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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31,
1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ____________ TO ___________
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 (I.R.S. Employer
Incorporation or Organization) Identification No.)
900 CHELMSFORD STREET
TOWER II, 12TH FLOOR
LOWELL, MASSACHUSETTS 01851
(Address of principal executive office)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 978-275-5100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 23, 1998 there were 13,206,242 shares outstanding of the
registrant's common stock, $0.01 par value. As of that date, the aggregate
market value of voting stock held by non-affiliates of the registrant was
approximately $219,762,000.
DOCUMENTS INCORPORATED BY REFERENCE
PART III -- Portions of the definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 28, 1998 are incorporated by reference
into Part III (Items 10, 11, 12 and 13).
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PART I
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its directors, officers or
employees may contain "forward-looking" information which involve risks and
uncertainties. Actual future results may differ materially from such statements.
Statements indicating that the Company "expects," "estimates," "believes," "is
planning" or "plans to" are forward-looking, as are other statements concerning
future financial results, product offerings or other events that have not yet
occurred. There are several important factors which could cause actual results
or events to differ materially from those anticipated by the forward-looking
statements. Such factors, some of which are described in greater detail in Item
7 under the heading "Risk Factors That May Affect Future Results," include, but
are not limited to, the receipt and shipment of new orders, the timely release
of enhancements to the Company's products, which could be subject to software
release delays, the growth rates of certain market segments, the positioning of
the Company's products in those market segments, variations in the demand for
customer service and technical support, pricing pressures and the competitive
environment in the software industry, and the Company's ability to penetrate
international markets and manage its international operations. Although the
Company has sought to identify the most significant risks to its business, the
Company cannot predict whether, or to what extent, any of such risks may be
realized nor can there be any assurance that the Company has identified all
possible issues which the Company might face.
ITEM 1: BUSINESS
GeoTel Communications Corporation ("GeoTel" or the "Company") is a provider
of Computer Telephony Integration (CTI) software solutions focused on enhanced
voice and data routing technology that enables customer-oriented companies to
deliver responsive and cost-effective customer service. The Company's software
solutions are aimed at decentralized or service-oriented corporations that use
call centers, voice response units, the Internet and other answering resources
to interact with their customers. GeoTel's software solutions, the Intelligent
CallRouter, Network Intelligent CallRouter (Network ICR) and Site ICR, are
designed for companies that utilize call centers to handle high volumes of
inbound customer calls and regard their effective handling of customer
interaction through call center technology as a key competitive advantage. The
Company is focused on open, standards-based software solutions for
enterprise-wide call distribution in a multi-vendor, multi-carrier,
fault-tolerant, distributed environment. GeoTel's call routing solutions have
been deployed by a variety of companies, including American Express, British
Telecom, Capital One, Carlson Wagonlit Travel, Citicorp, Compaq Computer, Delta
Air Lines, Fidelity Investments, First USA, Gateway 2000, J.C. Penney, Matrixx
Marketing, Optus Communications, Pacific Gas & Electric, Sprint Communications,
State Farm Insurance, and US Airways.
INDUSTRY BACKGROUND
Call Center Market
Companies are increasingly recognizing that excellent customer service can
be used as a strategic weapon to differentiate their firms from competitors. In
order to remain competitive, corporations must continually evaluate their
product and service offerings to expand market share, lower costs and meet
customer expectations. To improve service quality, companies have invested in
technologies that enable them to concentrate customer service representatives,
or agents, into groups known as call centers. Many corporations utilize call
centers as the primary method of interacting with their customers. These call
centers are typically deployed in multiple locations and can be utilized to
provide a prioritized level of services for their most valued customers.
Call centers allow businesses to reduce costs and deliver premium customer
service.
While call centers have grown both in size and importance, traditional call
center hardware and software products have been focused on stand-alone
applications rather than the customer interaction requirements of the entire
corporation. This focus on point solutions has led to a fragmented technology
environment for businesses that have multiple call centers, branch offices and
divisions, with call centers evolving as technology "islands" within the
corporation. As a result, corporations have found it difficult to leverage their
customer response resources in a unified fashion whether such resources are
personnel or systems-based. Increasingly, successful organizations are seeking
solutions to address these strategic business requirements through the
implementation of a single, integrated call center enterprise which utilizes all
the relevant resources maintained by the corporation in order to achieve a
unified, controllable
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and adaptable customer service solution. Enterprise-wide utilization of
resources and technology enables the corporation to maximize levels of customer
service while fully utilizing existing investments in telephony, technology and
personnel.
Call Center Technology
The technology utilized by call centers has evolved dramatically over the
past several years. Historically, due to the closed nature of public networks,
corporations installed premises-based switching systems at the end of long
distance or local exchange telephone lines. Reliance on these switching systems
requires corporations to use proprietary closed solutions offered by service
providers where multi-vendor switching system interoperability was not possible.
Consequently, the call center solutions employed by most corporations have been
designed around the technological limits of premises-based switching systems and
the limitations of carrier networks, which prevent corporations from realizing
the potential benefits of virtual call centers. Virtual call centers draw upon
all of the organization's call response resources and utilize open,
systems-based applications to enhance the capabilities of the existing call
center infrastructure by integrating it with existing business applications and
data.
The primary providers of call center solutions are interexchange carriers
(IXCs), including AT&T, MCI and Sprint, and Automatic Call Distributor (ACD)
switching system vendors including Lucent, Nortel and Aspect. Currently, the
major IXCs offer services that can route inbound toll-free calls to more than
one call center, but they have limited visibility as to why the call is being
delivered to that location. These services attempt to distribute calls among
multiple call center locations by relying on percentage allocations based on
historical data or call counting. Since there is no real-time data, these
routing schemes are limited because the system is not aware of what is actually
taking place in the individual call centers. For example, carriers might route
40% of a business' incoming calls to Boston, 30% to Dallas and 30% to Denver
using a set table based on time of day and origin of call. While this solution
is viable as long as each site is staffed accordingly to handle the inflow of
calls, it cannot dynamically adjust to variances in agent availability, call
handling times, and calls from non-network sources. Furthermore, the customer is
unable to benefit from a multi-carrier environment. Many ACD switching system
vendors provide private networking options that allow calls to flow from one
system to another, but these systems consume network bandwidth and still do not
optimize network resources. They are also ineffective in a multi-vendor ACD
environment.
Due to the migration toward open systems by the IXCs, customers are now
able to control connections across interexchange carrier networks based on
resources, customer profiles and other factors as determined by high-end
enterprise-level software applications. ACDs and other customer premises-based
switching systems have also opened control to computer applications. The
evolution of CTI technology allows computer applications to interface with and
control functions of the ACD or Private Branch Exchange (PBX). These
applications are capable of utilizing business data, legacy systems and
client/server systems and integrating them with existing telecommunications
systems.
To date, few organizations have fully realized the potential benefits
offered by virtual call centers due to the lack of enterprise-wide call and data
distribution. In particular, the need for enterprise-wide call and data
distribution must be addressed as a prerequisite for a well-managed
customer-focused call center. Traditional carrier services and ACD products have
limited flexibility and are generally not scaleable to large enterprises. These
solutions do not facilitate enterprise-wide call and data distribution since
they offer only local routing within a stand-alone ACD, and do not enable a
multi-vendor, multi-carrier solution. As a result, the Company believes that the
need exists for flexible, scaleable, customer premises-based and network-based
call processing software that will manage the control of customer-based
switching systems, network routing, call queuing and voice services.
GEOTEL SOLUTIONS
GeoTel products allow companies that utilize call center technology to
deliver cost-effective, premium customer service. These capabilities are
independent of the manufacturer of the ACD, PBX or key system to which they are
attached. GeoTel software also provides interfaces to multiple carrier networks
enabling call routing independent of the toll-free network provider.
GeoTel products extend the value of a corporation's existing call center
resources with enterprise-wide, intelligent call and data processing directed at
organizations that utilize call center technologies to interact with their
customers. The Company's products allow corporations to blend the logic of
carrier networks, ACDs, Interactive Voice Response Units (IVRs), Web servers and
other applications required to provide high-level customer service and customer
contact support. By integrating all call center applications, a corporation can
achieve large group efficiencies, such as utilizing available resources
regardless of location, instead of physically adding resources to a specific
call center. To achieve enterprise-wide call control, GeoTel software tracks all
call answering resources,
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enabling the system to route calls and associated data transactions to the
agent, skill group, IVR or other resource that best satisfies the rules
established by the corporation. The software connects all call center resources
into a hierarchical, networked system, so that an enterprise routing application
can receive the real-time status information required to control customer
transactions throughout the enterprise.
The Company's various software products offer the following advantages:
Virtual Call Center. GeoTel software transforms geographically dispersed
agent groups connected to different ACDs and IVRs into a single virtual team,
reducing the number of agents required for a given service level while offering
a more uniform level of service to all callers. Since labor is a significant
cost for service-oriented corporations, the ability to utilize agent resources
more effectively provides a significant cost savings for the Company's
customers. Essentially, GeoTel software extends local ACD capabilities to the
network level. Sophisticated enterprise-wide call routing routines, such as
those using customer account numbers or Automatic Number Identification (ANI),
can be developed once and deployed at either the network level or in conjunction
with an ACD or IVR at the customer's premises, or both.
Multiple Carrier and Switch Interoperability. The Company's open software
architecture does not require the customer to replace its existing
premises-based equipment, switches or carriers, therefore extending their value
in a "plug-and-play" environment. The Company's customers are also able to
select among AT&T, MCI or Sprint, offering them the ability to leverage new
features and cost saving opportunities from the major 800 providers. In
addition, GeoTel software allows customers to remain vendor independent by
supporting the major ACD switches -- Lucent DEFINITY(R), Aspect CallCenter(R),
Northern Telecom Meridian(TM) anD DMS-100, Rockwell Galaxy(TM) and Spectrum(TM),
and Siemens Rolm 9751 CBX and Siemens HICOM 300E - plus all leading IVR
platforms.
Real-Time Routing. The routing of customer calls is a real-time,
mission-critical application. GeoTel software's Pre-Routing feature is the
application of ACD-like call routing at the network level, before the caller
hears ringing and before the call is sent to a given destination. Unlike any
currently available call routing service offered by carriers, the Pre-Routing
feature can route calls based on real-time knowledge of agent availability and
queue status, not on a fixed percentage or allocation basis. The GeoTel software
recognizes where the call originates, gathers real-time information about the
status of all call centers and agents, and then routes calls based on best
available enterprise-wide capabilities and resources at the moment the call is
received. Post-Routing is the control of calls already connected to an ACD or
PBX, such as the intelligent transfer of calls from IVRs, agent-to-agent
transfers and the overflow of calls between call centers. These capabilities
enable the GeoTel software to route calls on an individual call basis, across
different ACDs and multiple carriers.
Fault Tolerant Open Architecture. GeoTel software products are designed to
be fault tolerant to hardware component failures, communications network
failures, asynchronous software errors and the catastrophic loss of a site. The
Company's technology utilizes an open architecture and is based on industry
standard software, such as Windows NT, SQL Server and InfoMaker. GeoTel products
have been designed to integrate with existing call center applications and
facilitate support of future applications. The Company has defined and published
application programming interfaces for major call center applications such as
workforce management, interactive IVRs and customer databases.
Consolidated Management Reporting. The Company's software enables customers
to manage their distributed call centers with consolidated, real-time and
historical reporting. GeoTel software provides the ability to access and combine
data from multiple databases, allowing the user to source best-of-class
applications for call volume forecasting, agent scheduling, workflow management
and screen-synchronization while maintaining an enterprise-wide view of the
performance of their call centers.
STRATEGY
The Company's primary business objective is to become the leading supplier
of customer-interaction software solutions for mission-critical call center
applications. To achieve this objective, the Company is pursuing the following
strategies:
Extend Technology Leadership. Capitalizing on the Company's experience in
call centers, communications and software technologies, the Company was the
first to deliver a client/server-based application solely focused on
enterprise-wide call distribution. The Company intends to continue to utilize
and integrate industry available technologies whenever appropriate and focus its
development resources on expanding the value-added call processing features
required by its customers. The Company believes it distinguishes itself through
its portfolio of supported ACDs and IVRs, multi-carrier connectivity, product
adaptability to business
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environments, implementation of industry standards, open systems platforms,
scalability and product integration with most call center applications.
Expand Enterprise Call Distribution. GeoTel intends to ensure that its call
distribution technology continues to expand to include all of the answering
resources available within a customer's business environment. These answering
resources include high-end production call centers, IVRs, the Internet, e-mail,
network resources and desktop applications. In August 1997, GeoTel introduced a
new software product, GeoTel Enterprise CTI, which provides an interface between
GeoTel software and desktop or server applications to seamlessly deliver
enterprise-wide call-event and customer-profile information to an agent's
desktop, enabling full utilization of corporate data in support of business
rules and objectives at the point of customer transaction fulfillment. GeoTel
software products have been implemented in systems supporting as few as 200 to
more than 10,000 call center agents.
Leverage Open Architecture. The Company continues to develop interfaces to
both existing and emerging call center technologies provided by the vendors of
market-leading technologies. The Company intends to provide its customers with
the ability to protect their investment in current call center solutions, while
providing value-added services and functionalities; beyond their existing
infrastructure. This will be accomplished by adhering to open industry standard
interfaces of other vendor products and publishing interfaces to the Company's
call routing software platform for products and services such as ACDs, carrier
networks, interactive IVRs, Web servers and customer databases.
Utilize Multiple Distribution Channels. The Company has established a
multi-channel distribution system to more cost-effectively address the potential
market for its products. To date, the Company has generated the majority of its
revenues through its direct sales force which maintains frequent customer
contacts and knowledge of customer applications. The Company's direct sales
force is complemented by strategic sales channels, including relationships with
Lucent, Hewlett-Packard, Sprint and MCI, selected resellers and international
partners. The Company intends to expand both direct and indirect distribution
channels and to penetrate international markets by expanding its relationships
with the market leaders of network services on a country-by-country basis.
Ensure Customer Success. GeoTel believes that superior customer service,
support and training are essential for customer satisfaction and are key to
differentiating its overall product offering. The Company offers installation
services and maintains a professional services organization to assist customers
in designing and deploying call routing applications and also provides training
for end-users and distribution partners. GeoTel intends to expand its own
customer service, support and training activities, as well as to encourage
third-party organizations, such as international partners, to become proficient
in deploying the Company's products.
PRODUCT LINES
The Company's CTI solutions are available in three configurations composed
of various bundled packages of the Company's individual software products.
Intelligent CallRouter
The GeoTel Intelligent CallRouter is an advanced call-by-call routing server
that supports multiple call routing clients independent of their location, ACD,
IXC or IVR. The multi-carrier, multi-vendor capabilities of the Intelligent
CallRouter allow the user to focus on delivering premium customer service
without the limitations of proprietary or custom-developed solutions. The
Intelligent CallRouter combines real-time call routing capabilities with an
extensive management reporting system. The Intelligent CallRouter is an open
systems product that has been deployed on industry-standard platforms. The
Company designed the system to support a broad range of intelligent
telecommunications interfaces, industry standard MIS tools, computer platforms
and a growing number of vertical market applications. The Intelligent CallRouter
uses Windows NT as the core multitasking operating environment. Windows NT
allows customers to select from a variety of hardware platforms certified by the
Company on which to deploy the Intelligent CallRouter application. The
Intelligent CallRouter open architecture enables interoperability with other
call processing and call volume management systems within an enterprise and
provides a means for integrating those various stand-alone solutions. The
Intelligent CallRouter can be interfaced to agent scheduling, workflow
management and other call center management tools. The distributed software
fault tolerance implemented in the Intelligent CallRouter provides the
mission-critical reliability required for enterprise-wide call distribution.
The principal function of the Intelligent CallRouter is to route telephone
calls among geographically distributed call centers in a way that optimizes the
use of resources across all call centers or other answering locations. In order
to perform these functions, the
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Intelligent CallRouter utilizes network-based information on the origin of the
call and information provided by the caller to match the caller with the skills
of the available answering resources. The primary components of the Intelligent
CallRouter are a central routing controller (the CallRouter), a database (the
Database Server), and a user interface (the Admin Workstation).
The core of the Intelligent CallRouter is a suite of software processes
called the CallRouter that provides the central intelligence by which customers
translate business goals into call routing decisions. The CallRouter receives
and responds to routing requests from the routing clients (Network Interface
Controllers and Peripheral Gateways), collects call center event activity from
the Peripheral Gateways and communicates with users through desktop Admin
Workstations.
GeoTel's database technology reduces the performance constraints normally
associated with ACD and network data aggregation. Operating in conjunction with
the CallRouter, the Intelligent CallRouter's Database Server stores and manages
historical information, including Pre-Routing(R) and Post-Routing(R) records,
routing scripts, and Intelligent CallRouter configuration data. The Intelligent
CallRouter Database Server is a relational database that can collect and process
large amounts of call and transaction data, including call handling, planning
and performance data. The database utilized by the Intelligent CallRouter is
Microsoft SQL Server for Windows NT.
The Administrative Workstation, the user interface into the Intelligent
CallRouter, enables system managers, administrators and supervisors to define,
modify or view call routing scripts; manage the system configuration; monitor
call center performance; define and request reports; and ensure system security.
Tools are designed to interact with company personnel in an intuitive manner,
using familiar terminology and simple "point and click" commands.
Network Intelligent CallRouter
In January 1997, the Company introduced the Network ICR to the worldwide
network carrier marketplace. This product, which functions as a Service Control
Point (SCP) or as an intelligent adjunct to an SCP, enables a carrier to embed
the Intelligent CallRouter functionality and components described above in its
network and make those capabilities available to its customers on a
network-service basis. With the Network ICR deployed, a carrier network monitors
the real-time availability and performance of its individual customers'
answering resources and utilizes that information to control the distribution of
calls across the customer's enterprise. At the same time, each customer can
implement unique call distribution logic through routing scripts developed at
the premises level.
The Network ICR is a flexible, broad-based solution designed to meet the
individual requirements of each call center customer. The product supports a
service continuum that includes any combination of the following capabilities:
enhanced toll-free services (time-of-day, day-of-week, percent allocation, call
distribution algorithms, and workforce-based call distribution); database lookup
routing (triggers to internal or external databases for basic translation,
dealer locator, call origination, and customer-profile-based routing);
Pre-Routing (dynamic, event-based, virtual - call center call routing and
reporting); Post-Routing (extending network control to the site level through
third-party call control over customer-premises equipment); network IVR
integration (routing based on caller-entered digits collected in response to
Network IVR prompting); network CTI (extending the value of network services
through integration with customer screen-pop applications); basic/direct
translations: number translation and Virtual Private Network (VPN) services.
To provide the mission-critical reliability needed for routing customer
calls, the Network ICR is fully redundant and fault tolerant across all its
components. In addition, the system uses international network protocol
standards and complies with each NSP's certification standards.
Site ICR
In February 1998, the Company introduced Site ICR which is a specific
bundled configuration of GeoTel (R) software products designed to meet the needs
of single-site call centers. Specifically, Site ICR offers call routing;
database lookup; consolidated real-time and historical reporting; full IVR
integration; and a CTI Server for data delivery to the desktop plus third-party
call control. This multi-purpose platform also enables Internet, e-mail and
predictive dialer applications. If a customer's operation expands to multiple
locations, Site ICR's underlying architecture readily scales to support
enterprise-wide CTI, Pre-Routing(R) and Post-Routing(R) while protecting an
initial investment. Fully fault tolerant, this GeoTel product provides the
mission-critical reliability required for the routing of customer calls. In
addition, Site ICR's open interface design permits rapid, non-intrusive
deployment.
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INDIVIDUAL SOFTWARE PRODUCTS
The following individual software products are either included in one or
more of the above configurations or can be licensed separately as an add-on to
the primary software product.
Network Interface Controller (NIC). The NIC is the software interface
between the Intelligent CallRouter and the IXC network. It communicates with the
IXC network through the intelligent network control interfaces that have been
made available by the carriers. The NIC receives call routing requests from the
network, forwards them to the CallRouter, and returns responses to the carrier
network. In effect, the NIC transforms the network into a routing client. This
approach allows customers to control routing decisions at the network level and
gain greater flexibility as they seek to further deploy advanced intelligent
network services.
Peripheral Gateway (PG). The PG software provides the interface between the
CallRouter and the call center system (ACD, PBX, or IVR) that is being monitored
and/or controlled by the Intelligent CallRouter. The PG connects to the CTI link
and/or MIS link and obtains information regarding agent availability, agent
performance, the number of calls in progress, and how they are being handled. To
facilitate Post-Routing(R), the PG can also exert control over the ACD, PBX or
IVR and instruct it where to route calls.
GeoTel Enterprise CTI. GeoTel Enterprise CTI provides an interface between
the Intelligent CallRouter and desktop or server applications to seamlessly
deliver enterprise-wide call-event and customer-profile information collected by
the Intelligent CallRouter from multiple networks, ACDs, IVRs and workstations
to an agent's desktop. Data elements can include dialed number, calling line ID
and caller-enter digits, as well as information extracted from external
databases or created as a result of call routing, voice processing and agent
transactions. Voice and data collected by an agent at the desktop can be
transferred between agents across multi-vendor switches, allowing customer and
transaction data to accompany a call from IVR to agent and from site to site as
required, increasing the efficiency of a virtual call center workforce by
reducing or eliminating time spent verbally soliciting information that is
already available. This CTI strategy enables the full utilization of corporate
data in support of business rules and objectives at the point of customer
transaction fulfillment.
GeoTel Enterprise IVR . GeoTel Enterprise IVR enables IVRs from multiple
vendors to communicate directly with the Intelligent CallRouter, leveraging
these devices in both the Pre-Routing and Post-Routing of calls. This direct,
two-way communication also allows the Intelligent CallRouter to manage IVR port
utilization and to include IVR data in comprehensive call center performance
reports. GeoTel Enterprise IVR offers caller identification and segmentation,
support for skills-based routing, IVR load balancing, and delivery of IVR data
to answering resources across the enterprise. The product enables the
Intelligent CallRouter to interact with multi-vendor IVRs by sending and
receiving industry-standard messages. Intelligent CallRouter users can
strategically position premises-based IVRs either behind or in front of the ACD,
and/or utilize network-based IVR capabilities. Regardless of location, the IVR
can initiate and complete call redirection without a PBX/ACD, enhancing call
delivery and customer satisfaction while reducing CPU and trunk utilization on
the ACD. Moreover, users can individually program their IVRs to receive
customized benefits from the interface and ensure that results meet business
objectives.
GeoTel[bullet]Gateway. GeoTel[bullet]Gateway extends the sources of information
on which call routing decisions can be based. For example, the product enabled
the Intelligent CallRouter to perform a customer database lookup during
Pre-Routing(R) to more effectively determine the optimum destination for each
call. Using a database- and application-independent interface to the Intelligent
CallRouter, values are passed between a routing script and the external database
via a custom application, giving the Intelligent CallRouter access to caller
information without compromising database security.
Software license fees for the Company's products vary significantly based on
a number of factors, including the functionality of the system, the number of
sites, the number of agents at each site and the level of redundancy required.
The customer list price for software license fees for the Intelligent CallRouter
software typically range from approximately $420,000 for a three site
configuration with some redundancy to approximately $1,000,000 for an eight site
configuration with extensive redundancy. Pricing for the Network ICR averages
approximately $2,000,000 to $3,000,000 per network service provider. Site ICR is
priced at $180,000 per call center site. The Company typically provides
discounts based on volume purchases. The Company and its customers generally
enter into maintenance agreements providing for ongoing service and product
upgrades for a fixed annual fee. Maintenance services and installation services,
which are not included in the license fee, amount to an additional 15% and 10%,
respectively, of the list price license fee. Maintenance contracts are renewable
on an annual basis.
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TECHNOLOGY
The Company has developed a number of innovative technologies to support its
open strategy:
Real-Time Routing. The Intelligent CallRouter's real-time delivery of
enterprise-wide call center data makes use of innovative Local and Wide Area
Network (LAN/WAN) solutions to efficiently distribute information and facilitate
connectivity. A mixed LAN/WAN environment is supplemented by dial capabilities
for both casual access of data from remote premises as well as alarm
notification and paging. All clients are configured with redundant data paths to
central services for both configuring and monitoring the enterprise. The system
is designed to run on single or multiple Windows NT server-class machines.
Interprocess communication is efficient based on native capabilities within
Windows NT integrated with the Company's processes. The architecture can scale
to support very large numbers of customers, call centers, ACDs, IVRs, Web
servers, agents, and other resources.
Fault Tolerance. To meet rigorous requirements for system reliability in the
call processing market, the Company has developed innovative industry standard
fault tolerant software solutions to provide not only tolerance of hardware,
software and communications failures, but also for the loss of an entire site.
The Company's software technology relating to virtual time synchronization
provides fault tolerance at the process level and includes protection against
single-point hardware failures. Detection of failures is immediate and the
Company has augmented standard TCP/IP protocols with features designed to
minimize outages due to communications failures.
Remote Support and Diagnostics Technology. The Intelligent CallRouter
incorporates extensive system management capabilities, including alarming with
automatic "phone home" and paging capabilities; symmetric database replication;
intelligent PC Server node management; and tools to provide graphical
representations of system status. Consistent with an open architecture, the
system will export Simple Network Management Protocol (SNMP) "traps" to
management systems. Fully redundant communications paths are enhanced with
real-time detection of communications failures with near instantaneous
switch-over to redundant links.
Carrier Connectivity. The Intelligent CallRouter meets the certification
standards of all three of the major U.S. interexchange carrier (IXC) networks,
AT&T, MCI and Sprint, by interfacing with the SS7, UDP/IP, and X.25 networks,
respectively, using the proprietary protocols of each carrier. The Intelligent
CallRouter architecture is designed to support the introduction of other network
interfaces as the Telecommunications Act of 1996 enables the entry of other
providers into the toll-free marketplace. Internationally, the Network ICR
interfaces with the British Telecom and Optus Communications networks via their
respective protocols. The Company is also developing interfaces for additional
international carriers.
Premises-based Switching/Call Processing Interfaces. The Company has
developed event-based interfaces to all of the major ACDs. The Intelligent
CallRouter currently supports eight switches: Lucent DEFINITY, Aspect
CallCenter, NTI Meridian, NTI DMS-100, Rockwell Galaxy, Rockwell Spectrum,
Siemens Rolm 9751 CBX and Siemens HICOM 300E. By developing event-based tracking
of the ACDs (detecting when any event of interest happens at the ACD), the
Intelligent CallRouter has the capability to report accurate enterprise-wide
statistics and know accurately which agents are available and skilled to handle
incoming calls. The Intelligent CallRouter can also control, via Post-Routing,
how calls directed to or from the switch are subsequently routed and has the
ability to deliver CTI information. By designing the Intelligent CallRouter to
have the capability to interface to all ACDs, PBXs, IVRs, and other
premises-based equipment, the Intelligent CallRouter enables customers to
utilize equipment from multiple vendors allowing effective use of a multi-vendor
switching environment. In contrast, proprietary solutions require all switches
to be purchased from the same vendor.
Visual Script Editor. The Intelligent CallRouter uses visual/object-based
call routing scripts controlled and defined by the customer. The Visual Script
Editor is used to describe how calls are to be routed on a call-by-call basis.
Each dialed number can have a unique treatment or can be handled with a
collection of other dialed numbers. Many scripting objects are defined to assist
the script designer in choosing an appropriate algorithm. The Database Lookup
and Application Gateway objects enable the Script editor to import, in
real-time, external database information or arbitrary data that can be used in
subsequent script objects.
SALES AND MARKETING
The Company's distribution strategy is to sell its Intelligent CallRouter
and Site ICR software solutions and services to major corporations who are
significant users of inbound toll-free services. The Company sells its Network
ICR software solution and services to IXC's, providing them with the ability to
place the Network ICR within their long-distance network. This allows the IXC
8
<PAGE> 9
to resell the call routing capabilities of the Network ICR to their customers as
a value-added service. The Company uses a direct sales force in North America
and Europe as its primary distribution channel to market to these companies.
There are currently nineteen direct sales representatives located in eleven
offices in the U.S and one office in Canada. Each sales representative carries a
quota for a defined geographic territory and is compensated for all sales within
the territory. The Company's sales strategy is based on a consultative sales
process, working closely with customers to understand and define their needs and
determine how they can be addressed by the Company's products. This strategy
continues after the initial sale. The Company, through ongoing sales, support,
training, and maintenance, maintains close contact with its existing customers
in order to determine the customers' evolving requirements for updates and
enhancements.
In addition to the direct sales organization, the Company has signed
agreements with AT&T, Hewlett Packard, Lucent Technologies, Sprint, MCI and
Optus to complement direct sales and provide international distribution. These
arrangements range from co-marketing agreements with AT&T and Sprint, to
distribution agreements with Hewlett Packard, Lucent Technologies and Optus. MCI
has signed a three-year renewable agreement with the Company to offer its
products as a service to customers on a worldwide basis. Optus is a distributor
of the Company's products in the Australian and New Zealand markets. Lucent
Technologies is a distributor of the Company's products on a world wide basis.
Hewlett Packard is a distributor of the Company's products on a world-wide basis
with the exception of the Company's Network ICR products which it does not have
the right to distribute in the United States. To complement its North American
and European sales strategy, the Company intends to develop sales channels for
its products in additional international markets. The Company plans to address
additional international markets by using its direct sales force and expects to
add several other distribution partners.
The Company supports its distribution strategy with a variety of focused
marketing activities designed to identify qualified prospects and expand the
Company's reputation. The Company attends several industry trade shows, conducts
numerous informational seminars in different cities, regularly speaks at
industry events, publishes articles and white papers, and uses direct mail. In
addition, the telecommunications marketplace is heavily influenced by reference
accounts and, as such, the Company is dependent upon its existing customers for
favorable references.
As part of its marketing and product strategy, the Company cultivates
relationships with the major ACD/PBX vendors and IVR vendors, as well as the
IXC's. Equipment from each of the ACD/PBX vendors is maintained at the Company's
facilities and technical discussions are ongoing to ensure tight integration
with the various switches. The Company intends to continue to expand the range
and number of products it supports based on customer requests and market
opportunities.
The Company currently derives substantially all of its revenues from
licenses of the Intelligent CallRouter and Network ICR and related services. A
significant portion of the Company's revenues to date has been derived from a
limited number of customers. DEC and Optus accounted for approximately 19% and
14%, respectively, of the Company's total revenues in 1997, and Fidelity and
Optus accounted for approximately 14% and 11%, respectively, of the Company's
total revenues in 1996. International sales represented 33.5% and 15.3% of
revenues in 1997 and 1996, respectively. More information regarding the
Company's revenues is included under the heading "Risk Factors That May Affect
Future Results," and Footnote I in Item 8 under "Notes to Consolidated Financial
Statements."
CUSTOMER SERVICE AND SUPPORT
The Company believes that high quality customer service and support are
integral components of the solutions it offers. The Company's customer service
and support organization provides customers with technical support, training,
consulting and implementation/installation services. The Company believes that
in order to meet its customers' support expectations it must invest in and
leverage technology to build its service infrastructure. As of December 31,
1997, the Company had 41 employees in its customer service and support
organization. All of the Company's customers currently have software maintenance
agreements with the Company that provide for one or more of the following
services:
Software Maintenance and Support. The Company's support organization offers
a variety of support services to its customers including telephone, electronic
mail and facsimile customer support through its support services staff. In
addition, the product provides a "call home" application which allows customers
to request service on-line. Initial product license fees do not cover software
maintenance. Through its standard customer support package, the Company provides
its customers with continuous, 7 day, 24 hour-per-day basic telephone support
and 24-hour monitoring and quick response through use of the Company's remote
support technology. The office staffing hours for support are Monday through
Friday, 8:30 a.m. to 6:30 p.m. (EST), excluding Company
9
<PAGE> 10
holidays. Coverage is provided after normal business hours by one or more
Company representatives who are available via the Company's answering service
and/or pager and have remote access to computer systems to assist in resolution
of reported problems. Periodic product updates and maintenance releases are
included with the annual support fees for the Company's standard support
package, which is 15% of the then-current list price of the licensed products.
Documentation and Training. The Company provides each customer with product
design, documentation and training. The product includes an easy-to-use
graphical user applications interface with on-line help. A complete library of
end-user documentation is also provided with each system. The Company offers
comprehensive training courses in all aspects of the product at its facility in
Lowell, Massachusetts, and at the customer's option, provides on-site customer
training. Fees for education and training services, beyond those services
provided as a part of installation services, are in addition to and separate
from the license fees charged for the Company's software products and are
charged per student, per class or on a time and materials basis.
Professional Services. The Company's application consultants are available
to work closely with customers to provide assistance concerning application
design and report customization. Fees for consulting services are charged
separately from the Company's software products on a time and materials basis.
In addition, the Company intends to continue to develop relationships with
third-party consulting organizations in order to support its customer base.
Installation Services. The Company provides customers with comprehensive
installation services, including initial application design, implementation
planning, system design support, project management, initial education and
training, and coordination of third-party software and hardware acquisition. The
Company's fee for installation services is charged separately from the Company's
licensing fees and is based on a percentage of the then-current list price of
the products being installed. Fees for the Company's standard installation
services are typically 10% of the then-current list price of the licensed
products.
PRODUCT DEVELOPMENT
Since its inception, the Company has made substantial investments in product
development. The Company's development organization was built upon a base of
software professionals with extensive experience in operating systems,
communications, fault tolerance, and software quality processes. Customer
experience and direct input into the product planning process is reflected in
all products designed and delivered by the Company.
The Company announced the Intelligent CallRouter in August 1994 and began
customer shipments in May 1995. In January 1997, the Company announced the
Network ICR followed in August 1997 by Enterprise CTI. In addition to these new
products, during 1997 the Company released new versions of its products. The
Company plans to introduce enhancements to its existing products and new
products that can be sold to existing and new customers. The Company is
currently working on several projects that will be designed to enhance its
products in the areas of desktop integration, computer telephony integration,
and the use of the Internet and Intranets. The Company also places significant
emphasis on enhancing its products to work in international markets.
The Company intends to expand its existing product offerings and introduce
new products for the call processing software market. Although the Company
expects that most of its new products will be developed internally, the Company
may, based on timing and cost considerations, acquire technology and products
from third parties and evaluate third-party applications for inclusion within
its products on an ongoing basis. The Company believes that its future
performance will depend, in large part, on its ability to maintain and enhance
its current product line, develop new products that achieve market acceptance,
maintain technological competitiveness, meet an expanding range of customer
requirements and continue to recruit highly-skilled and qualified software
professionals.
As of December 31, 1997, the Company's product development, quality
assurance and technical writing staff consisted of 40 employees. The Company's
total expenses for research and development for 1997, 1996 and 1995 were
$4,023,000, $3,086,000 and $2,322,000, respectively which represented 21.6%,
34.1% and 151.4% of revenues, respectively. The Company anticipates that it will
continue to commit substantial resources to research and development in the
future and that product development expenses may increase in absolute dollars in
future periods.
COMPETITION
The market for telecommunications software products is intensely competitive
and is subject to rapid technological change. Although to date the Company has
experienced limited competition, the Company expects competition to increase
significantly in the
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<PAGE> 11
future. Currently, the Company's principal competitors are the interexchange
carriers, particularly AT&T, and to a lesser extent MCI and Sprint, which
provide proprietary call routing solutions as part of their service offerings.
In addition, a number of other companies have products that could be competitive
with the Company's products, including Genesys Telecommunications Laboratories,
IBM and IEX Corporation. Additional competitors, including traditional ACD
providers, such as Lucent Technologies, Aspect Telecommunications Corporation,
Northern Telecommunications, Inc. and Rockwell International Corporation, may
enter the market by enhancing their proprietary private network solutions or by
entering into arrangements with the interexchange carriers. The Company believes
that, to date, approximately one-half of the Company's customers have purchased
the Company's products to replace or enhance existing call routing solutions
offered by the interexchange carriers. The Company's other customers have
purchased the Company's products in order to implement a virtual call center
solution for the first time. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
materially adversely affect the Company's business, operating results and
financial condition. Some of the Company's current, and many of the Company's
potential, competitors have significantly greater financial, technical,
marketing and other resources than the Company. As a result, they may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products than the Company. In addition, one or more interexchange
carriers, including MCI, Optus and Sprint, which are customers of the Company,
could choose to provide or distribute competitive products and services.
Accordingly, there can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, operating results and financial condition. Moreover, the Company may
be subject to potential conflicts of interest from time to time if a customer,
such as IBM, MCI, Optus or Sprint, provides or distributes competitive products
or services. In this regard, a customer which elects to provide or distribute
competitive products or services could make strategic decisions with respect to
pricing and other matters relating to products provided or distributed by it
which could adversely affect the Company's business, operating results and
financial condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies primarily on a combination of patent, copyright,
trademark and trade secrets laws, as well as confidentiality agreements to
protect its proprietary rights. The Company has been issued one patent relating
to the architecture, operating methodologies and interfaces of the Company's
Intelligent CallRouter. The Company also has one patent application pending in
the United States and internationally. While the Company believes that its
pending patent application relates to a patentable invention, there can be no
assurance that such patent application or any future patent application will be
granted or that any patent relied upon by the Company will not be challenged,
invalidated or circumvented, or that rights granted thereunder will provide
competitive advantages to the Company. Moreover, despite the Company's efforts
to protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain the use of information that the
Company regards as proprietary. In addition, the laws of some foreign countries
do not protect the Company's proprietary rights to as great an extent as do the
laws of the United States. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology.
The Company is not aware that any of its products infringes the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not claim infringement by the Company with respect to current or future
products. The Company expects that software product developers will increasingly
be subject to infringement claims as the number of products and competitors in
the Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company, if at all, which could have a material adverse effect
upon the Company's business, operating results and financial condition.
The software and network adapter necessary to enable the Company's
Intelligent CallRouter to interface with the AT&T network is licensed by the
Company from a single vendor under a perpetual, fully-paid license. Although the
Company has access to the source code underlying this software and 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.
Intelligent CallRouter, Pre-Routing(R) and Post-Routing(R) are registered
trademarks of the Company and GeoTel is a trademark of the Company. All other
trademarks and trade names referred to in this Annual Report are the property of
their respective owners.
11
<PAGE> 12
EMPLOYEES
As of December 31, 1997, the Company had a total of 132 employees, 130 of
which are based in the United States. Of the total, 40 were in research and
development, 41 were in support and support services, 38 were in sales and
marketing and 13 were in administration and finance. The Company's future
performance depends in significant part upon the continued service of its key
technical, sales and marketing, and senior management personnel and its
continuing ability to attract and retain highly qualified technical, sales and
marketing, and managerial personnel. Competition for such personnel is intense
and there can be no assurance that the Company will be successful in attracting
or retaining such personnel in the future. None of the Company's employees are
represented by a labor union or are subject to a collective bargaining
agreement. The Company has not experienced any work stoppages and considers its
relations with its employees to be good.
The Company has adopted policies with regard to the issuance of stock
options and payment of cash bonuses in years in which the Company has met or
exceeded its internal performance goals. These policies are designed to minimize
turnover and align company and employee goals, although there can be no
assurance that such policies will be successful.
ITEM 2: PROPERTIES
The Company's executive office is located in Lowell, Massachusetts in a
facility consisting of 51,105 square feet, under a sublease which expires in
December 2006. This sublease provides for an additional 15,885 square feet on
January 1, 1999. The Company has the right, with proper notice, to terminate
this sublease at the end of the sixth year (2003) of the sublease. In addition,
the Company leases office space in the metropolitan areas of Atlanta, Chicago,
Dallas, Philadelphia, Phoenix, San Francisco, Washington, D.C. and Ontario,
Canada. Management believes that its current office facilities will meet its
needs for the next twelve months.
ITEM 3: LEGAL PROCEEDINGS
On January 31, 1997 the Company filed suit for patent infringement against
Genesys Telecommunications Laboratories, Inc. ("Genesys"), of San Francisco,
California, in the U.S. District Court for the District of Massachusetts. In the
action, the Company, owner of U.S. Patent No. 5,546,452, alleges that certain of
Genesys' products infringe the Company's patent. The Company is seeking damages
and injunctive relief. Genesys denies infringement, and claims that the
Company's patent is invalid. The suit is in the early stages of discovery.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company became subject to the reporting requirements of the Securities
Exchange Act of 1934 on November 20, 1996. There were no matters submitted to a
vote of the Company's shareholders during the fourth quarter of the fiscal year
ended December 31, 1997.
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market under the Symbol: "GEOC". The following table sets forth the
range of high and low bid prices, on a quarterly basis, for the Company's common
stock since the Company's public offering in November 1996 as reported by the
Nasdaq Stock Market.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------- --------------------
HIGH LOW HIGH LOW
------- ------- --------- -------
<S> <C> <C> <C> <C>
First Quarter ...................................... $ 19.125 $ 10.75
Second Quarter ..................................... $ 14.75 $ 9.50
Third Quarter ...................................... $ 20.0625 $ 12.50
Fourth Quarter (Public offering November 20, 1996).. $ 18.125 $ 12.00 $ 20.625 $ 13.50
</TABLE>
The Company has not declared or paid cash dividends on its common stock and
does not plan to pay cash dividends to its shareholders in the near future. The
Company presently intends to retain its earnings to finance further growth of
its business. As of March 23, 1998, the Company's common stock was held by
approximately 326 shareholders of record. This does not reflect persons or
entities who hold their stock in nominee or street name accounts through various
brokerage firms. The Company estimates that there are over 2,500 shareholders
who hold their stock in nominee or street name accounts.
CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 20, 1996, the Company's Registration Statement of Form S-1 (File
No. 333-13263) became effective. The net proceeds from the offering were
approximately $26,704,000. To date, the Company has utilized approximately
$756,000 of the proceeds to repay borrowings under its outstanding equipment
lines of credit. The Company has not used any of the remaining proceeds from the
effective date (November 20, 1996) through December 31, 1997. No payments were
made to directors, officers (except in their capacity as employees of the
Company) or to persons owning ten percent or more of any class of equity
securities of the Company, or to the affiliates of the Company.
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<PAGE> 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations" and the Consolidated Financial Statements and the Notes
thereto appearing elsewhere in this report.
<TABLE>
<CAPTION>
INCEPTION
(JUNE 4, 1993)
YEAR ENDED DECEMBER 31, THROUGH
---------------------------------------------- DECEMBER 31,
1997 1996 1995 1994 1993
----------- ----------- -------- ------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license .................... $ 14,651 $ 7,880 $ 1,360
Services and other .................. 3,960 1,167 174
----------- ----------- --------
Total revenues ...................... 18,611 9,047 1,534
Cost of Revenues:
Cost of software license ............ 514 297 264
Cost of services and other .......... 3,070 1,414 611
----------- ----------- --------
Total cost of revenues .............. 3,584 1,711 875
----------- ----------- --------
Gross profit ............................. 15,027 7,336 659
----------- ----------- --------
Operating Expenses:
Research and development ............ 4,023 3,086 2,322 $ 1,879 $ 140
Sales and marketing ................. 5,632 2,760 1,476 570 --
General and administrative .......... 1,916 1,052 887 641 261
----------- ----------- -------- -------- -----
Total operating costs ............... 11,571 6,898 4,685 3,090 401
----------- ----------- -------- -------- -----
Income (loss) from operations ............ 3,456 438 (4,026) (3,090) (401)
Interest income, net ..................... 1,969 316 164 124 24
----------- ----------- -------- -------- -----
Income (loss) before income tax benefit... 5,425 754 (3,862) (2,966) (377)
Income tax benefit ....................... 828 -- -- -- --
----------- ----------- -------- -------- -----
Net income (loss) ........................ 6,253 754 (3,862) (2,966) (377)
Accretion of convertible preferred stock
to redemption value .................... -- (97) (77) (35) (4)
----------- ----------- -------- -------- -----
Net income (loss) available
(attributable) to common
stockholders ........................... $ 6,253 $ 657 $ (3,939) $ (3,001) $(381)
=========== =========== ======== ======== =====
Net income (loss) per share available
(attributable) to common stockholders:
Basic ............................... $ 0.48 $ 0.18 $ (5.57) $ (9.61) N/A*
=========== =========== ======== ======== =====
Diluted ............................. $ 0.45 $ 0.06 $ (5.57) $ (9.61) N/A*
=========== =========== ======== ======== =====
Weighted average number of common and
common equivalent shares:
Basic shares ........................ 13,113,074 3,555,318 707,140 312,429 N/A*
=========== =========== ======== ======== =====
Diluted shares ...................... 13,830,984 11,134,288 707,140 312,429 N/A*
=========== =========== ======== ======== =====
</TABLE>
* The only common stock outstanding during this period was restricted common
stock which all were subject to repurchase by the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .......... $40,428 $33,263 $ 4,537 $ 3,793 $ 451
Working capital .................... 36,177 31,421 4,292 4,249 2,841
Total assets ....................... 50,273 36,924 6,449 5,483 3,020
Long-term debt, less current portion -- -- 408 338 --
Convertible preferred stock ........ -- -- 11,986 7,937 3,267
Total stockholders' equity (deficit) $39,926 $32,437 $(7,312) $(3,357) $ (370)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated in June 1993 to develop telecommunications
software solutions that enable enhanced call center applications. From inception
through the first half of 1995, the Company was engaged principally in research
and product development of its Intelligent CallRouter product. The Company's
first customer installation of the Intelligent CallRouter occurred in May 1995
and the Company recognized its first revenue from customer shipments in the
fourth quarter of 1995. The Company
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<PAGE> 15
initially achieved profitability in the first quarter of 1996. Unit shipments
have grown due to increasing market acceptance of the Company's product and
increases in the size of the Company's direct sales force. The Company expects
that the Intelligent CallRouter and Network ICR products and related services
will account for substantially all of its revenue for the foreseeable future.
The Company believes that its future performance will depend in large part on
its ability to maintain and enhance its current Intelligent CallRouter product
line, develop new products that achieve market acceptance, maintain
technological competitiveness, meet an expanding range of customer requirements
and continue to recruit highly skilled and qualified software professionals. The
Company primarily markets its products in the United States through a direct
sales force which is complemented by strategic sales channels, selected
resellers and international partners.
The Company's revenue is derived from three sources: software licenses,
services and customized software development contracts. Software license
revenue, which has historically represented the majority of the Company's total
revenue, is generally payable within thirty days of product acceptance. The
Company recognizes software license fee revenues generally upon shipment unless
there are significant post-delivery obligations or collection is not reasonably
assured. When significant post-delivery obligations exist, typically customer
acceptance criteria, revenues are deferred until such obligations have been
satisfied. The Company recognizes revenue on customized software development
contracts based on reaching specified milestones under the terms of the
respective agreements. Service revenues consist primarily of maintenance,
installation, consulting and training revenues. Maintenance revenues are
recognized ratably over the term of the support period, which is typically
twelve months. Installation, consulting and training revenues are recognized
when the services are performed.
A significant portion of the Company's revenues to date has been derived
from a limited number of customers. Revenues attributable to the Company's five
largest customers accounted for approximately 54.1%, 49.1% and 94.4% of the
Company's total revenues in 1997, 1996 and 1995, respectively. The Company had
two customers in 1997 and 1996 and three customers in 1995 that individually
accounted for over 10% of the Company's total annual revenues in those years.
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.
Export sales to Australia and the United Kingdom were 14% and 19%,
respectively in 1997 and 11% and 4%, respectively in 1996. No export sales
occurred in 1995.
The Company's future results are subject to substantial risks and
uncertainties. The Company has experienced substantial revenue growth since
product introduction in 1995 and first achieved profitability in the first
quarter of 1996. 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 and 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 Intelligent CallRouter
and Network ICR products 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 Intelligent CallRouter 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's annual operating results may vary significantly in the future
depending on factors such as increased competition from the interexchange
carriers or 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, the lengthy sales cycle of the Company's products, 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.
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<PAGE> 16
OPERATING RESULTS
The following table sets forth certain consolidated financial information
for the years ended December 31, 1997 and 1996 (the first two full years the
Company has recognized revenue) in dollars and as a percentage of revenues. The
Company has not included financial information for any years prior to the year
ended December 31, 1996 as the Company was primarily a development stage
enterprise and expenses in those years related primarily to the research and
development of the Company's products and initial marketing efforts.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1997 1996
-------- --------- --------- --------
(DOLLARS IN THOUSANDS) (PERCENTAGE OF REVENUES)
<S> <C> <C> <C> <C>
Revenues:
Software license................... $ 14,651 $ 7,880 78.7% 87.1%
Services and other................. 3,960 1,167 21.3 12.9
-------- --------- --------- --------
Total revenues..................... 18,611 9,047 100.0 100.0
-------- --------- --------- --------
Cost of Revenues:
Cost of software license........... 514 297 2.8 3.3
Cost of services and other......... 3,070 1,414 16.5 15.6
-------- --------- --------- --------
Total cost of revenues............. 3,584 1,711 19.3 18.9
-------- --------- --------- --------
Gross Profit............................ 15,027 7,336 80.7 81.1
-------- --------- --------- --------
Operating Expenses:
Research and development........... 4,023 3,086 21.6 34.1
Sales and marketing................ 5,632 2,760 30.2 30.5
General and administrative......... 1,916 1,052 10.3 11.7
-------- --------- --------- --------
Total operating costs.............. 11,571 6,898 62.1 76.3
-------- --------- --------- --------
Income from operations.................. 3,456 438 18.6 4.8
Interest income, net.................... 1,969 316 10.6 3.5
-------- --------- --------- --------
Income before income tax benefit 5,425 754 29.2 8.3
Income tax benefit...................... 828 -- 4.4 --
-------- --------- --------- --------
Net income.............................. $ 6,253 $ 754 33.6% 8.3%
======== ========= ========= ========
</TABLE>
REVENUES
Revenues consist of software license fees and services. The Company recorded
no revenues until the fourth quarter of 1995. Revenues increased 105.7% to
$18,611,000 in 1997 from $9,047,000 in 1996. Software license revenue during
these periods increased 85.9% to $14,651,000 in 1997 from $7,880,000 in 1996.
The Company believes that the increase in license revenue is attributable to
several factors including revenue recognized under an international software
licensing agreement with Digital Equipment Co., Ltd. (the "DEC Agreement");
continued market acceptance of the Company's products indicated by an increase
in unit sales; 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. The DEC
Agreement provides, among other things, for the resale of a specified number of
software licenses and one year maintenance support valued at approximately
$7,800,000. In 1997, under the DEC Agreement, the Company recognized
approximately $3,278,000 in software licenses and services revenues compared to
$355,000 in 1996. Management anticipates recognizing the remaining revenue under
the DEC Agreement over the next several quarters.
Services and other revenues, consisting primarily of maintenance,
installation and consulting revenues, increased 239.3% to $3,960,000 in 1997
from $1,167,000 in 1996. Services and other revenue increased to 21.3% of total
revenues for 1997 compared to 12.9% in 1996. Services and other revenue
increased in dollars and as a percentage of total revenues in 1997 primarily as
the result of an increase in the Company's customer base. Maintenance revenue,
installation services, and consulting and training revenue represented 59.2%,
28.5% and 12.3%, respectively, of total services and other revenues in 1997
compared to 31.4%, 58.9% and 9.7%, respectively, in 1996. Maintenance revenue
comprises a larger percentage of total services and other revenues in 1997 due
to the increase in customer maintenance renewals. The Company anticipates that
maintenance revenue as a percentage of total services and other revenues will
continue to grow 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 services and other revenues from year to year. The Company
performs consulting services primarily in situations where such work will result
in additional software license revenue.
International revenues increased to 33.5% of total revenues in 1997 compared
to 15.3% in 1996. International revenues increased to $6,240,000 in 1997 from
$1,382,000 in 1996. The majority of the international revenue in 1997 and 1996
were derived from two
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<PAGE> 17
customers. The Company believes that it will continue to derive a significant
portion of its revenues from international sales and that international revenue
will comprise a larger percentage of total revenue in future years. To date, the
Company's international sales have been denominated in U.S. currency.
In 1996, an investor who at the time owned over 10% of the Company's total
common shares outstanding, was also a customer of the Company. This customer's
purchases from the Company represented 14% and 38% of total revenues in 1996 and
1995, respectively. Gross profit from these transactions approximated those
realized in similar transactions with unrelated parties. At December 31, 1996,
this investor's ownership percentage was approximately 9% and at December 31,
1997 this investor no longer had a significant ownership percentage in the
Company.
COST OF REVENUES
Cost of software license revenue. Cost of software license revenue consists
principally of product warranty costs, development costs associated with the DEC
Agreement and the costs of interface cards. Cost of software license revenue in
1997 increased 73.1% to $514,000 from $297,000 in 1996. Cost of software
licenses as a percentage of software license revenue were 3.5% and 3.8% for 1997
and 1996, respectively. The increase in dollars in 1997 was primarily due to
development costs under the DEC Agreement and an increase in software license
revenue. The Company believes that in future periods, cost of software license
revenue will continue to range from 3% to 5% of software license revenue.
Cost of services and other revenue. Cost of services and other revenue
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 costs (salaries, fringe benefits
and recruiting fees), travel and facility costs. Cost of services and other
revenue in 1997 increased 117.1% to $3,070,000 from $1,414,000 in 1996. Cost of
services and other revenue as a percentage of services and other revenues were
77.5% and 121.2% for 1997 and 1996, respectively. The dollar increase was a
result of increased personnel and travel costs. These costs increased as a
result of the increase in the number of customers under maintenance contracts.
The Company believes that in future periods, cost of services and other revenue
as a percentage of services and other revenue will fluctuate significantly based
upon the mix of the services provided. The Company plans on continuing to invest
in its infrastructure both domestically and internationally and as a result, the
Company anticipates that the cost of services and other revenue will increase in
dollars and as a percentage of services and other revenues. The Company believes
that in future periods, cost of services and other revenue will increase to 80%
to 90% of services and other revenues.
OPERATING EXPENSES
Research and Development. Research and development expenses consist
principally of personnel and facility costs. Research and development expenses
in 1997 increased 30.4% to $4,023,000 from $3,086,000 in 1996. Research and
development expenses as a percentage of total revenues were 21.6% and 34.1% in
1997 and 1996, respectively. The percentage decrease from 1996 to 1997 was
primarily the result of the Company's significant revenue growth. The increase
in absolute dollars from 1996 to 1997 was the result of increases in personnel
and related facility costs. The major product development efforts in 1997
related to the development of new products such as Network ICR and Enterprise
CTI. In addition to these new products, during 1997 the Company released new
versions of its existing products. The Company plans to introduce enhancements
to its existing products and new products that can be sold to existing and new
customers. The Company is currently working on several projects that will be
designed to enhance its products in the areas of desktop integration, computer
telephony integration, and the use of the Internet and Intranets. The Company
also places significant emphasis on enhancing its products to work in
international markets. The Company anticipates that research and development
expenses will continue to increase in absolute dollars but level off as a
percentage of revenues ranging from 18% to 20% in the foreseeable future.
Sales and Marketing. Sales and marketing expenses consist principally of
personnel costs, commissions, travel, trade shows, promotional expenses and
facility costs. Sales and marketing expenses in 1997 increased 104.1% to
$5,632,000 from $2,760,000 in 1996. Sales and marketing expenses as a percentage
of total revenues were 30.2% and 30.5% for 1997 and 1996, respectively. The
increase in absolute dollars was primarily comprised of increases in personnel,
travel, facility and commission costs. The increase in personnel costs was the
result of adding sales personnel to the direct sales force. Direct sales
personnel headcount increased to nineteen at the end of 1997 from ten at the end
of 1996. The commission expense increase was attributable to higher sales. The
Company anticipates that sales and marketing expenses will increase in absolute
dollars but not vary significantly as a percentage of total revenues in the
foreseeable future as the Company continues its international expansion and
increases its reseller channel. The Company anticipates that sales and marketing
expenses will range from 30% to 33% in the foreseeable future.
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<PAGE> 18
General and Administrative. General and administrative expenses consist
principally of personnel costs for administrative, finance, information systems,
human resources and general management personnel, as well as legal expenses and
facility costs. General and administrative expenses in 1997 increased 82.1% to
$1,916,000 from $1,052,000 in 1996. General and administrative expenses as a
percentage of total revenues were 10.3% and 11.7% for 1997 and 1996,
respectively. General and administrative expenses have increased in absolute
dollars due to an increase in personnel, travel and legal costs. These costs
have increased due to an increase in employees, growth of the business and the
incremental costs of operating as a public company. The Company anticipates that
general and administrative expenses will increase in absolute dollars but level
off as a percentage of revenues ranging from 10% to 12% in the foreseeable
future.
INTEREST INCOME, NET
Interest income, net, of $1,969,000 and $316,000 for 1997 and 1996,
respectively, resulted from investments of the Company's cash balances, net of
interest expense incurred on bank term notes in 1996. In the fourth quarter of
1996, the Company raised approximately $26,704,000 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 due to an increase in cash
available for investment in 1997 compared to 1996.
INCOME TAX BENEFIT
The Company recorded a benefit for income taxes in 1997 by eliminating its
valuation allowance resulting in net deferred tax assets of approximately
$2,190,000. Prior to the fourth quarter of 1997, the Company had recorded a full
valuation allowance against its deferred tax assets due to uncertainty regarding
the potential realizability of these assets. In the fourth quarter of 1997, the
Company determined that it is more likely than not that the deferred tax assets
will be realized. The factors contributing to the elimination of the allowance
were profitability since 1996 and management's projections of profitability in
the future. See the Consolidated Financial Statements and Notes thereto. The
Company expects its effective tax rate to approximate 38.5% in 1998.
No income tax provision was recorded for federal income tax purposes for the
years prior to the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company, prior to its initial public offering on November 20, 1996, had
financed its operations since inception primarily by private sales of equity
securities pursuant to which the Company received approximately $12,123,000 and
by bank term notes to finance purchases of equipment. The principal uses of cash
have been to fund research and development of the Company's products and initial
marketing of the products and to purchase capital equipment. On November 20,
1996, the Company completed its initial public offering of common stock, which
generated net proceeds of $26,704,000. The Company used approximately $756,000
of the proceeds to repay borrowings under its outstanding equipment lines of
credit. The Company's cash and cash equivalents increased to $40,428,000 at
December 31, 1997 from $33,263,000 at December 31, 1996. The increase in cash
and cash equivalents was due to the increase in operating profits and due to an
increase in advance customer payments (recorded to deferred revenue). Through
December 31, 1997, the Company had received approximately $7,800,000 in cash
under the DEC Agreement of which approximately $3,633,000 has been recognized as
revenue and the remainder recorded to deferred revenue. The DEC Agreement
provides, among other things, for the development of customized software, the
resale of a specified number of software licenses and one year of maintenance
support. Management anticipates recognizing the remaining revenue under the DEC
Agreement over the next several quarters. The Company's accounts receivable
increased to $3,685,000 at December 31, 1997 from $2,121,000 at December 31,
1996. The Company's working capital increased to $36,177,000 at December 31,
1997 from $31,421,000 at December 31, 1996.
The Company's operating activities generated cash of $8,796,000 and
$3,306,000 in 1997 and 1996, respectively. The Company's operating activities
used cash of $3,940,000 in 1995. The Company was in the development stage up
until the fourth quarter of 1995, which resulted in a negative cash flow from
operations. The improvement in cash flow from operations is primarily the result
of 1997 and 1996 being the Company's first two years of sales and
profitability and, to a lesser extent, an increase in customer advance payments
in those years.
The Company's investing activities used cash of $2,047,000 and $743,000 in
1997 and 1996, respectively, and provided $472,000 in cash in 1995. In 1995,
investing activities provided cash as the result of the net increase from the
sale and maturity of marketable securities partially offset by capital
expenditures. In 1997 and 1996, investing activities resulted in a use of cash
due to the
18
<PAGE> 19
significant increase in capital expenditures. Capital expenditures increased
significantly in 1997 and 1996 due to the increase in personnel and for product
development needs. Capital expenditures in 1997 also reflect the Company's move
to a larger corporate office.
The Company's financing activities provided $416,000, $26,163,000, and
$4,212,000 in 1997, 1996 and 1995, respectively. In 1995, financing activities
consisted primarily of the sale of Convertible Preferred Stock. In 1996,
financing activities consisted primarily of the Company's initial public
offering of common stock. In 1997, financing activities consisted primarily of
sales of equity securities under the Company's employee stock plans.
As of December 31, 1997, the Company had no material commitments for capital
expenditures.
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 June 1997, FASB issued Statement of Financial Accounting Standards ("SFAS
130") "Reporting Comprehensive Income". SFAS 130 requires changes in
comprehensive income to be shown in a financial statement that is displayed with
the same prominence as other financial statements. While not mandating a
specific financial statement format, SFAS 130 requires that an amount
representing total comprehensive income be reported. SFAS 130 will become
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods is required for comparative
purposes. The Company does not believe that the adoption of SFAS 130 will have a
material impact on its financial statements.
In June 1997, FASB issued Statement of Financial Accounting Standards ("SFAS
131") "Disclosures about Segments of an Enterprise and Related Information".
SFAS 131, which supersedes Statement No. 14, "Financial Reporting for Segments
of a Business Enterprise," changes the way public companies report information
about segments. SFAS 131, which is based on the management approach to segment
reporting, includes requirements to report segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. SFAS
131 is effective for fiscal years beginning after December 15, 1997. Restatement
for earlier years is required for comparative purposes unless impracticable. In
addition, SFAS 131 need not be applied to interim periods in the initial year;
however, in subsequent years, interim period information must be presented on a
comparative basis. The Company does not believe that the adoption of SFAS 131
will have a material impact on its financial statement disclosures.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition" which
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions and supercedes SOP 91-1, "Software
Revenue Recognition." This pronouncement will become effective for fiscal years
beginning after December 15, 1997. Upon adoption, the Company does not expect
any material impact on its revenue recognition policies.
IMPACT ON THE YEAR 2000 ISSUE
The Company is aware of the issues associated with the programming code in
existing computer systems and software products as the millennium (Year 2000)
approaches. The Company has designed its products to, and has commenced efforts
to ensure that the computer systems and applications upon which it relies for
internal operations will, function properly beyond 1999. Based on an assessment
of its products to date, the Company believes that its products are compatible
with Year 2000 functionality. While the Company's Year 2000 compliance
evaluation is not yet complete, the Company does not at this time foresee a
material impact on its business or operating results from the Year 2000 problem.
There can be no assurance, however, that further assessment of the Company's
products and internal systems and applications will not indicate that additional
Company efforts to assure Year 2000 compliance are necessary, and such efforts
may be costly and may divert the Company's resources from other product
development or infrastructure improvement programs. The foregoing could result
in the loss of or delay in market acceptance of the Company's products and
services, increased service and warranty costs to the Company or payment by the
Company of compensatory or other damages. Further, there can be no assurance
that the systems operated by other companies upon which the Company relies will
be Year 2000 compliant on a timely basis. The Company's business, operating
results and financial condition could be materially
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<PAGE> 20
adversely affected by the failure of the Company's products and its internal
systems and applications to properly operate or manage data beyond 1999. Costs
incurred in the compliance effort will be expensed as incurred.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a highly competitive and changing environment that
involve a number of risks, some of which are beyond the Company's control. The
following discussion highlights a number of these risks.
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-K that are not historical facts (including, but not limited to,
statements concerning services and other revenue, anticipated revenue under the
DEC Agreement, international revenues, anticipated cost of revenues levels,
anticipated operating expense levels and such expense levels relative to the
Company's total revenues) constitute forward-looking statements and are made
under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995.
Limited Operating History; Future Operating Results Uncertain. The Company
was incorporated in June 1993 and did not begin shipping products until May
1995. As of December 31, 1997, the Company had an accumulated deficit of
$202,000. The Company's future results are subject to substantial risks and
uncertainties. The Company has experienced substantial revenue growth since the
Intelligent CallRouter 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, 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, 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 and 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 Intelligent CallRouter and Network ICR
products 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 Intelligent CallRouter 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. 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.
Potential Fluctuations in Quarterly Operating Results. The Company's
quarterly operating results may in the future vary significantly depending on
factors such as increased competition from 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, the lengthy sales cycles of the Company's products, 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. Product revenues are also difficult to forecast
because the market for the Company's software products is rapidly evolving, and
the Company's sales cycle varies substantially from customer to customer. A
significant portion of the Company's revenues and operating income has been, and
is expected to continue to be, derived from software licensing fees from a
limited number of customers. Variability in the timing of such license fees may
cause material fluctuations in the Company's business, operating results and
financial condition. The Company's products and services generally require
capital expenditures by customers as well as the commitment of resources to
implement the Company's products. Accordingly, the Company is substantially
dependent on its customers' decisions as to the timing and level of such
expenditures and resource commitments. In addition, the Company typically
realizes a significant portion of license revenues in the last month of a
quarter. As a result, the magnitude of quarterly fluctuations may not become
evident until late in, or after the close of, a particular quarter. The
Company's expenses are based in part on the Company's expectations as to future
revenue levels and to a large extent are fixed in the short-term. If revenues do
not meet expectations, the Company's business, operating results and financial
condition are likely to be materially adversely affected. In particular, because
only a small portion of the Company's expenses varies with revenues, net income
may be disproportionately affected by a reduction in revenues. As a result, the
Company believes that
20
<PAGE> 21
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
Due to the foregoing factors, it is likely that in some future quarter the
Company's revenue or operating results will be below the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock could be materially adversely affected.
Potential Volatility of Stock Price. The market price of the Company's
Common Stock may be volatile and may be significantly affected by factors such
as actual or anticipated fluctuations in the Company's quarterly operating
results, announcements of new products by the Company or its competitors,
developments with respect to conditions and trends in the telecommunications
industry, government regulation, changes in estimates by securities analysts of
the Company's future performance, general market conditions and other factors.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have adversely affected the market prices of
securities of companies for reasons unrelated to their operating performance. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
such a company. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. These broad market fluctuations may adversely affect the market
price of the Common Stock.
Risks Associated with Customer Concentration and One-Time License Fees. A
significant portion of the Company's revenues to date has been derived from a
limited number of customers. Revenues attributable to the Company's five largest
customers accounted for approximately 94.4%, 49.1% and 54.1% of the Company's
total revenues in 1995, 1996 and 1997, respectively. Fidelity, Sprint and
America Online accounted for approximately 38.3%, 25.9% and 20.0%, respectively,
of the Company's total revenues in 1995. Fidelity and Optus accounted for
approximately 14.1% and 11.4%, respectively, of the Company's total revenues for
1996. Digital Equipment, Ltd. and Optus accounted for approximately 18.9% and
14.3%, respectively, of the Company's total revenues for 1997. 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. None of the
Company's customers, other than Hewlett Packard, MCI, and Sprint, is
contractually obligated to license or purchase additional products or services
from the Company and these customers generally have acquired fully-paid licenses
to the installed product. As a result of this customer concentration, the
Company's business, operating results and financial condition could be
materially adversely affected by the failure of anticipated orders to
materialize or by deferrals or cancellations of orders. In addition, a
significant portion of the Company's revenues to date has been derived from
initial license fees from customers who have acquired fully-paid licenses to the
installed product. There can be no assurance that any of the Company's customers
will continue to purchase the Company's products and services in amounts similar
to previous periods or that revenues from customers that have accounted for
significant revenues in past periods, individually or as a group, will continue
or, if continued, will reach or exceed historical levels in any future period.
The Company's operating results may in the future be subject to substantial
period-to-period fluctuations as a consequence of such customer concentration.
Lengthy Sales and Implementation Cycles. The Company's products are
typically intended for use in applications that may be critical to a customer's
business. The license and implementation of the Company's software products
generally involves a significant commitment of resources by prospective
customers. As a result, the Company's sales process is often subject to delays
associated with lengthy approval processes that typically accompany significant
capital expenditures. For these and other reasons, the sales cycle associated
with the license of the Company's products is often lengthy (recently averaging
approximately six months) and subject to a number of significant delays over
which the Company has little or no control. In addition, the Company does not
recognize license revenues until all significant post-delivery obligations have
been satisfied, including the development of specific product features which, in
certain cases, can take several quarters. The time required to implement the
Company's products can vary significantly with the needs of its customers and is
generally a process that extends for several months. There can be no assurance
that the Company will not experience delays in the future, particularly if the
Company receives orders for large, complex installations.
Product Concentration; Dependence on Growth in Call Center Market. The
Company currently derives substantially all of its revenues from licenses of the
Intelligent CallRouter and Network ICR and related services. Broad market
acceptance of the Company's products is critical to the Company's future
success. As a result, a decline in demand for or failure to achieve broad market
acceptance of the Intelligent CallRouter and Network ICR as a result of
competition, technological change or otherwise, would have a material adverse
effect on the business, operating results and financial condition of the
Company. A decline in sales of the Intelligent CallRouter and Network ICR could
also have a material adverse effect on sales of other Company products that may
be sold to Intelligent CallRouter and Network ICR customers. The Company's
future financial performance will depend in part on the successful development,
introduction and customer acceptance of new and enhanced versions of the
Intelligent CallRouter and Network ICR and other products. There can be no
assurance that the Company will continue to be successful in marketing the
Intelligent CallRouter and
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<PAGE> 22
Network ICR or any new or enhanced products.
The Intelligent CallRouter is utilized in call centers maintained by
companies in a variety of industries. This product together with Network ICR are
currently expected to account for substantially all of the Company's future
revenues. Although demand for the Intelligent CallRouter and Network 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 those environments. There can be no assurance that the
market for the Company's products will continue to grow. In addition, changes in
the business or pricing strategies of the interexchange carriers or ACD vendors
could adversely affect demand for the Company's products. If the call center
market fails to grow or grows more slowly than the Company currently
anticipates, the Company's business, operating results and financial condition
would be materially adversely affected. During recent years, segments of the
telecommunications industry have experienced significant economic downturns
characterized by decreased product demand, price erosion, work slowdowns and
layoffs. The Company's operations may in the future experience substantial
fluctuations from period to period as a consequence of such industry patterns,
general economic conditions affecting the timing of orders from major customers,
and other factors affecting capital spending. There can be no assurance that
such factors will not have a material adverse effect on the Company's business,
operating results and financial condition.
Competition. The market for telecommunications software products is
intensely competitive and is subject to rapid technological change. Although to
date the Company has experienced limited competition, the Company expects
competition to increase significantly in the future. Currently, the Company's
principal competitors are the interexchange carriers, particularly AT&T, and to
a lesser extent MCI and Sprint, which provide proprietary call routing solutions
as part of their service offerings. In addition, a number of other companies
have introduced or announced their intention to introduce products that could be
competitive with the Company's products, including Genesys Telecommunications
Laboratories, IBM and IEX Corporation. Additional competitors, including
traditional ACD providers, such as Lucent Technologies, Aspect
Telecommunications Corporation, Northern Telecommunications, Inc. and Rockwell
International Corporation, may enter the market by enhancing their proprietary
private network solutions or by entering into arrangements with the
interexchange carriers. The Company believes that, to date, approximately
one-half of the Company's customers have purchased the Company's products to
replace or enhance existing call routing solutions offered by the interexchange
carriers. The Company's other customers have purchased the Company's products in
order to implement a virtual call center solution for the first time. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could materially adversely affect the
Company's business, operating results and financial condition. Some of the
Company's current, and many of the Company's potential, competitors have
significantly greater financial, technical, marketing and other resources than
the Company. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than the
Company. In addition, one or more interexchange carriers, including MCI, Optus
and Sprint, which are customers of the Company, could choose to provide or
distribute competitive products and services. Accordingly, there can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not materially adversely affect its business, operating results and financial
condition. Moreover, the Company may be subject to potential conflicts of
interest from time to time if a customer, such as IBM, MCI, Optus or Sprint,
provides or distributes competitive products or services. In this regard, a
customer which elects to provide or distribute competitive products or services
could make strategic decisions with respect to pricing and other matters
relating to products provided or distributed by it which could adversely affect
the Company's business, operating results and financial condition.
Dependence on New Products and Rapid Technological Change. The market for
the Company's products is characterized by rapid technological change, frequent
new product introductions and evolving industry standards. The introduction of
products embodying new technologies and the emergence of new industry standards
can render existing products obsolete and unmarketable. The life cycles of the
Company's products are difficult to estimate. The Company's future success will
depend upon its ability to enhance its current products and to develop and
introduce new products on a timely basis that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. There can be no assurance that the Company
will be successful in developing and marketing product enhancements or new
products that respond to technological change or evolving industry standards,
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction and marketing of these products, or
that its new products and product enhancements will adequately meet the
requirements of the marketplace and achieve market acceptance. If the Company is
unable, for technological or other reasons, to develop and introduce new
products or enhancements of existing products in a timely manner in response to
changing market conditions or customer requirements, the Company's business,
operating results and financial condition will be
22
<PAGE> 23
materially adversely affected. In February 1998, the Company released a new
version of its Intelligent CallRouter product and the Company plans to introduce
additional enhancements in the near term. These enhancements are subject to
significant technical risks. If these enhancements are delayed or if they do not
achieve market acceptance, the Company's business, operating results and
financial condition will be materially adversely affected.
Risk of Product Defects or Development Delays. Software products as complex
as those offered by the Company frequently contain errors or failures,
especially when first introduced or when new versions are released. Although the
Company conducts extensive product testing, new products and enhancements could
contain software errors and, as a result, the Company could experience delays in
recognizing revenues during the period required to correct these errors. The
Company could in the future lose revenues as a result of software errors or
defects. The Company's products are typically intended for use in applications
that may be critical to a customer's business. As a result, the Company believes
that its current customers and potential customers have a greater sensitivity to
product defects than the market for software products generally. Although the
Company has not experienced material adverse effects resulting from any such
errors to date, there can be no assurance that, despite testing by the Company
and by current and potential customers, errors will not be found in new products
or releases after commencement of commercial shipments, resulting in the loss of
revenue or delay in market acceptance, diversion of development resources,
damage to the Company's reputation, or increased service and warranty costs, any
of which could have a material adverse effect upon the Company's business,
operating results and financial condition.
Management of Growth; Dependence Upon Key Personnel. The Company has
recently experienced a period of rapid growth in revenues that has placed a
significant strain upon its management systems and resources. The Company's
ability to compete effectively and to manage future growth, if any, will require
the Company to continue to improve its financial and management controls,
reporting systems and procedures on a timely basis and expand, train and manage
its employee work force. There can be no assurance that the Company will be able
to do so successfully. The Company's failure to do so could have a material
adverse effect upon the Company's business, operating results and financial
condition. The Company's future performance depends in significant part upon the
continued service of its key technical, sales and senior management personnel,
none of whom is bound by an employment agreement. The loss of the services of
one or more of the Company's executive officers could have a material adverse
effect on the Company's business, operating results and financial condition. The
Company's future success also depends on its continuing ability to attract and
retain highly qualified technical, sales and managerial personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
can retain its key technical, sales and managerial employees or that it can
attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future.
Risks Associated with International Expansion. International sales accounted
for approximately 33.5% and 15.3% of the Company's revenues for 1997 and 1996,
respectively. As part of its business strategy, the Company is seeking
opportunities to expand its products into international markets. The Company
believes that such expansion is important to the Company's ability to continue
to grow and to market its products and services. In marketing its products and
services internationally, however, the Company will face new competitors, some
of whom may have established strong relationships with carriers. In addition,
the ability of the Company to enter the international markets will be dependent
upon the Company's ability to integrate its products with local proprietary
networks in foreign countries. There can be no assurance that the Company will
be successful in integrating its products with these proprietary networks or
marketing or distributing its products abroad or that, if the Company is
successful, its international revenues will be adequate to offset the expense of
establishing and maintaining international operations. To date, the Company has
limited experience in marketing and distributing its products internationally.
In addition to the uncertainty as to the Company's ability to establish an
international presence, there are certain difficulties and risks inherent in
doing business on an international level, such as compliance with regulatory
requirements and changes in these requirements, export restrictions, export
controls relating to technology, tariffs and other trade barriers, protection of
intellectual property rights, difficulties in staffing and managing
international operations, longer payment cycles, problems in collecting accounts
receivable, political instability, fluctuations in currency exchange rates and
potentially adverse tax consequences. There can be no assurance that one or more
of such factors will not have a material adverse effect on any international
operations established by the Company and, consequently, on the Company's
business, operating results and financial condition.
Dependence on Proprietary Technology; Risks of Infringement. The Company is
dependent upon its ability to protect its proprietary technology. To protect its
proprietary rights, the Company relies on a combination of patents, copyrights,
trademarks, trade secret laws and confidentiality procedures. The Company has
been issued one United States patent and also has one patent application pending
in the United States and internationally. There can be no assurance that patents
will be issued with respect to the pending or future patent applications or that
the Company's existing or future patents will be upheld as valid or will prevent
the
23
<PAGE> 24
development of competitive products. In addition, existing patent, copyright,
trademark and trade secret laws afford only limited protection, and many
countries' laws do not protect the Company's proprietary rights to the same
extent as do the laws of the United States. Accordingly, there can be no
assurance that the Company will be able to protect its proprietary rights
against unauthorized third-party copying, use or exploitation, any of which
could have a material adverse effect on the Company's business, operating
results and financial condition. Attempts may be made to copy or reverse
engineer aspects of the Company's products, or to obtain, use or exploit
information or methods which the Company deems proprietary. Additionally, there
can be no assurance that the Company's customers and others will not develop
products which infringe upon the Company's rights, or that compete with the
Company's products. Policing the use of the Company's products is difficult and
expensive, and there is no assurance that such efforts would prove effective.
Litigation or other action may be necessary in the future to enforce the
Company's proprietary rights, to seek and confirm patent protection for the
Company's technologies, or to determine the validity and scope of the
proprietary rights of others. Any litigation could be time-consuming and result
in significant costs. The Company expects that its software products may
increasingly be subject to claims as the number of products and competitors in
the Company's markets grows and the functionality of such products overlaps. Any
such claims, with or without merit, could result in substantial costs and
diversions of resources and management's attention, and could cause product
shipment delays or require the Company to enter into royalty or licensing
agreements, any of which could have a material adverse impact on the Company's
business, operating results and financial condition. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, if at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition.
Dependence on a Single Supplier for a Certain Product. The software and
network adapter necessary to enable the Company's Intelligent CallRouter to
interface with the AT&T network is licensed by the Company from a single vendor
under a perpetual, fully-paid license. Although the Company has access to the
source code underlying this software and 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.
Product Liability. The Company's license agreements with its customers
generally contain provisions designed to limit the Company's exposure to
potential product liability claims. However, it is possible that the limitation
of liability provisions contained in the Company's license agreements may not be
effective under the laws of certain jurisdictions. Although the Company has not
experienced any product liability claims to date, the sale and support of
products by the Company may entail the risk of such claims, and there can be no
assurance that the Company will not be subject to such claims in the future. A
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, operating results and
financial condition.
24
<PAGE> 25
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Consolidated Balance Sheets as of December 31, 1997 and 1996... 26
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996, and 1995........................... 27
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 1997, 1996 and 1995............. 28
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995............................ 29
Notes to Consolidated Financial Statements..................... 30
Report of Independent Accountants.............................. 39
25
<PAGE> 26
GEOTEL COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 40,428 $ 33,263
Accounts receivable ............................................ 3,685 2,121
Prepaid expenses and other current assets ...................... 1,648 524
Deferred income taxes .......................................... 763 --
-------- --------
Total current assets ...................................... 46,524 35,908
Property and equipment, net ......................................... 2,322 1,016
Deferred income taxes ............................................... 1,427 --
-------- --------
Total assets .............................................. $ 50,273 $ 36,924
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 708 $ 656
Accrued expenses ............................................... 967 857
Accrued compensation and related accruals ...................... 1,311 685
Accrued income taxes ........................................... 951 --
Deferred revenue ............................................... 6,410 2,289
-------- --------
Total current liabilities ................................. 10,347 4,487
-------- --------
Commitments (Note H)
Stockholders' equity:
Preferred stock, $.01 par value, authorized 5,000,000 shares,
none issued .................................................. -- --
Common stock, $.01 par value, authorized 40,000,000 shares,
issued 13,453,853 and 13,358,296 shares; outstanding
13,151,736 and 13,083,553 shares in 1997 and 1996,
respectively ................................................. 135 134
Additional paid-in capital ..................................... 40,893 39,967
Accumulated deficit ............................................ (202) (6,455)
Notes receivable from stockholders ............................. -- (116)
Unearned compensation .......................................... (855) (1,051)
-------- --------
39,971 32,479
Less treasury stock, at cost, 302,117 and 274,743 shares in 1997
and 1996, respectively........................................ (45) (42)
-------- --------
Total stockholders' equity ................................ 39,926 32,437
-------- --------
Total liabilities and stockholders' equity ................ $ 50,273 $ 36,924
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
26
<PAGE> 27
GEOTEL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Revenues:
Software license ................................ $ 14,651 $ 6,850 $ 821
Services and other .............................. 3,960 921 126
Related party licenses and services (Note I) .... -- 1,276 587
----------- ------------ -----------
Total revenues .................................. 18,611 9,047 1,534
----------- ------------ -----------
Cost of Revenues:
Cost of software license ........................ 514 297 264
Cost of services and other ...................... 3,070 1,414 611
----------- ------------ -----------
Total cost of revenues .......................... 3,584 1,711 875
----------- ------------ -----------
Gross profit ......................................... 15,027 7,336 659
----------- ------------ -----------
Operating Expenses:
Research and development ........................ 4,023 3,086 2,322
Sales and marketing ............................. 5,632 2,760 1,476
General and administrative ...................... 1,916 1,052 887
----------- ------------ -----------
Total operating costs ........................... 11,571 6,898 4,685
----------- ------------ -----------
Income (loss) from operations ........................ 3,456 438 (4,026)
----------- ------------ -----------
Other Income (Expense):
Interest income ...................................... 1,969 386 225
Interest expense ..................................... -- (70) (61)
----------- ------------ -----------
Total other income, net .......................... 1,969 316 164
----------- ------------ -----------
Income (loss) before income tax benefit............... 5,425 754 (3,862)
Income tax benefit ................................... 828 -- --
----------- ------------ -----------
Net income (loss) .................................... 6,253 754 (3,862)
Accretion of convertible preferred stock to redemption
value .............................................. -- (97) (77)
----------- ------------ -----------
Net income (loss) available (attributable) to common
stockholders ....................................... $ 6,253 $ 657 $ (3,939)
=========== ============ ===========
Net income (loss) per common share:
Basic ........................................... $ 0.48 $ 0.18 $ (5.57)
=========== ============ ===========
Diluted ......................................... $ 0.45 $ 0.06 $ (5.57)
=========== ============ ===========
Weighted average number of common and common
equivalent shares: ................................. 13,113,074 3,555,318 707,140
=========== ============ ===========
Basic shares
Diluted shares .................................. 13,830,984 11,134,288 707,140
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
27
<PAGE> 28
GEOTEL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
NOTES
NUMBER ADDITIONAL RECEIVABLE
OF PAID-IN ACCUMULATED FROM UNEARNED
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS COMPENSATION
------------ -------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994........... 2,072,588 $ 21 $ 66 $ (3,347) $ (94)
Sale of common stock for cash,
services and notes receivable..... 499,992 5 85 (86)
Acquisition of treasury stock.......
Net loss............................ (3,862)
Accretion of Convertible Preferred
Stock to redemption value......... (77)
---------- ----- -------- ------- ------ -------
Balance December 31, 1995........... 2,572,580 26 74 (7,209) (180)
Sale of common stock and exercise of
stock options..................... 27,000 34
Accretion of Convertible Preferred
Stock to redemption value......... (97)
Issuance of common stock from initial
public offering, net.............. 2,465,000 25 26,644
Conversion of Preferred Stock into
common stock...................... 8,293,716 83 12,161
Acquisition of treasury stock and
forgiveness of notes receivable... 64
Stock options granted below fair
value - net of terminations....... 1,151 $(1,151)
Amortization of unearned compensation 100
Net income.......................... 754
---------- ----- -------- ------- ------ -------
Balance December 31, 1996........... 13,358,296 134 39,967 (6,455) (116) (1,051)
Exercise of stock options........... 67,412 1 46
Issuance of stock under employee
stock purchase plan .............. 28,145 318
Acquisition of treasury stock.......
Offering costs...................... (62)
Repayment of notes receivable....... 116
Tax benefits from employees'
exercise of stock options ....... 288
Stock options granted below fair
value - net of terminations....... 336 (336)
Amortization of unearned compensation 532
Net income.......................... 6,253
---------- ----- -------- ------- ------ -------
Balance December 31, 1997........... 13,453,853 $ 135 $ 40,893 $ (202) $ -- $ (855)
============ ===== ======== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCK
------------------
TOTAL
NUMBER STOCKHOLDERS'
OF EQUITY
SHARES AMOUNT (DEFICIT)
-------- -------- -------------
<S> <C> <C> <C>
Balance December 31, 1994........... 163,211 $ (3) $ (3,357)
Sale of common stock for cash,
services and notes receivable..... 4
Acquisition of treasury stock....... 80,275 (20) (20)
Net loss............................ (3,862)
Accretion of Convertible Preferred
Stock to redemption value......... (77)
------- ----- -------
Balance December 31, 1995........... 243,486 (23) (7,312)
Sale of common stock and exercise of
stock options..................... (101,222) 1 35
Accretion of Convertible Preferred
Stock to redemption value......... (97)
Issuance of common stock from initial
public offering, net.............. 26,669
Conversion of preferred stock into
common stock...................... 12,244
Acquisition of treasury stock and
forgiveness of notes receivable... 132,479 (20) 44
Stock options granted below fair
value - net of terminations....... --
Amortization of unearned compensation 100
Net income.......................... 754
------- ----- -------
Balance December 31, 1996........... 274,743 (42) 32,437
Exercise of stock options........... 47
Issuance of stock under employee
stock purchase plan .............. 318
Acquisition of treasury stock....... 27,374 (3) (3)
Offering costs...................... (62)
Repayment of notes receivable....... 116
Tax benefits from employees'
exercise of stock options ....... 288
Stock options granted below fair
value - net of terminations....... --
Amortization of unearned compensation 532
Net income.......................... 6,253
------- ----- -------
Balance December 31, 1997........... 302,117 $ (45) $39,926
======= ===== =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
28
<PAGE> 29
GEOTEL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................... $ 6,253 $ 754 $(3,862)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization ........................ 741 517 359
Deferred income taxes ................................ (2,190) -- --
Equity compensation .................................. 532 137 1
Tax benefit from employees' exercise of stock options 288 -- --
Changes in operating assets and liabilities:
Accounts receivable and accounts receivable--
related party ................................. (1,564) (1,106) (1,015)
Prepaid expenses and other current assets ....... (1,124) (417) (38)
Accounts payable ................................ 52 496 51
Accrued expenses and accrued compensation ....... 736 908 292
Accrued income taxes ............................ 951 -- --
Deferred revenue and deferred revenue
-- related party .............................. 4,121 2,017 272
-------- -------- -------
Net cash provided by (used for) operating activities ...... 8,796 3,306 (3,940)
-------- -------- -------
Cash flows from investing activities:
Proceeds from sales and maturities of marketable securities -- -- 952
Purchases of property and equipment ....................... (2,047) (743) (480)
-------- -------- -------
Net cash provided by (used for) investing activities ...... (2,047) (743) 472
-------- -------- -------
Cash flows from financing activities:
Proceeds from sale of common stock, net ................... 303 26,704 3
Proceeds from notes receivable for common stock ........... 116 7 --
Proceeds from sale of convertible preferred stock, net .... -- 161 3,972
Proceeds from long-term debt .............................. -- 358 418
Principal payments under long-term debt ................... -- (1,067) (161)
Acquisition of treasury stock ............................. (3) -- (20)
-------- -------- -------
Net cash provided by financing activities ................. 416 26,163 4,212
-------- -------- -------
Net change in cash and cash equivalents ................... 7,165 28,726 744
Cash and cash equivalents, beginning of year .............. 33,263 4,537 3,793
-------- -------- -------
Cash and cash equivalents, end of year .................... $ 40,428 $ 33,263 $ 4,537
======== ======== =======
Supplemental disclosures of noncash financing activities:
Notes received in exchange for common stock ............... $ -- $ -- $ 86
======== ======== =======
Supplemental cash flow information:
Income taxes paid ......................................... $ 124 $ -- $ --
======== ======== =======
Interest paid ............................................. $ -- $ 66 $ 60
======== ======== =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
29
<PAGE> 30
GEOTEL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS:
GeoTel Communications Corporation ("GeoTel" or the "Company") is a provider
of Computer Telephony Integration (CTI) software solutions focused on enhanced
voice and data routing technology that enables customer-oriented companies to
deliver responsive and cost-effective customer service. The Company's software
solutions are aimed at decentralized or service-oriented corporations that use
call centers, voice response units, the Internet and other answering resources
to interact with their customers. Principal operations of the Company commenced
during 1995. The Company currently derives substantially all of its revenues
from licenses of the Intelligent CallRouter and Network ICR and related
services. The Company primarily markets its products in the United States
through a direct sales force which is complemented by strategic sales channels,
selected resellers and international partners.
B. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation
The consolidated financial statements include the accounts of GeoTel
Communications Corporation and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated.
Use of Accounting Estimates
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.
Cash, Cash Equivalents and Investments
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents. The Company classifies its
investments as available-for-sale and states them at amortized cost plus accrued
interest, which approximates market value. Unrealized gains and losses as of
December 31, 1997 and 1996 were immaterial. Cash equivalents consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
Commercial paper ......... $38,269 $31,216
Money market instruments.. 1,382 1,415
------- -------
Total cash equivalents ... $39,651 $32,631
======= =======
</TABLE>
Income Taxes
The Company provides for income taxes under the liability method, which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Under this method, a valuation allowance is
required against net deferred tax assets if, based upon the available evidence,
it is more likely than not that some or all of the deferred tax assets will not
be realized. Tax credits are generally recognized as reductions of income tax
provisions in the year in which the tax credits arise.
30
<PAGE> 31
Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation and amortization using the straight-line method over their
estimated useful lives as follows:
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
----------------------------- ---------------------
Computer and lab equipment... 3 years
Furniture and fixtures....... 3 years
Leasehold improvements....... Shorter of lease term or
estimated useful life
Repairs and maintenance are charged to expense as incurred. Significant
improvements are capitalized and depreciated. Upon retirement or sale, the cost
of the assets disposed of and the related accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in the results of
operations.
Revenue Recognition
The Company recognizes license fee revenues generally upon shipment unless
there are significant post-delivery obligations or collection is not reasonably
assured. When significant post-delivery obligations exist, typically, customer
acceptance criteria, revenues are deferred until no such significant obligations
remain. The Company recognizes revenue on customized software development
contracts based on reaching specified milestones under the terms of the
respective agreements. Service and other revenues have consisted primarily of
maintenance, installation and training revenues. Maintenance revenues are
recognized ratably over the term of the support period, which is typically
twelve months. Installation and training revenues generally are recognized when
the services are performed. Amounts received prior to revenue recognition and
for prepaid maintenance revenue are classified as deferred revenue.
Product Warranty Costs
The Company provides a ninety day warranty and provides for estimated direct
labor and associated indirect costs. Provision for estimated warranty costs is
recorded at the time of sale and periodically adjusted to reflect actual
experience.
Financial Instruments and Concentrations of Credit Risk
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, trade accounts receivable, accounts payable, accrued
expenses and other liabilities approximate fair value due to their short
maturities. The Company invests its excess cash primarily in highly rated
commercial paper and financial institutions.
Accounts receivable at December 31, 1997 and 1996 was comprised of a limited
number of customers. Eight customer balances comprised 94% of the total accounts
receivable balance at December 31, 1997. Three customer balances comprised 94%
of the total accounts receivable balance at December 31, 1996 (See Note I). To
reduce risk, the Company routinely assesses the financial strength of its
customers and, as a consequence believes that its trade accounts receivable
credit risk exposure is limited. The Company generally does not require
collateral and historically has not experienced significant losses on trade
receivables.
Research and Development
Research and development costs are charged to operations as incurred. The
Company capitalizes eligible software costs incurred after technological
feasibility of the product has been established. The Company achieves
technological feasibility when a working model has been established. To date,
costs eligible for capitalization have been immaterial and no costs have been
capitalized.
Net Income (Loss) Per Common Share
Net income (loss) per basic common share is computed by dividing income
(loss) available (attributable) to common stockholders by the weighted average
number of common shares outstanding for the period which included vested
restricted common stock. Net income per diluted common shares is computed based
on the weighted average number of common and dilutive common equivalent shares
outstanding during each period. Common equivalent shares consist of the
Company's Series A, B and C Convertible Participating Preferred Stock
(collectively, the "Convertible Preferred Stock"), common stock options and
unvested restricted common stock outstanding in the period. The Company adopted
SFAS 128, "Earnings Per Share" (SFAS 128) in 1997. All amounts have been
restated to conform with SFAS 128.
31
<PAGE> 32
C. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following (in thousands):
DECEMBER 31,
--------------------
1997 1996
------- -------
Computer and lab equipment ................... $ 3,119 $ 1,934
Furniture and fixtures ....................... 173 86
Leasehold improvements ....................... 734 32
------- -------
4,026 2,052
Less accumulated depreciation and amortization (1,704) (1,036)
------- -------
$ 2,322 $ 1,016
======= =======
D. INCOME TAXES:
Certain items of income and expense are not reported in tax returns and
financial statements in the same year. The tax effects of these differences are
reported as deferred income taxes. Deferred tax assets and liabilities are
recognized for the expected future tax consequences, utilizing enacted statutory
rates applicable to future years, of temporary differences between the tax bases
of assets and liabilities. Deferred tax assets are recognized, net of any
valuation allowance, for the estimated future tax effects of deductible
temporary differences and tax operating loss and credit carryforwards. Deferred
tax expense (benefit) represents the change in the deferred tax asset or
liability balances.
The components of deferred tax assets at December 31, 1997 and 1996 were as
follows (in thousands):
DECEMBER 31,
------------------
1997 1996
------ -------
Deferred tax assets:
Depreciation .............. $ 248 $ 171
Capitalized start-up costs. 1,338 1,762
Accrued expenses .......... 532 179
Tax credits ............... 72 223
Net operating losses ...... -- 443
------ -------
Net deferred tax assets ..... 2,190 2,778
Valuation allowance ......... -- (2,778)
------ -------
Total net deferred tax assets $2,190 $ --
====== =======
The income tax benefit for 1997 was comprised of the following (in thousands):
Current:
Federal ........ $ 1,247
State .......... 115
-------
Total current.. 1,362
-------
Deferred:
Federal ........ (1,622)
State .......... (568)
-------
Total deferred.. (2,190)
-------
Total ............ $ (828)
=======
No income tax provision was recorded for federal income tax purposes for the
years ended December 31, 1996 and 1995. The differences between statutory
federal income taxes and the benefit for income taxes in 1997 was as follows
(dollars in thousands):
DOLLARS PERCENT
------- -------
Statutory federal income taxes...... $ 1,845 34.0%
State income taxes, net of federal
tax benefit ................... 122 2.2
Tax benefit from research and
development credits ........... (153) (2.8)
Non deductible expenses ............ 64 1.2
Tax benefit of foreign sales
corporation ................... (58) (1.0)
------ -----
Subtotal............................ $ 1,820 33.6%
====== =====
Change in valuation allowance ...... (2,648) (48.9)
------ -----
Total............................... $ (828) (15.3)%
====== =====
The difference between the statutory federal income tax rate and the
Company's effective tax rate for the year ended December 31,
32
<PAGE> 33
1997 was principally due to the elimination of the valuation allowance to
reflect the deferred tax assets utilized in 1997 to reduce current income taxes
and to recognize deferred tax assets of approximately $2,190,000 at December 31,
1997. The difference between the statutory federal income tax rate and the
Company's effective tax rate for the year ended December 31, 1996 was
principally due to the utilization of net operating losses, capitalized start-up
costs including research and development cost carryforwards. The Company elected
to capitalize start-up costs and research and development costs for income tax
purposes and amortize them over five and ten years, respectively, for the period
prior to recording product revenue in 1995.
A valuation allowance was recorded at December 31, 1996 to offset the entire
net deferred tax assets as a result of the uncertainties regarding the
realization of these assets due to the Company's limited history of operating
profits. In the fourth quarter of 1997, the Company determined that it is more
likely than not that these tax assets will be realized and, accordingly,
eliminated the valuation allowance.
E. CONVERTIBLE PREFERRED STOCK:
The following table reflects Convertible Preferred Stock activity, from
December 31, 1994 through December 31, 1996:
<TABLE>
<CAPTION>
AMOUNT
SHARES (in thousands)
---------- --------
<S> <C> <C>
Balance at December 31, 1994 ............ 6,006,286 $ 7,937
Shares of Series C issued, August 1995 .. 1,712,329 3,972
Accretion to redemption value ........... -- 77
---------- --------
Balance at December 31, 1995 ............ 7,718,615 11,986
Shares of Series C issued, February 1996. 70,000 161
Accretion to redemption value ........... -- 97
Conversion to common stock .............. (7,788,615) (12,244)
---------- --------
Balance at December 31, 1996 ............ -- $ --
========== ========
</TABLE>
The holders of a majority of the outstanding shares of Convertible Preferred
Stock were entitled, at any time after July 31, 2000 and automatically upon an
IPO meeting certain criteria, to cause all such shares to be converted into
common stock on a share-for-share basis, as defined and to receive from the
Company their liquidation amount in three equal, annual installments. In
September 1996, the Company's Board of Directors adopted and the stockholders
approved an amendment to the terms of the Company's Convertible Preferred Stock
to provide that, in lieu of any cash payment in connection with the automatic
conversion of the Convertible Preferred Stock upon the IPO, the Convertible
Preferred Stock will be converted into an additional number of shares of common
stock determined by dividing fifty percent of the original purchase price of the
Convertible Preferred Stock by the IPO price. The Convertible Preferred Stock
was being accreted to approximately $12,756,000 which is equal to the sum of (i)
the price per share paid for each share of Convertible Preferred Stock and (ii)
the fair value of the common stock, at the date of the original issuance of the
Convertible Preferred Stock, for which such Convertible Preferred Stock will be
converted. The Company has provided for periodic accretion of the fair value of
the common stock using the effective interest method. All outstanding shares of
Convertible Preferred Stock were converted into common stock upon the closing of
the Company's IPO on November 20, 1996.
F. STOCKHOLDERS' EQUITY (DEFICIT):
Initial Public Offering
The Company completed its IPO on November 20, 1996 and sold 2,465,000 shares
of common stock at $12.00 per share, resulting in net proceeds, after deducting
underwriting discounts and expenses, of $26,704,000. In addition, the Company's
Board of Directors adopted and the stockholders approved an increase in the
number of authorized shares of capital stock from 21,788,615 shares to
45,000,000 shares, of which 40,000,000 shares have been designated as common
stock and 5,000,000 shares have been designated as preferred stock.
Preferred Stock
The Company's Board of Directors has the authority, without further
stockholder approval, to issue such shares of preferred stock in one or more
series and to fix the relative rights, preferences, privileges, qualifications,
limitations and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and
33
<PAGE> 34
the number of shares constituting any series or the designation of such series.
Net Income Per Common Share
The calculation of per share earnings (loss) is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ---------
(In thousands except per share figures)
<S> <C> <C> <C>
Basic:
Net income (loss) $ 6,253 $ 657 $ (3,939)
Weighted average common shares outstanding 13,113,074 3,555,318 707,140
Net income (loss) per share, basic $ 0.48 $ 0.18 $ (5.57)
=========== =========== ========
Diluted:
Net income (loss) for calculating diluted
earnings per share $ 6,253 $ 657 $ (3,939)
Weighted average common shares outstanding 13,113,074 3,555,318 707,140
Common stock equivalents 717,910 7,578,970 --
Total weighted average shares outstanding 13,830,984 11,134,288 707,140
Net income (loss) per share, diluted $ 0.45 $ 0.06 $ (5.57)
=========== =========== ========
</TABLE>
Options to purchase 102,000, 197,650 and 30,000 shares of common stock were
outstanding at December 31, 1997, 1996 and 1995, respectively, but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of the common shares. The option
prices range from $17.68 to $19.25 for options outstanding at December 31, 1997,
$6.40 to $14.75 for options outstanding at December 31, 1996 and $0.30 for
options outstanding at December 31, 1995. These options expire beginning 2005
through 2007.
Restricted Stock Purchase Plan
The Company has adopted, and subsequently amended, a 1993 Restricted Stock
Purchase Plan (the "1993 Plan"), which provides for the issuance of common stock
to directors, officers, consultants and other key personnel at prices determined
by a Committee selected by the Board of Directors. Participants' unvested shares
are subject to repurchase by the Company at the original purchase price for up
to five years. Twenty percent of the shares vest on the first anniversary of the
date of purchase and, thereafter, the remaining shares vest on a monthly basis
through the fifth anniversary of the date of purchase. As of December 31, 1997,
the Company had the right to repurchase up to 281,998 unvested shares. Such
shares may be repurchased at the original purchase price ranging from $0.10 to
$0.18 per share. There are no shares available for further grant under the 1993
Plan. The shares outstanding at December 31, 1997 under the 1993 Plan have a
weighted average repurchase price of $0.14 per share.
Information related to the 1993 Plan is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES SHARE PRICE SHARES SHARE PRICE SHARES SHARE PRICE
--------- ----------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year .................. 986,143 $0.14 1,091,622 $0.14 613,310 $0.14
Issued ................... -- -- 27,000 0.18 499,992 0.18
Repurchased .............. (27,374) 0.12 (132,479) 0.14 (21,680) 0.10
------- --------- ---------
Outstanding at end of year 958,769 $0.14 986,143 $0.14 1,091,622 $0.14
======= ========= =========
</TABLE>
In connection with the sale of common stock under the 1993 Plan described
above, the Company received full recourse notes
34
<PAGE> 35
receivable totaling approximately $86,000 from certain employees during the year
ended December 31, 1995. These notes bear interest at 5.25% and were required to
be paid in full upon the one year anniversary of the Company's initial public
offering. The interest is payable at the date of maturity. Such notes were
collateralized by the common stock purchased and accordingly are included in
stockholders' equity. All outstanding notes were repaid in 1997.
Stock Option Plan
In 1995, the Board of Directors adopted and the stockholders subsequently
approved the Company's 1995 stock option plan (the "1995 Plan"), which provides
for the issuance of incentive stock options and nonqualified stock options to
eligible employees, officers and consultants to the Company. The options can be
granted for periods of up to ten years and generally vest ratably over a four or
five year period with initial vesting occurring on the first anniversary from
the grant date and then monthly thereafter. The maximum number of shares
authorized for issuance under the 1995 Plan increases each January 1, beginning
on January 1, 1997 by an amount equal to four percent of the total number of
shares of common stock issued and outstanding as of the close of business on
December 31 of the preceding year, not exceeding 6,000,000 shares. In addition
in 1996, the Board of Directors adopted and stockholders approved the number of
shares of common stock available for grants under the 1995 Plan to be increased
by the number of shares repurchased by the Company from time to time under the
1993 Plan. At December 31, 1997, 2,009,057 shares were authorized for issuance
under the 1995 Plan. Effective January 1, 1998, the number of authorized shares
was increased to 2,574,585 shares. The option price for incentive stock options
shall be the fair market value at the time the option is granted. In the case of
options granted to a shareholder who at the time of grant owns, directly or
indirectly, stock possessing more than 10% of total combined voting power of any
class of stock of the Company, the exercise price of the options shall not be
less than 110% of the fair market value of the common stock as of the date of
grant.
In 1997, 1996 and 1995, options to purchase 24,489, 101,222 and 68,216
respectively, were granted in conjunction with a management incentive program
approved by the Board of Directors. The management incentive program provided
cash and equity compensation to the participants if certain annual performance
criteria were achieved. Under this program, options in 1996 and 1995 were
granted at the beginning of the year at fair market value with vesting occurring
at the end of five years subject to one year accelerated vesting from the grant
date if certain annual performance criteria were achieved. A similar plan was in
place for 1997 except the option price was below fair market value ($0.01) and
the initial vesting period was four years. The value of the options granted
below fair market value on the grant date was approximately $308,000. The
performance criteria were achieved in each of the years and vesting was
accelerated. Accordingly, $308,000 was recognized as equity compensation.
Information related to the 1995 Plan is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- -------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 907,796 $ 2.72 64,500 $0.24 -- --
Granted ........................ 921,558 13.65 982,018 2.62 64,500 $0.24
Cancelled ...................... (135,985) 7.34 (37,500) 2.47 -- --
Exercised ...................... (67,412) 0.70 (101,222) 0.30 -- --
--------- -------- ------
Outstanding at end of year ..... 1,625,957 $ 8.61 907,796 $2.72 64,500 $0.24
========= ======== ======
</TABLE>
The following information summarizes information concerning currently
outstanding and exercisable options:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER REMAINING WEIGHTED AVERAGE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
- ------------------------ ----------- ---------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
$0.01 to $0.30.......... 534,483 8.37 $ 0.28 166,059 $ 0.30
$3.00 to $8.00.......... 242,174 8.80 7.07 57,070 7.03
$10.44 to $14.75........ 474,000 9.39 12.07 4,550 14.54
$15.125 to $19.25....... 375,300 9.65 17.10 3,000 17.68
--------- -------
Total................... 1,625,957 9.03 $ 8.61 230,679 $ 2.47
========= =======
</TABLE>
The Company had options that were exercisable into 230,679 and 20,208 shares
of common stock with a weighted average exercise price of $2.47 and $0.25 per
share at December 31, 1997 and 1996, respectively. No options were exercisable
at December 31, 1995. As of December 31, 1997 and 1996, the Company had 214,466
and 465,708 shares, respectively, available for future option grants under the
1995 Plan.
Certain employees have disposed of stock acquired through the exercise of
incentive stock options earlier than the mandatory holding period required for
such options. The tax benefits allowed to the Company because of these
dispositions, together with the tax benefits realized from the exercise of
nonqualified stock options, have been recorded as increases to additional
paid-in capital.
35
<PAGE> 36
Employee Stock Purchase Plan
In September 1996, the Company's Board of Directors adopted and the
stockholders approved the 1996 Employee Stock Purchase Plan (the "1996 Purchase
Plan"). The 1996 Purchase Plan covers substantially all employees. The 1996
Purchase Plan covers an aggregate of up to 250,000 shares of common stock to be
issued and sold to participating employees of the Company through a series of
six-month offerings, beginning January 1, 1997. The 1996 Purchase Plan enables
employees, subject to a defined maximum percentage of base compensation and
number of shares, to purchase common stock at 85% of the lower of the fair
market value of the Company's common stock on the first or last day of each
offering period. In 1997, purchases of 28,145 shares of common stock generating
proceeds of $318,000 were made under the 1996 Purchase Plan. At December 31,
1997, 221,855 shares of common stock were reserved for purchases under the 1996
Purchase Plan.
Stock-Based Compensation Plans
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
the 1995 Plan and the 1996 Purchase Plan. Accordingly, compensation expense has
only been recognized for its stock-based compensation plan for any options
granted below fair value of the common stock. In the year ended December 31,
1997 and 1996, the Company recorded approximately $336,000 and $1,151,000,
respectively, in unearned compensation for options to purchase 55,758 and
674,580 shares, respectively, granted at exercise prices below the fair value of
the common stock. The weighted average exercise price of options granted below
fair value was $4.52 in 1997 and $2.49 in 1996. No options were granted below
fair value prior to the year ended December 31, 1996.
The fair value of each option granted during 1997, 1996 and 1995 is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Dividend yield None None None
Expected volatility (post IPO) 54% 60% None
Risk-free interest rate 6.0% 8.25% 8.75%
Expected life 5 years 5 years 5 years
Weighted average fair value of options granted at
fair market value $7.62 $0.30 $0.24
Weighted average fair value of options granted
below fair market value at date of grant $9.16 $4.21 None
</TABLE>
Had compensation cost for the Company's 1997, 1996 and 1995 stock option
grants, restricted stock grants and employee stock purchase plan activity been
determined consistent with Financial Accounting Standards No. 123 "Accounting
for Stock Based Compensation," the Company's net income (loss) per share would
approximate the pro forma amounts below:
Net Income (loss) Earnings (loss)
(In thousands) Per Share
------------------ -------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
As Reported:
1997 $ 6,253 $ 6,253 $ 0.48 $ 0.45
1996 $ 657 $ 657 $ 0.18 $ 0.06
1995 $(3,939) $(3,939) $(5.57) $(5.57)
Pro forma:
1997 $ 5,646 $ 5,646 $ 0.43 $ 0.42
1996 $ 560 $ 560 $ 0.16 $ 0.05
1995 $(3,948) $(3,948) $(5.58) $(5.58)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts.
G. RETIREMENT SAVINGS PLAN:
In 1994, the Company adopted a Retirement Savings Plan (the "Savings Plan")
for its employees, which has been qualified under Section 401(k) of the Internal
Revenue Code. Eligible employees are permitted to contribute to the Savings Plan
through payroll deductions within statutory limitations and subject to any
limitations included in the Savings Plan. Contributions to the Savings Plan are
made at the discretion of Management. To date, the Company has made no
contributions to the Plan.
36
<PAGE> 37
H. OPERATING LEASES:
The Company leases certain equipment and office space under operating leases
that expire through 2006. The Company entered into a sublease agreement in
February 1997 for office space for its new executive office in Lowell,
Massachusetts. Initially, the lease provided 31,770 square feet, which increased
by an additional 15,885 square feet on January 1, 1998 and will further increase
by 15,885 on January 1, 1999. The Company has the right, with proper notice, to
terminate this sublease at the end of the sixth year (2003) of the sublease.
At December 31, 1997, future minimum annual lease commitments, including
operating costs, under operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Amount
---------
<S> <C> <C>
1998 $ 675
1999 880
2000 838
2001 838
2002 891
Thereafter 3,405
--------
Total $ 7,527
========
</TABLE>
Rent expense was approximately $324,000, $170,000 and $124,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
I. SIGNIFICANT CUSTOMERS AND RELATED PARTY TRANSACTIONS:
Revenues attributable to the Company's five largest customers accounted for
54.1%, 49.1% and 94.4% in 1997, 1996 and 1995, respectively. The following table
summarizes sales as a percentage of total revenue to significant customers (more
than 10% annually) for the year ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Related Party ............. -- 14% 38%
Customer A ................ -- -- 20
Customer B ................ -- -- 26
Customer C ................ 14% 11 --
Customer D ................ 19 -- --
---- ---- ----
Percentage of total revenue 33% 25% 84%
==== ==== ====
</TABLE>
Export sales to Australia and the United Kingdom were 14% and 19%,
respectively, in 1997 and 11% and 4%, respectively, in 1996. No export sales
occurred in 1995.
In August 1995, the Company sold 1,048,801 shares of Series C Convertible
Participating Preferred Stock to an investor that subsequently became a customer
of the Company. In 1996 and 1995, this customer purchases represented 14% and
38%, respectively, of total revenues. Gross profit from related party
transactions approximated those realized in similar transactions with unrelated
parties. Purchases by this customer for the year ended December 31, 1995 were
made through another shareholder of the Company.
37
<PAGE> 38
J. NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, FASB issued Statement of Financial Accounting Standards ("SFAS
130") "Reporting Comprehensive Income". SFAS 130 requires changes in
comprehensive income to be shown in a financial statement that is displayed with
the same prominence as other financial statements. While not mandating a
specific financial statement format, SFAS 130 requires that an amount
representing total comprehensive income be reported. SFAS 130 will become
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods is required for comparative
purposes. The Company does not believe that the adoption of SFAS 130 will have a
material impact on its financial statements.
In June 1997, FASB issued Statement of Financial Accounting Standards ("SFAS
131") "Disclosures about Segments of an Enterprise and Related Information".
SFAS 131, which supersedes Statement No. 14, "Financial Reporting for Segments
of a Business Enterprise," changes the way public companies report information
about segments. SFAS 131, which is based on the management approach to segment
reporting, includes requirements to report segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. SFAS
131 is effective for fiscal years beginning after December 15, 1997. Restatement
for earlier years is required for comparative purposes unless impracticable. In
addition, SFAS 131 need not be applied to interim periods in the initial year;
however, in subsequent years, interim period information must be presented on a
comparative basis. The Company does not believe that the adoption of SFAS 131
will have a material impact on its financial statement disclosures.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition" which
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions and supercedes SOP 91-1, "Software
Revenue Recognition." This pronouncement will become effective for fiscal years
beginning after December 15, 1997. Upon adoption, the Company does not expect
any material impact on its revenue recognition policies.
38
<PAGE> 39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
GeoTel Communications Corporation:
We have audited the accompanying consolidated balance sheets of GeoTel
Communications Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
GeoTel Communications Corporation as of December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 20, 1998
39
<PAGE> 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with accountants on any matter of accounting
principles, financial statement disclosure, or auditing scope or procedures
required to be reported under this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until their successors have been duly elected and
qualified. There are no family relationships among any of the executive officers
or directors of the Company.
The executive officers of the Company, and their ages as of December 31,
1997, are as follows:
NAME AGE POSITION
------------------ --- -------------------------------------
John C. Thibault.. 44 President, Chief Executive Officer and
Director
Louis J. Volpe.... 48 Senior Vice President of Worldwide
Sales and Marketing
Timothy J. Allen.. 48 Vice President of Finance, Chief
Financial Officer, Treasurer and
Secretary
G. Wayne Andrews.. 47 Vice President, Chief Technology
Officer and Director
Judith A. Kelly... 50 Vice President of Customer Service
Steven H. Webber.. 53 Vice President of Engineering
- ----------
John C. Thibault has served as President, Chief Executive Officer and
Director of the Company since January 1994. From April 1991 to October 1993, Mr.
Thibault served as President, Chief Executive Officer and Director of Coral
Network Corporation. From April 1988 to April 1991, Mr. Thibault served as an
officer of Motorola, Inc. and Senior Vice President and General Manager of
Motorola's Codex product division. From May 1986 to April 1988, Mr. Thibault was
President and Chief Executive Officer of PBX manufacturer Intecom, Inc., a
subsidiary of Wang Laboratories. Prior to his position at Intecom, he held
several senior management positions over an 11-year period with Wang.
Louis J. Volpe has served as Senior Vice President of Worldwide Sales and
Marketing of the Company since May 1996. From February 1995 to April 1996, Mr.
Volpe served as Vice President of Marketing of the Company. Mr. Volpe served as
Senior Vice President of Marketing and Operations of Parametric Technology
Corporation from May 1993 to January 1995 and as Vice President of Marketing and
Operations from September 1989 to May 1993. Prior to Parametric, Mr. Volpe was
an executive at Prime Computer.
Timothy J. Allen has served as Vice President of Finance, Chief Financial
Officer, Treasurer and Secretary of the Company since February 1995. From March
1990 to September 1994, Mr. Allen served as Vice President and Chief Financial
Officer of Object Design, Inc. From July 1988 to October 1989, Mr. Allen served
as Vice President of Finance and Chief Accounting Officer for Xyvision Inc. From
January 1983 to June 1988, Mr. Allen served as Xyvision's Corporate Controller.
Prior to joining Xyvision, Mr. Allen was Corporate Controller at Nixdorf
Computer Corporation.
G. Wayne Andrews, a co-founder of the Company, has served as a Director of
the Company since June 1993, as Vice President and Chief Technical Officer of
the Company since January 1994 and as President of the Company from June 1993 to
December 1993. From October 1989 to December 1992, Mr. Andrews was co-founder
and Vice President of Teloquent Communications Corporation. At Teloquent, Mr.
Andrews held positions as Vice President Product Management, Vice President
Engineering and Vice President Customer Support. Prior to co-founding Teloquent,
Mr. Andrews was Director, International Development Center, and Director,
Advanced Switching Systems at Teknekron Infoswitch Corp.
Judith A. Kelly has served as Vice President of Customer Service of the
Company since November 1997. From January 1996 to November 1997, Ms. Kelly
served as Director of Marketing Systems Integration for ADC Telecommunications,
Inc. Prior to her position at ADC Telecommunications, Inc. she held several
management positions over a 23-year period with Digital Equipment Corporation.
40
<PAGE> 41
Steven H. Webber, a co-founder of the Company, has served as Vice President
of Engineering of the Company since October 1993. Prior to joining the Company,
Mr. Webber held a number of key technical and management positions with Stratus
Computer Inc., including Chief Technical Advisor and Director of Strategic
Planning. Prior to Stratus, Mr. Webber held a number of key technical positions
at Honeywell Information Systems, Inc. and Massachusetts Institute of
Technology.
The information regarding directors set forth under the caption "Election of
Directors" appearing in the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 28, 1998, which will be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
1997, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation"
appearing in the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 28, 1998, which will be filed with the Securities
and Exchange Commission not later than 120 days after December 31, 1997, is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" appearing in the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on May 28, 1998,
which will be filed with the Securities and Exchange Commission not later than
120 days after December 31, 1997, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions" appearing in the Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be held on May 28, 1998, which will be
filed with the Securities and Exchange Commission not later than 120 days after
December 31, 1997, is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(1) FINANCIAL STATEMENTS
The following financial statements are filed as part of this Annual Report:
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31,
1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995
Notes to Consolidated Financial Statements
Report of Independent Accountants
(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not required.
(3) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1997.
41
<PAGE> 42
(4) EXHIBITS
Documents listed below, except for documents identified by an asterisk, are
being filed as exhibits herewith. Documents identified by parenthetical numbers
are not being filed herewith and, pursuant to Rule 12b-32 of the General Rules
and Regulations promulgated by the Commission under the Securities Exchange Act
of 1934 (the "Act"), reference is made to such documents as previously filed as
exhibits with the Commission.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
*3.1 Amended and Restated Certificate of Incorporation of the
Company.
*3.2 By-Laws of the Company, as amended and restated.
*4.1 Specimen of Stock Certificate representing shares of Common
Stock.
*10.1 Stock Purchase Agreement between the Company and the
Investors named therein, dated August 9, 1995.
*10.2 Amended and Restated Stockholders Agreement between the
Company and certain stockholders of the Company, dated
August 9, 1995.
*10.3 Amended and Restated Founders Registration Rights Agreement
between the Company, G. Wayne Andrews, John C. Thibault and
Steven Webber.
*10.4 Development/License Agreement between the Company and DANAR
Corporation, dated March 4, 1996.
*10.5 Software License and Technical Support Agreement between the
Company and MCI Telecommunications Corporation, dated as of
June 17, 1996.
*10.6 Software License and Distribution Agreement between the
Company and Optus Systems PTY Ltd. dated as of March 29,
1996.
*10.7 Office lease by and between Nationwide Life Insurance
Company and the Company, dated as of November 22, 1996.
*10.8 Loan Modification Agreement between the Company and Silicon
Valley Bank, dated September 11, 1996.
*10.9 Letter Agreement between Silicon Valley Bank and the
Company, dated September 11, 1996. *10.10 Letter Agreement
between Silicon Valley Bank and the Company, dated May 1,
1995.
*10.10 Letter Agreement between Silicon Valley Bank and the
Company, dated May 1, 1995.
*10.11 Letter Agreement between Silicon Valley Bank and the
Company, dated May 18, 1994.
*10.12 Promissory Note executed by the Company in favor of Silicon
Valley Bank, dated March 1, 1996.
*10.13 Executive Change in Control Agreement between the Company
and Timothy J. Allen, dated September 26, 1996.
*10.14 Executive Change in Control Agreement between the Company
and G. Wayne Andrews, dated September 26, 1996.
*10.15 Executive Change in Control Agreement between the Company
and John C. Thibault, dated September 26, 1996.
*10.16 Executive Change in Control Agreement between the Company
and Louis J. Volpe, dated September 26, 1996.
*10.17 Executive Change in Control Agreement between the Company
and Steven H. Webber, dated September 26, 1996.
*10.18 GeoTel Communications Corporation 1995 Stock Option Plan.
*10.19 GeoTel Communications Corporation 1993 Restricted Stock
Purchase Plan.
*10.20 GeoTel Communications Corporation 1996 Employee Stock
Purchase Plan.
**+10.22 Software Agreement Incorporating Licensing Rights between
the Company and Digital Equipment Co., Limited, dated
December 1, 1996
42
<PAGE> 43
**10.23 Sublease Agreement between the Company and National Medical
Care, Inc. d/b/k Fresenius Medical Care-North America dated
February 7, 1997.
***10.24 First Sublease Amendment between National Medical Care, Inc.
d/b/k Fresenius Medical Care-North America dated October 29,
1997.
*** 21.1 List of Subsidiaries
23.1 Consent of Coopers & Lybrand L.L.P.
24.1 Power of Attorney (included on the signature pages of the
Annual Report on Form 10-K/A).
***27.1 Financial Data Schedule
- ----------
* Incorporated by reference to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission (Reg. No. 333-13263).
** Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
*** Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
+ Confidential Treatment Requested.
43
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Boston, Commonwealth of Massachusetts on the 13th day of May, 1998.
GEOTEL COMMUNICATIONS CORPORATION
By: /s/ TIMOTHY J. ALLEN
---------------------------------------
TIMOTHY J. ALLEN
VICE PRESIDENT OF FINANCE, CHIEF
FINANCIAL OFFICER, TREASURER AND
SECRETARY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ * President, Chief Executive Officer May 13, 1998
- ----------------------- and Director (principal executive
JOHN C. THIBAULT officer)
/s/ TIMOTHY J. ALLEN Vice President of Finance, Chief May 13, 1998
- ----------------------- Financial Officer, Treasurer and
TIMOTHY J. ALLEN Secretary (principal accounting
and financial officer)
/s/ * Senior Vice President of Sales May 13, 1998
- ----------------------- and Marketing and Director
LOUIS J. VOLPE
/s/ * Director May 13, 1998
- -----------------------
ALEXANDER V. d'ARBELOFF
/s/ * Director May 13, 1998
- -----------------------
GARY BOWEN
/s/ * Director May 13, 1998
- -----------------------
GARDNER C. HENDRIE
/s/ * Director May 13, 1998
- -----------------------
W. MICHAEL HUMPHREYS
* By: /s/ Timothy J. Allen
-------------------------
TIMOTHY J. ALLEN
ATTORNEY IN FACT
44
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of GeoTel Communications Corporation on Form S-8 (File No. 33-21525) of our
report dated January 20, 1998, on our audits of the consolidated financial
statements of GeoTel Communications Corporation as of December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997,
which report is included in this Annual Report on Form 10-K/A.
/s/ Coopers & Lybrand L.L.P.
----------------------------------
Coopers & Lybrand L.L.P.
Boston, Massachusetts
May 14, 1998
