<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 000-22605
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 94-3120525
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1155 MARKET STREET, SAN FRANCISCO, CALIFORNIA 94103
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (415) 437-1100
Not Applicable
(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:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OUTSTANDING AT SEPTEMBER 30, 1998
------------------- ---------------------------------
<S> <C>
Common Stock, no par value 22,864,155 Shares
</TABLE>
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Genesys Telecommunications Laboratories, Inc.
THIRD QUARTER 1998 FORM 10-Q
TABLE OF CONTENTS
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<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements 3
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 15
ITEM 2. Changes in Securities and Use of Proceeds 16
ITEM 3. Defaults Upon Senior Securities 16
ITEM 4. Submission of Matters to a Vote of
Security Holders 16
ITEM 5. Other Information 16
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
2
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PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
--------------------
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998
and June 30, 1998 4
Condensed Consolidated Statements of Operations for the
three months ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for the three
months ended September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
3
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GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
----------------- ---------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 42,583 $ 30,256
Short-term investments 10,157
Accounts receivable, net 28,007 28,454
Prepaid expenses and other 8,719 8,314
----------------- ---------------
Total current assets 89,913 83,562
PROPERTY AND EQUIPMENT, net 17,625 14,675
OTHER ASSETS 6,463 6,742
----------------- ---------------
$ 114,280 $ 104,700
================= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 153 $ 243
Current portion of long-term obligations 33 33
Accounts payable 4,520 2,639
Accrued payroll and related benefits 3,702 4,539
Other accrued liabilities 5,674 8,427
Deferred revenues 18,820 16,805
----------------- ---------------
Total current liabilities 34,611 30,977
----------------- ---------------
LONG-TERM OBLIGATIONS 93 102
----------------- ---------------
SHAREHOLDERS' EQUITY:
Common stock 74,402 72,356
Shareholder notes receivable (316) (440)
Cumulative translation adjustment (222) (188)
Retained Earnings 5,712 1,893
----------------- ---------------
Total shareholders' equity 79,576 73,621
----------------- ---------------
$ 114,280 $ 104,700
================= ===============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
4
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GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
------------ -------------
(Unaudited)
REVENUES:
<S> <C> <C>
License $ 23,662 $ 13,267
Service 5,346 2,973
------------ -------------
Total revenues 29,008 16,240
------------ -------------
COST OF REVENUES:
License 1,052 671
Service 4,055 1,821
------------ -------------
Total cost of revenues 5,107 2,492
------------ -------------
GROSS MARGIN 23,901 13,748
------------ -------------
OPERATING EXPENSES:
Research and development 5,403 3,059
Sales and marketing 10,403 6,950
General and administrative 2,703 1,862
------------ -------------
Total operating expenses 18,509 11,871
------------ -------------
INCOME FROM OPERATIONS 5,392 1,877
INTEREST AND OTHER INCOME (EXPENSE), NET 484 335
------------ -------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 5,876 2,212
PROVISION FOR INCOME TAXES 2,057 816
------------ -------------
NET INCOME $ 3,819 $ 1,396
============ =============
BASIC NET INCOME PER SHARE $ 0.17 $ 0.07
============ =============
DILUTED NET INCOME PER SHARE 0.15 0.05
============ =============
BASIC WEIGHTED AVERAGE COMMON SHARES 22,628 20,510
============ =============
DILUTED WEIGHTED AVERAGE
COMMON SHARES 25,779 26,096
============ =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
5
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GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
1998 1997
---------------- --------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,819 $ 1,396
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred stock compensation expense 119 119
Depreciation and amortization 1,918 981
Provision for doubtful accounts 100 5
Changes in operating assets and liabilities:
Accounts receivable (547) 1,801
Prepaid expenses and other (405) (406)
Accounts payable (1,881) (543)
Accrued payroll and related benefits 837 405
Other accrued liabilities 2,753 (162)
Deferred revenues 2,015 265
---------------- --------------
Net cash provided by (used in) operating activities 8,728 3,861
---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of short-term investments 13,408 -
Purchases of short-term investments (6,580) (16,682)
Purchases of property and equipment (4,488) (2,628)
(Increase) decrease in other assets (693) (240)
---------------- --------------
Net cash provided by (used in) investing activities 1,647 (19,550)
---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from/(Repayments of) note payable (90) 30
Principal payments on capital lease obligations (9) (124)
Proceeds from sales of common stock 2,051 69
---------------- --------------
Net cash used in financing activities 1,952 (25)
---------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS 12,327 (15,714)
CASH AND CASH EQUIVALENTS:
Beginning of Period 30,256 47,160
---------------- --------------
End of Period $ 42,583 $ 31,446
=============== ==============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
6
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GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared by Genesys Telecommunications Laboratories, Inc. (the Company) without
audit and reflect all adjustments which are, in the opinion of management,
necessary for a fair presentation of the financial position and the results of
operations of the Company for the interim periods. The statements have been
prepared in accordance with the regulations of the Securities and Exchange
Commission (SEC). Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles. The results of operations
for the three months ended September 30, 1998 are not necessarily indicative of
the operating results to be expected for the full fiscal year or future
operating periods. The information included in this report should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the fiscal year ended June 30, 1998 and the risk factors as set forth in the
Company's Annual Report on Form 10-K, including, without limitation, risks
relating to limited operating history, potential fluctuations in quarterly
operating results, lengthy sales cycle, lengthy implementation cycle, dependence
on third party consultants, dependence on new products, rapid technological
change, competition, product concentration, management of growth, dependence on
third-party resellers, GeoTel litigation, customer concentration, dependence on
emerging CTI market, risks associated with international sales and operations,
dependence on key personnel, government regulation of immigration, dependence on
ability to integrate with third-party technology, product liability, protection
of intellectual property, concentration of stock ownership, possible volatility
of stock price, shares eligible for future sale, registration rights, effect of
certain charter provisions, anti-takeover effects of provisions of the by-laws
and uncertainty as to use of proceeds. Any party interested in reviewing these
publicly available documents should write to the SEC or the Chief Financial
Officer of the Company.
2. CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated.
7
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3. NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"),
which was adopted by the Company in the quarter ended December 31, 1997, and in
accordance with this standard all prior periods presented have been restated to
conform to its provisions. Under the new requirements for calculating earnings
per share, the dilutive effect of potential common shares is excluded from basic
net income (loss) per share. Diluted net income (loss) per share is computed
using the weighted average number of common and potential common shares
outstanding during the period. Potential common shares consist of preferred
stock (using the "if converted" method) and stock options and warrants (using
the treasury stock method). Potential common shares are excluded from the
dilutive computation only if their effect is anti-dilutive.
In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin 98, which included SEC requirements related to the adoption
of SFAS 128. The Company applied these provisions to the calculation of basis
and diluted weighted average shares outstanding for all periods presented in the
accompanying statements of operations.
Basic and Diluted Weighted Average Common and Potential Common Shares
presented in the accompanying statements of operations (as rounded) are
comprised of the following (in thousands):
<TABLE>
<CAPTION>
Three Months
Ended
September 30,
-------------------------------------
1998 1997
------------- ---------------
<S> <C> <C>
Weighted average common shares outstanding 22,628 19,843
Shares issued in acquisition of Forte - 667
BASIC WEIGHTED AVERAGE COMMON SHARES 22,628 20,510
================ ===============
Weighted average options and warrants for common stock 3,151 5,586
DILUTED WEIGHTED AVERAGE COMMON SHARES 25,779 26,096
================ ===============
</TABLE>
4. LITIGATION
On December 17, 1996, GeoTel Communications Corporation ("GeoTel") filed
a lawsuit in the United States District Court for the District of Massachusetts
naming the Company as defendant, and alleging infringement of a patent issued to
GeoTel entitled "Communications System Using a Central Controller to Control at
Least One Network and Agent System", U.S. Patent No. 5,546,452 (the "GeoTel
Patent"). In the complaint, GeoTel requested injunctive relief, an accounting
for damages and an assessment of interest and costs, and other relief as the
court deems just and proper. On February 10, 1997, the Company filed an answer
in response to the complaint filed by GeoTel, asserting that the GeoTel Patent
is invalid, denying the alleged patent infringement and seeking dismissal of the
complaint with prejudice. The litigation is currently in early discovery stages,
with depositions to commence fall of 1998 and fact discovery scheduled to be
completed in January 1999. The Company believes that it has meritorious defenses
to the asserted claims and intends to defend the litigation vigorously. GeoTel
alleges that the Genesys Call Router, Genesys Call Center Manager and Genesys
Call Concentrator products, and the T Server product, as a necessary element of
all Genesys products, infringe the GeoTel Patent. After consultation with
counsel, the Company does not believe any of the products described under
"Business--Products" in the Company's Annual Report on Form 10-K infringe any
valid claims of the GeoTel Patent. In connection with the Company's development
of the potential new products described under "Business--Research and
Development" in the Company's Annual Report on Form 10-K, the Company has
sought the advice of such counsel and believes that such potential products can
be developed without infringing the GeoTel Patent; however, there can be no
assurance that GeoTel will not assert infringement of the GeoTel Patent with
respect to such potential new products. Further, the outcome of litigation is
inherently unpredictable, and there can be no assurance that the results of
these proceedings will be favorable to the Company or that they will not have a
material adverse effect on the Company's business, financial condition or
results of operations. Regardless of the ultimate outcome, the GeoTel litigation
could result in substantial expense to the Company and significant diversion of
effort by the Company's technical and managerial personnel. If the Court
determines that the Company infringes GeoTel's patent and that the GeoTel patent
is valid and enforceable, it could issue an injunction against the use or sale
of certain of the Company's products and it could assess significant damages
against the Company. Accordingly, an adverse determination in the proceeding
could subject the Company to significant liabilities and require the Company to
seek a license from GeoTel. Although patent and other intellectual property
disputes in the software area have sometimes been settled through licensing or
similar arrangements, costs associated with such arrangements may be
substantial, and there
8
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can be no assurance that a license from GeoTel, if required, would be available
to the Company on acceptable terms or at all. Accordingly, an adverse
determination in the GeoTel litigation could prevent the Company from licensing
certain of its software products, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2"),
which was adopted by the Company in its first fiscal quarter of 1999. SOP 97-2
clarifies and amends certain provisions of Statement of Position 91-1, "Software
Revenue Recognition". The adoption of the provisions of SOP 97-2 did not have a
material impact on the Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which was adopted by the Company in its first quarter of fiscal 1999.
Accordingly, the Company is required to disclose, in financial statement format,
all non-owner changes in equity. Such changes include, for example, cumulative
foreign currency translation adjustments, certain minimum pension liabilities
and unrealized gains and losses on available-for-sale securities. The Company's
only reconciling item to comprehensive income from net income is cumulative
translation adjustments resulting from foreign currency exchange rates, the net
effect of which is immaterial to the Company's financial statements for the
periods presented.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which establishes standards
for reporting information about operating segments in annual financial
statements and interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. As defined in SFAS 131, operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. The Company will adopt SFAS 131 for the year ended June 30, 1998. The
Company believes the adoption of SFAS 131 will not have a material impact on
its financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Company does
not expect the adoption of SFAS 133, required beginning the first of quarter of
2000 to have a material effect on its consolidated financial statements.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Genesys Telecommunications Laboratories, Inc (''Genesys'' or the ''Company'')
is a leading provider of enterprise-wide customer interaction, computer
telephony and e-mail software solutions. The Company's products allow an
organization to optimally manage its customer interactions and employee
communications to increase productivity, lower costs and achieve greater
customer satisfaction and loyalty. To accomplish this, Genesys' software-based
solutions integrate and extend the capabilities of an organization's computer,
telecommunications and database systems, bringing together what were once
disparate technologies. The Company believes that as customer interactions are
increasingly viewed as strategic to an organization's mission, call center
capabilities will be extended beyond traditional agent, site and switch
boundaries, transforming the entire enterprise into a customer interaction
network.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data of the Company
expressed as a percentage of total revenues for the years and periods indicated.
<TABLE>
<CAPTION>
Three Months
Ended
September 30,
---------------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
Revenues:
License ................................................... 81.6% 81.7%
Service ................................................... 18.4 18.3
---------------- ---------------
Total revenues........................................ 100.0 100.0
---------------- ---------------
Cost of revenues:
License ................................................... 3.6 4.1
Service ................................................... 14.0 11.2
---------------- ---------------
Total cost of revenues................................ 17.6 15.3
---------------- ---------------
Gross Margin.................................................... 82.4 84.7
---------------- ---------------
Operating expenses:
Research and development................................... 18.6 18.8
Sales and marketing........................................ 35.9 42.8
General and administrative................................. 9.3 11.5
---------------- ---------------
Total operating expenses.............................. 63.8 73.1
---------------- ---------------
Income from operations.......................................... 18.6 11.6
Interest and other income (expense), net........................ 1.7 2.1
---------------- ---------------
Income before provision for income taxes........................ 20.3 13.6
Provision for income taxes...................................... 7.1 5.0
---------------- ---------------
Net income ................................................... 13.2% 8.6%
================ ===============
</TABLE>
10
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Revenues
--------
License. License revenues increased by 78.4% from $13.3 million in the three
-------
months ended September 30, 1997 to $23.7 million in the three months ended
September 30, 1998. This increase resulted from the market's growing acceptance
of the Company's products and underlying technology, an expansion of the
Company's product offerings, and a significant increase in the Company's sales,
marketing and customer service organizations. The Company does not believe that
the historical growth rates of license revenues will be sustainable or are
indicative of future results.
Service. Service revenues primarily comprise fees from consulting, post-
-------
contract support and, to a lesser extent, training services. Service revenues
increased by 79.8% from $3.0 million in the three months ended September 30,
1997 to $5.3 million in the three months ended September 30, 1998. The
Company's software license agreements often provide for maintenance, consulting
and training. Accordingly, increases in licensing activity have resulted in
increases in revenues from services related to maintenance, consulting and
training.
If the Company is successful in implementing its strategy of encouraging
third-party organizations such as systems integrators to undertake a greater
percentage of implementation of the Company's products, service revenues may
decrease as a percentage of total revenues, while maintenance as a percentage of
total revenues is expected to increase. The Company does not believe that the
historical growth rates of service revenues will be sustainable or are
indicative of future results.
Cost of Revenues
----------------
License. Cost of license revenues includes the costs of product media, product
-------
duplication and manuals, as well as allocated labor and overhead costs
associated with the preparation and shipment of products. Cost of license
revenues were $1.1 million and $0.7 million, in the three months ended
September 30, 1998 and 1997, respectively. The increase in absolute dollar
amounts relates primarily to an increase in the volume of products shipped by
the Company, and the resulting increase in documentation material costs and
personnel necessary to assemble and ship the products. Also included in cost
of license revenues is amortization of capitalized software costs amounting
to, approximately, $132,000 and $37,500 for the three months ended September
30, 1998 and 1997, respectively.
Service. Cost of service revenues are primarily comprised of employee-related
-------
costs incurred in providing consulting, post-contract support and training
services. Cost of service revenues were $4.1 million and $1.8 million in the
three months ended September 30, 1998 and 1997, respectively. The increase in
absolute dollars was due primarily to increases in consulting, support and
training personnel, and increases in overhead costs associated with travel,
computer equipment and facilities. The cost of service revenues as a percentage
of service revenues may vary between periods due to the mix of services provided
by the Company and the resources used to provide these services.
Operating Expenses
------------------
For the three months ended September 30, 1998 and 1997, the Company's
operating expenses were $18.5 million and $11.9 million, or 63.8% and 73.1% of
total revenues, respectively.
Research and Development. Research and development expenses were $5.4 million
and $3.1 million, or 18.6% and 18.8% of total revenues in the three months ended
September 30, 1998 and 1997, respectively. These expenses increased in absolute
dollars primarily as a result of an increase in personnel to support the
Company's product development activities. The Company expects that research and
development expenditures will continue to increase in absolute dollars.
Research and development expenses are generally charged to operations as
incurred. In accordance with Statement of Financial Accounting Standards No. 86,
the Company capitalized approximately $0.4 million and $0.3 million of
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software development costs incurred in the three months ended September 30, 1998
and 1997, respectively, related to the development of its T-server product
suite.
Sales and Marketing. Sales and marketing expenses were $10.4 million and $6.9
-------------------
million, representing 35.9% and 42.8% of total revenues in the three months
ended September 30, 1998 and 1997, respectively. These expenses increased in
absolute dollars primarily due to the Company's continuing investment in
building a direct sales force to support the increasing demand for its products,
and the Company's investment in expanding its channel sales force in North
America, Europe and the Asia Pacific. In addition, the Company incurred
increased marketing expenses associated with the Company's expanding product
line, including trade shows and promotional expenses. The Company expects to
continue to expand its direct sales and marketing efforts, and therefore,
anticipates sales and marketing expenditures will continue to increase
significantly in absolute dollars.
General and Administrative. General and administrative expenses were $2.7
--------------------------
million and $1.9 million, or 9.3% and 11.5% of total revenues in the three
months ended September 30, 1998 and 1997, respectively. These expenses increased
in absolute dollars during these periods principally due to the addition of
staff and information system investments to support the growth of the Company's
business during these periods. In addition, the Company has incurred higher
legal costs associated primarily with general corporate matters, trademark
matters and patent filings. The Company expects to continue to increase its
general and administrative staff and to incur other costs necessary to manage a
growing organization, accordingly, it expects general and administrative
expenses to continue to increase in absolute dollars. General and administrative
expenses as a percentage of total revenues have decreased from 11.5% in the
first quarter of fiscal 1998 to 9.3% in the first quarter of fiscal 1999, due
principally to the significant investments made by the Company in 1998 relative
to total revenues in anticipation of significant growth during fiscal 1998 and
1999. The Company expects to continue to increase general and administrative
expenses in absolute dollars, but expects that these expenses as a percentage of
total revenues will stabilize.
Provision for Income Taxes
--------------------------
The Company's effective tax rate for the three months ended September 30,
1998 was 35%, which the Company estimates will be the effective tax rate for the
remainder of fiscal 1999. The Company's effective tax rate for the year ended
June 30, 1998 was 34%.
Year 2000
---------
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company is assessing
both the internal readiness of its computer systems and the compliance of its
computer products and software sold to customers for handling the year 2000. The
Company has designed and tested current versions of its products to be year 2000
ready. Some of the Company's customers might be running older product versions
that might not be year 2000 ready. It is possible that the Company may
experience increased expenses in addressing migration issues for these
customers. In addition, there can be no assurances that the Company's current
products do not contain undetected errors or defects associated with year 2000
date functions that may result in material costs to the Company. Some
commentators have stated that a significant amount of litigation will arise out
of year 2000 compliance issues. Because of the unprecedented nature of such
litigation, it is uncertain whether or to what extent the Company may be
affected by it. Although the Company does not believe that it will incur any
material costs or experience material disruptions in its business associated
with preparing its internal systems for the year 2000, there can be no assurance
that the Company will not experience serious unanticipated negative consequences
and/or material costs caused by undetected errors or defects in the technology
used in its internal systems, which are composed predominantly of third party
software and hardware technology with embedded software, and the Company's own
software products.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company's primary sources of liquidity included
cash and cash equivalents of $42.6 million and short-term investments of $10.2
million.
The Company generated cash from operating activities of $8.7 million in the
three months ended September 30, 1998 related primarily to an increase in net
income, accrued liabilities and deferred revenues, which was offset in part by a
decrease in accounts payable. The Company generated cash from operating
activities of $3.9 million in the three months ended September 30, 1997 related
primarily to an increase in net income and a decrease in accounts receivable.
The Company generated cash from the net maturity of $6.8 million of short-
term investments in the three months ended September 30, 1998. The Company used
cash of $4.5 million for the purchase of property and equipment in the three
months ended September 30, 1998. The Company used cash to purchase $16.7
million of short-term investments and $2.6 million of property and equipment in
the three months ended September 30, 1997.
The Company has established subsidiaries in foreign countries, including the
United Kingdom, France, Germany, Sweden, Canada, Russia, Japan, Singapore and
Australia, which function primarily as sales offices in those locations. The
Company expects to establish offices in other foreign countries as it continues
to expand its international operations. The capital expenditures necessary to
establish a foreign office are not significant, and,
12
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accordingly, the Company does not expect that the establishment of these
subsidiaries will have a material adverse effect on its liquidity and capital
resources.
The Company believes that its existing sources of liquidity will satisfy the
Company's projected working capital and capital requirements for at least the
next twelve months.
QUARTERLY RESULTS OF OPERATIONS AND FORWARD LOOKING STATEMENTS
The Company's quarterly operating results have in the past fluctuated and may
in the future fluctuate significantly, depending on a number of factors, many of
which are beyond the Company's control, including: market acceptance of the
Company products; competition; the size, timing and recognition of revenue from
significant orders; the Company's ability to develop and market new products and
product enhancements; new product releases by the Company and its competitors
and the timing of such releases; the length of sales and implementation cycles;
the Company's ability to integrate acquired business; the Company's success in
establishing indirect sales channels and expanding its direct sales force; the
Company's success in retaining and training third-party support personnel; the
delay or deferral of significant revenues until acceptance of software required
by an individual license transaction; technological changes in the market for
the Company's products; the deferral of customer orders in anticipation of new
products and product enhancements; purchasing patterns of indirect channel
partners and customers; changes in pricing policies by the Company and its
competitors; the mix of revenues derived from the Company's direct sales force
and various indirect distribution and marketing channels; the mix of revenues
derived from domestic and international customers; seasonality; changes in
operating expenses; changes in relationships with strategic partners; changes in
Company strategy; personnel changes; foreign currency exchange rate
fluctuations; the ability of the Company to control its costs; and general
economic factors.
While the Company generally operates with limited backlog, from time to time
it receives orders from customers that are for project development over an
extended period of time. The Company derives substantially all of its revenues
from licenses of the Company's platform and related applications software and
services. The Company believes that the purchase of its products is relatively
discretionary and generally involves a significant commitment of capital and
other resources by a customer. The Company's typical order size ranges from
$200,000 to $400,000; however, several orders during the three months ended
September 30, 1998 exceeded $500,000 each. The timing of the receipt and
shipment of a single order can have a significant impact on the Company's
revenues and results of operations for a particular quarter. In situations
requiring customer acceptance of implementation, the Company does not recognize
license revenues until installations are complete and does not recognize the
consulting component of service revenues until the services are rendered. As a
result, revenue recognition may be delayed in many instances. Historically, the
Company has often recognized a substantial portion of its revenues in the last
month of a quarter, with these revenues frequently concentrated in the last two
weeks of a quarter. As a result, product revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter, and
revenues for any future quarter are not predictable with any meaningful degree
of certainty. 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, which may last from three to nine months or more, varies
substantially from customer to customer. The Company's quarterly revenues are
also subject to seasonal fluctuations, particularly in the quarter ending in
September when reduced activity outside North America during the summer months
can adversely affect the Company's revenues. The Company's expenses are
relatively fixed and are based, in part, on expectations as to future revenues.
Consequently, if future revenue levels were below expectations, net income would
be disproportionately affected because a proportionately smaller amount of the
Company's expenses varies with its revenues. In addition, the Company expects
that sales derived through indirect channels, which are more difficult to
forecast and generally have lower gross margins than direct sales, will increase
as a percentage of total revenues. Due to all of the foregoing factors, the
Company believes that period-to-period comparisons of its results of operations
are not meaningful and should not be relied upon as indications of future
performance. It is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock would likely be
materially adversely affected.
13
<PAGE>
Because of these factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and that
such comparisons should not be relied upon as indications of future performance.
Certain statements contained in this Quarterly Report on Form 10-Q, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, constitute "forward looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934 regarding events, conditions and financial trends that may affect the
Company's future plans, business strategy, results of operations and financial
position. Readers are referred to the "Risk Factors" section of the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission,
which identify important risk factors that could cause actual results to differ
from those contained in the forward-looking statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Not applicable.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
On December 17, 1996, GeoTel Communications Corporation (''GeoTel'')
filed a lawsuit in the United States District Court for the District of
Massachusetts naming the Company as defendant, and alleging infringement of a
patent issued to GeoTel entitled ''Communications System Using a Central
Controller to Control at Least One Network and Agent System'', U.S. Patent No.
5,546,452 (the ''GeoTel Patent''). In the complaint, GeoTel requested injunctive
relief, an accounting for damages and an assessment of interest and costs, and
other relief as the court deems just and proper. On February 10, 1997, the
Company filed an answer in response to the complaint filed by GeoTel, asserting
that the GeoTel Patent is invalid, denying the alleged patent infringement and
seeking dismissal of the complaint with prejudice. The litigation is currently
in early discovery stages, with depositions to commence fall of 1998 and fact
discovery scheduled to be completed in January 1999. The Company believes that
it has meritorious defenses to the asserted claims and intends to defend the
litigation vigorously. GeoTel alleges that the Genesys Call Router, Genesys Call
Center Manager and Genesys Call Concentrator products, and the T Server product,
as a necessary element of all Genesys products, infringe the GeoTel Patent.
After consultation with counsel, the Company does not believe any of the
products described under ''Business--Products'' in the Company's Annual Report
on Form 10-K infringe any valid claims of the GeoTel Patent. In connection with
the Company's development of the potential new products described under
''Business--Research and Development'' in the Company's Annual Report on
Form 10-K, the Company has sought the advice of such counsel and believes that
such potential products can be developed without infringing the GeoTel Patent;
however, there can be no assurance that GeoTel will not assert infringement of
the GeoTel Patent with respect to such potential new products. Further, the
outcome of litigation is inherently unpredictable, and there can be no assurance
that the results of these proceedings will be favorable to the Company or that
they will not have a material adverse effect on the Company's business,
financial condition or results of operations. Regardless of the ultimate
outcome, the GeoTel litigation could result in substantial expense to the
Company and significant diversion of effort by the Company's technical and
managerial personnel. If the Court determines that the Company infringes
GeoTel's patent and that the GeoTel patent is valid and enforceable, it could
issue an injunction against the use or sale of certain of the Company's products
and it could assess significant damages against the Company. Accordingly, an
adverse determination in the proceeding could subject the Company to significant
liabilities and require the Company to seek a license from GeoTel. Although
patent and other intellectual property disputes in the software area have
sometimes been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial, and there can be no
assurance that a license from GeoTel, if required, would be available to the
Company on acceptable terms or at all. Accordingly, an adverse determination in
the GeoTel litigation could prevent the Company from licensing certain of its
software products, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
15
<PAGE>
ITEM 2. Changes in Securities and Use of Proceeds
-----------------------------------------
During the period covered by this report, there were no changes in the
rights of holders of any class of securities of the Company and no unregistered
sales of equity securities.
On June 16, 1997, the Company's registration statement on Form S-1
(SEC File No. 333-24479) was declared effective. The registration statement
registered for offer and sale 2,500,000 (2,875,000 shares including over-
allotments) of the Company's Common Stock, no par value, for an aggregate price
of $45 million ($51.75 million including over-allotments) (the "Offering").
Pursuant to the Offering, which was completed in June 1997, the Company sold
2,375,000 shares, including over-allotments, of Common Stock and certain
shareholders of the Company sold 500,000 shares of Common Stock. The shares in
the Offering were sold in a firm commitment underwriting that was co-managed by
Goldman Sachs & Company, Lehman Brothers and Robertson, Stephens & Company (now
known as BancBoston Robertson Stephens). The amount of underwriting expenses
incurred by the Company in connection with the Offering were approximately
$1,990,500, resulting in net proceeds to the Company in the amount of
$37,137,000.
As of September 30, 1998, none of the net proceeds from the Offering
have been used by the Company, and the net proceeds are held in cash or high-
grade short-term investments. The Company's planned use of proceeds is as
described in the registration statement.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
ITEM 5. Other Information
-----------------
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit
Number Exhibit
------ -------
27.1 Financial Data Schedule
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
Date: November 13, 1998 By: /s/ MICHAEL J. McCLOSKEY
-----------------------------------------
Michael J. McCloskey
President, Chief Financial Officer and Secretary
17
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