<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21761
GEOTEL COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3194255
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
900 CHELMSFORD STREET, TOWER II, 12TH FLOOR
LOWELL, MASSACHUSETTS 01851
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (978) 275-5100
NO CHANGE SINCE LAST REPORT
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date:
CLASS OUTSTANDING AT MAY 6, 1998
- ----------------------------- ----------------------------------
Common Stock, $0.01 par value 13,229,274 shares
============================= ==================================
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GEOTEL COMMUNICATIONS CORPORATION
INDEX TO FORM 10-Q
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31,
1998 and December 31, 1997 3
Consolidated Statements of Income for the three
months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
Exhibit 27.1 Financial Data Schedule 14
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GEOTEL COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 41,613 $ 40,428
Accounts receivable 4,604 3,685
Prepaid expenses and other current assets 1,976 1,648
Deferred income taxes 763 763
-------- --------
Total current assets 48,956 46,524
-------- --------
Property and equipment, net 3,150 2,322
Deferred income taxes 1,427 1,427
-------- --------
Total assets $ 53,533 $ 50,273
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 812 $ 708
Accrued expenses 1,287 967
Accrued compensation and related accruals 1,477 1,311
Accrued income taxes 703 951
Deferred revenue 7,751 6,410
-------- ---------
Total current liabilities 12,030 10,347
-------- --------
Stockholders' equity:
Preferred stock -- --
Common stock 135 135
Additional paid-in capital 41,058 40,893
Accumulated earnings (deficit) 1,151 (202)
Unearned compensation (796) (855)
-------- --------
41,548 39,971
Less treasury stock, at cost (45) (45)
-------- --------
Total stockholders' equity 41,503 39,926
-------- --------
Total liabilities and stockholders' equity $ 53,533 $ 50,273
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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GEOTEL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
---- ----
<S> <C> <C>
Revenues:
Software license $ 6,149 $ 2,474
Services and other 1,629 713
------- -------
Total revenues 7,778 3,187
------- -------
Cost of Revenues:
Cost of software licenses 185 99
Cost of services and other 1,439 504
------- -------
Total cost of revenues 1,624 603
------- -------
Gross profit 6,154 2,584
------- -------
Operating Expenses:
Research and development 1,346 867
Sales and marketing 2,396 1,027
General and administrative 781 368
------- -------
Total operating expenses 4,523 2,262
------- -------
Income from operations 1,631 322
Interest income 534 424
------- -------
Income before income taxes 2,165 746
Provision for income taxes 812 21
------- -------
Net income $ 1,353 $ 725
======= =======
Net income per share:
Basic earnings per share $ 0.10 $ 0.06
======= =======
Diluted earnings per share $ 0.10 $ 0.05
======= =======
Weighted average number of common and common
equivalent shares outstanding:
Basic shares 12,929 13,086
======= =======
Diluted shares 13,856 13,769
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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GEOTEL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,353 $ 725
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 227 169
Equity compensation 59 58
Changes in operating assets and liabilities:
Accounts receivable (919) (95)
Prepaid expenses and other current assets (328) (195)
Accounts payable 104 (300)
Accrued expenses and other current liabilities 486 (92)
Accrued income taxes (248) --
Deferred revenue 1,341 71
-------- --------
Net cash provided by operating activities 2,075 341
-------- --------
Cash flows used in investing activities:
Purchases of property and equipment, net (1,055) (223)
-------- --------
Cash flows from financing activities:
Proceeds from sale of common stock and option 165 1
exercises
Offering costs of registering common stock -- (63)
Proceeds from notes receivable for common stock -- 89
-------- --------
Net cash provided by financing activities 165 27
-------- --------
Net increase in cash and cash equivalents 1,185 145
Cash and cash equivalents, beginning of period 40,428 33,263
-------- --------
Cash and cash equivalents, end of period $ 41,613 $ 33,408
-------- --------
</TABLE>
The accompanying footnotes are an integral part of these consolidated
financial statements.
5
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GEOTEL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements for the three months ended March 31,
1998 and the related footnote information are unaudited and have been prepared
on a basis substantially consistent with the 1997 audited consolidated financial
statements, and in the opinion of management include all adjustments (consisting
of only normal recurring adjustments) necessary for fair presentation of the
results of this interim period. These statements should be read in conjunction
with the consolidated financial statements and related notes for the year ended
December 31, 1997 included in the Company's Amended Form 10-K. The results of
operations for the three month period ended March 31, 1998 are not necessarily
indicative of the results to be expected for the entire year.
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.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. COMPUTATION OF INCOME PER SHARE
Net income per basic common share is computed by dividing income by the weighted
average number of common shares outstanding for the period which includes 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 common stock options and unvested restricted common stock outstanding
in the period. The calculation of per share earnings is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(In thousands except per share data)
<S> <C> <C>
Basic:
- ------
Net income $ 1,353 $ 725
=========== ===========
Weighted average common shares outstanding 12,928,786 13,086,372
========== ==========
Net income per share
$ 0.10 $ 0.06
=========== ===========
Diluted:
- --------
Net income $ 1,353 $ 725
=========== ===========
Weighted average common shares outstanding 12,928,786 13,086,372
Common stock equivalents 926,881 682,747
----------- -----------
Total weighted average shares and equivalents outstanding 1,855,667 13,769,119
=========== ===========
Net income per share $ 0.10 $ 0.05
=========== ===========
</TABLE>
6
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3. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
requires that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
income by their nature in an annual financial statement. For example, other
comprehensive income may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. For the three months
ended March 31, 1998 and 1997, the Company's net income and comprehensive
income were the same.
Effective January 1, 1998, the Company adopted 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 supersedes SOP 91-1, "Software Revenue Recognition." SOP 97-2
did not have a material impact on the Company's revenue recognition policies for
the three months ended March 31, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying consolidated
financial statements for the periods specified and the associated notes. Further
reference should be made to GeoTel Communications Corporation's (the "Company")
Amended Form 10-K for the year ended December 31, 1997.
7
<PAGE> 8
OPERATING RESULTS
The following table presents selected unaudited financial information for
the Company's quarters ended March 31, 1998 and 1997 as well as the percentage
of the Company's total revenues represented by each item. The Company's
operating results for any one quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997 1998 1997
---- ---- ---- ----
(DOLLARS IN THOUSANDS) (PERCENTAGE OF REVENUE)
<S> <C> <C> <C> <C>
Revenues:
Software license ........... $6,149 $2,474 79.1% 77.6%
Services and other ......... 1,629 713 20.9 22.4
------ ------ ------ ------
Total revenues ............. 7,778 3,187 100.0 100.0
------ ------ ------ ------
Cost of Revenues:
Cost of software licenses .. 185 99 2.4 3.1
Cost of services and other.. 1,439 504 18.5 15.8
------ ------ ------ ------
Total cost of revenues ..... 1,624 603 20.9 18.9
------ ------ ------ ------
Gross Profit ................. 6,154 2,584 79.1 81.1
------ ------ ------ ------
Operating Expenses:
Research and development ... 1,346 867 17.3 27.2
Sales and marketing ........ 2,396 1,027 30.8 32.2
General and administrative.. 781 368 10.0 11.6
------ ------ ------ ------
Total operating costs ...... 4,523 2,262 58.1 71.0
------ ------ ------ ------
Income from operations ....... 1,631 322 21.0 10.1
Interest income .............. 534 424 6.8 13.3
------ ------ ------ ------
Income before income taxes ... 2,165 746 27.8 23.4
Provision for income taxes ... 812 21 10.4 0.7
------ ------ ------ ------
Net income ................... $1,353 $ 725 17.4% 22.7%
------ ------ ------ ------
</TABLE>
REVENUES
Total revenues for the first quarter of 1998 increased by 144.1% to
$7,778,000 from $3,187,000 for the first quarter of 1997. Software license
revenue for the first quarter of 1998 increased by 148.5% to $6,149,000 from
$2,474,000 for the first quarter of 1997. The Company believes that the increase
in software 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 the first quarter of
1998, under the DEC Agreement, the Company recognized approximately $1,266,000
in software license revenue and $162,500 in services and other revenue compared
to no software license revenue and $150,000 in services and other revenue
for the first quarter of 1997. The Company has recognized $4,374,000 in software
license revenue and $688,000 in services and other revenue under the DEC
Agreement on a cumulative basis through March 31, 1998. Management anticipates
recognizing the remaining revenue under the DEC Agreement over the next several
quarters.
Services and other revenue for the first quarter of 1998 increased by
128.5% to $1,629,000 from $713,000 for the first quarter 1997. In the first
quarter of 1998, maintenance revenue, installation services revenue and
consulting and other revenue represented 51.7%, 40.0% and 8.3%, respectively, of
services and other revenue. In the first quarter of 1997, maintenance revenue,
installation services revenue and consulting and other revenue represented
36.5%, 35.1% and 28.4%, respectively, of services and other revenue. Services
and other revenue decreased to 20.9% of total revenues in the first quarter of
1998 from 22.4% of total revenues in the first quarter of 1997 due to a lower
percentage of revenue from customized development work in the first quarter of
1998 compared to the first quarter of 1997. Services and other revenue increased
in dollars in the first quarter of 1998 primarily due to the increase in the
Company's customer base. The Company anticipates that maintenance revenue will
continue to increase in dollars and as a percentage of total revenues as the
Company's customer base increases. Installation services revenue will vary based
upon software license revenue. Consulting and other revenue for the first
quarter 1997 consisted primarily of custom development work for one of the
Company's strategic partners. Revenue and expenses related to custom development
work are recognized upon the customer acceptance of such work. Consulting and
other revenue are non-recurring in nature and will fluctuate in dollars and as a
percentage of
8
<PAGE> 9
total revenues from quarter to quarter. The Company performs consulting work
primarily in situations where such work will result in additional software
license revenue.
International revenues for the first quarter of 1998 increased 308.9% to
$2,249,000 from $550,000 for the first quarter of 1997 and increased as a
percentage of total revenues to 28.9% from 17.3%. The international revenue in
1998 and 1997 were derived from three and two customers, respectively. 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.
A significant portion of the Company's total revenues to date has been
derived from a limited number of customers. Revenues attributable to the five
largest customers in each quarter accounted for approximately 60.3% and 71.7% of
the Company's total revenues for the quarters ended March 31, 1998 and 1997,
respectively. No customer accounted for more than ten percent of the Company's
total revenues in either of these periods. 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.
COST OF REVENUES
Cost of software licenses. Cost of software licenses consists principally
of product warranty, development costs associated with the DEC Agreement and the
costs of interface cards. Cost of software licenses for the first quarter of
1998 increased by 86.9% to $185,000 from $99,000 for the first quarter of 1997.
Cost of software licenses as a percentage of software license revenue were 3.0%
and 4.0% for the first quarters of 1998 and 1997, respectively. The Company
believes that in future periods, the percentage of cost of software licenses
will range from 3% to 5% of software license revenue but be subject to increase
dependent upon the size of any development related contracts.
Cost of services. 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 for the first quarter of 1998
increased by 185.5% to $1,439,000 from $504,000 for the first quarter of 1997.
Cost of services as a percentage of services and other revenue were 88.3% and
70.7% for the first quarters of 1998 and 1997, respectively. The increase was a
result of increased personnel and travel costs. These costs increased as a
result of an 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 range from 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
for the first quarter of 1998 increased by 55.2% to $1,346,000 from $867,000 for
the first quarter of 1997. Research and development expenses as a percentage of
total revenues were 17.3% and 27.2% for the first quarters of 1998 and 1997,
respectively. The decrease as a percentage of total revenue for the periods was
primarily the result of the Company's significant revenue growth. The increase
in absolute dollars for the periods was the result of increases in personnel and
related facility costs. The major product development efforts in the first
quarter of 1998 related to the development of interfaces for international
carriers, network voice response unit capabilities, computer telephony
integration for the desktop and enhancements to the Company's existing products.
The Company released a new version of its products during the first quarter of
1998. The Company plans to continue to introduce enhancements to its existing
products and new products that can be sold to existing and new customers. The
Company is also working on several projects that will be designed to enhance its
products for use with the Internet and Intranets. The Company anticipates that
research and development expenses will continue to increase in absolute dollars
and range from 17% to 20% of total revenues in the foreseeable future.
9
<PAGE> 10
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 for the first quarter of 1998
increased by 133.3% to $2,396,000 from $1,027,000 for the first quarter of 1997.
Sales and marketing expenses as a percentage of total revenues were 30.8% and
32.2% for the first quarters of 1998 and 1997, 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 twenty-seven at the end of the first quarter of 1998 from
eleven at the end of the first quarter of 1997. 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.
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 for the first quarter of
1998 increased by 112.2% to $781,000 from $368,000 for the first quarter of
1997. General and administrative expenses as a percentage of total revenues were
10.0% and 11.6% for the first quarters of 1998 and 1997, 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 $534,000 and $424,000 for the first quarters of
1998 and 1997, respectively, resulted from investments of the Company's cash
balances.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for the three months ended March 31, 1998
was approximately 37.5% compared to approximately 2.8% for the three months
ended March 31, 1997. In the first quarter of 1997, the effective tax rate was
significantly lower than the statutory rate 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 until the fourth quarter of
1997 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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company's cash and cash equivalents, accounts
receivable and working capital increased to $41,613,000, $4,604,000 and
$36,926,000, respectively, compared to $40,428,000, $3,685,000 and $36,177,000,
respectively, at December 31, 1997.
The Company generated cash in the amount of $2,075,000 from operations in
the first quarter of 1998 compared to $341,000 in the first quarter of 1997. The
improvement in cash flow from operations is primarily the result of an increase
in advance customer payments and more profitable operations as a result of
higher revenues.
The Company used cash in investing activities of $1,055,000 and $223,000 in
the first quarters of 1998 and 1997, respectively. Capital expenditures
increased due to an increase in leasehold improvements for expanded office space
and due to the growth in personnel. The Company invested in leasehold
improvements due to the expansion of its corporate office from approximately
31,800 square feet to 67,000 square feet. The Company generated cash in
financing activities of $165,000 and $27,000 in the first quarters of 1998 and
1997, respectively. Financing activities consisted primarily of sales of equity
securities.
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<PAGE> 11
As of March 31, 1998, 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.
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 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.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of future financial performance of
the Company. However, from time to time, information provided by the Company or
statements made by its employees may contain "forward-looking" information that
involve risks and uncertainties. In particular, statements contained in this
Form 10-Q that are not historical facts (including, but not limited to,
statements concerning services and other revenue, 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. The Company's actual results of operations and financial condition have
varied and may in the future vary significantly from those stated in any
forward-looking statements. Factors that may cause such differences include,
without limitation, the risks, uncertainties and other information discussed
below, as well as the accuracy of the Company's internal estimates of revenue
and operating expense levels. Each of these factors, and others, are discussed
from time to time in the filings made by the Company with the Securities and
Exchange Commission.
The Company's future results are subject to substantial risks and
uncertainties. The Company has experienced substantial revenue growth since the
ICR product introduction and first achieved profitability in the first quarter
of 1996. However, due to the Company's limited operating history there can be no
assurance that such revenue growth and profitability will continue in the future
on a quarterly or annual basis. Future operating results will depend on many
factors, including the demand for the Company's products, the level of product
and price competition, the Company's success in expanding its direct sales
force, indirect distribution channels 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 ICR 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 ICR 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 these environments.
The Company is dependent upon its ability to protect its proprietary
technology and relies upon a combination of patents, copyrights, trademarks,
trade secret laws and confidentiality procedures. There can be no assurance that
the protections put in place by the Company will be adequate. The Company
believes that international expansion is important to the Company's ability to
continue its growth. There can be no assurance that the Company will be
successful in integrating its product in international markets and such revenues
are subject to a number of risks including compliance with regulatory
requirements, export restrictions and controls, trade barriers, protection of
intellectual property rights, management of international operations, collection
of receivables, political instability, currency exchange rate fluctuation and
potentially adverse tax consequences. The Company depends on a single vendor for
the software and network adapter necessary for the ICR to interface with the
AT&T network. Although the Company has a perpetual, fully-paid license, with
access to the underlying source code for this software and the rights to
manufacture the network adapter, if for any reason the vendor does not make the
software or network adapter available to the Company, there can be no assurance
that the Company will be able to develop these products on a timely basis.
The Company's quarterly operating results may vary significantly in the
future depending on factors such as increased competition from the interexchange
carriers, Automatic Call Distribution switching system vendors and other
companies, the timing of new product announcements and changes in pricing
policies by the Company and its competitors, market acceptance of new and
enhanced versions of the Company's products, the size and timing of significant
orders, order cancellations by customers, changes in operating expenses, changes
in Company strategy, personnel changes, the Company's ability to manage growth,
if any, including the continued improvement in its financial and management
controls and growth of its employee work force and general economic factors. The
Company's expense levels are based, in part, on its expectations of future
revenues and to a large extent are fixed in the short-term. If revenue levels
are below expectations, the Company's business, operating results and financial
condition are likely to be materially
11
<PAGE> 12
adversely affected. Net income may be disproportionately affected by a reduction
in revenues because a proportionately smaller amount of the Company's expenses
varies with its revenues. As a result, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Additional information on the factors that could affect the Company's financial
results is included in the Company's 1997 Amended Form 10-K which has been filed
with the Securities and Exchange Commission.
International sales accounted for approximately 28.9% and 17.3% of the
Company's revenues for the three months ended March 31, 1998 and 1997,
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.
PART II. OTHER INFORMATION
ITEM 2. 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 March 31, 1998. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 27.1 Financial Data Schedule.
(b) Report on Form 8-K.
The Company did not file a Form 8-K during the quarter ended March 31, 1998.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GEOTEL COMMUNICATIONS CORPORATION
(Registrant)
May 13, 1998 /s/ Timothy J. Allen
--------------------------------------------------
Timothy J. Allen
Vice President of Finance, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Chief Accounting Officer)
13
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE QUARTER ENDED MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q FILING.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1998
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