT REGARDING COMPUTATION OF NET INCOME
PER COMMON AND COMMON EQUIVALENT SHARE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Historical - Primary:
Weighted average common stock outstanding.......... 13,100,191 2,280,740 13,093,281 2,298,293
Cheap stock(1)..................................... -- 850,595 -- 850,595
Weighted average common stock equivalents.......... 648,150 8,392,086 665,448 8,390,953
----------- ----------- ----------- -----------
Weighted average number of common and common
equivalent shares outstanding............... 13,748,341 11,523,421 $13,758,729 11,539,841
=========== =========== =========== ===========
Net income.......................................... $ 981 $ 97 $ 1,706 $ 142
Less: accretion of redeemable convertible preferred
stock to redemption value........................... -- (27) -- (54)
----------- ----------- ----------- -----------
Net income available to common shareholders......... $ 981 $ 70 $ 1,706 $ 88
----------- ----------- ----------- -----------
Net income per common and common equivalent shares.. $ 0.07 $ 0.01 $ 0.12 $ 0.01
----------- ----------- ----------- -----------
</TABLE>
- -----------------------------------
(1) In accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 83, issuances of common stock, common stock equivalents and
Convertible Preferred Stock within one year prior of the initial filing of
the Company's Registration Statement for an initial public offering
("IPO") at share prices below the IPO price of $12.00 per share are
considered to have been made in anticipation of the contemplated public
offering. Accordingly, these stock issuances are treated as if issued and
outstanding, using the treasury stock method for options, for all periods
prior to the IPO.
(2) Fully diluted net income per share is not presented as it is the same
as that disclosed in historical net income per share for the periods
presented.
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q FILING.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 36,870
<SECURITIES> 0
<RECEIVABLES> 2,428
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,254
<PP&E> 3,224
<DEPRECIATION> (1,311)
<TOTAL-ASSETS> 42,167
<CURRENT-LIABILITIES> 7,612
<BONDS> 0
0
0
<COMMON> 134
<OTHER-SE> 34,421
<TOTAL-LIABILITY-AND-EQUITY> 42,167
<SALES> 7,195
<TOTAL-REVENUES> 7,195
<CGS> 1,306
<TOTAL-COSTS> 1,306
<OTHER-EXPENSES> 4,969
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,827
<INCOME-TAX> 121
<INCOME-CONTINUING> 1,706
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,706
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
