<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 DECEMBER 31, 1997
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)
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)
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:
TITLE OF EACH CLASS OUTSTANDING AT DECEMBER 31, 1997
------------------- --------------------------------
Common Stock, no par value 20,845,810 shares
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
SECOND QUARTER 1998 FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
ITEM 1. Financial Statements 3
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 17
ITEM 2. Changes in Securities and Use of Proceeds 18
ITEM 3. Defaults Upon Senior Securities 18
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information 18
ITEM 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
--------------------
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1997 and June 30, 1997 4
Condensed Consolidated Statements of Operations for the
three and six months ended December 31, 1997 and 1996. 5
Condensed Consolidated Statements of Cash Flows for the
six months ended December 31, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
3
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
---- ----
(UNAUDITED)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 24,533 $ 47,160
Short-term investments 23,840 -
Accounts receivable, net 19,529 18,297
Prepaid expenses and other 4,399 3,880
----------------- --------------
Total current assets 72,301 69,337
PROPERTY AND EQUIPMENT, net 10,452 7,383
OTHER ASSETS 3,428 3,225
----------------- --------------
$ 86,181 $ 79,945
================= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit $ - $ 241
Current portion of long-term obligations 469 476
Accounts payable 2,441 2,707
Accrued payroll and related benefits 1,912 1,748
Other accrued liabilities 6,368 4,985
Deferred revenues 14,947 12,152
----------------- ----------------
Total current liabilities 26,137 22,309
----------------- ----------------
LONG-TERM OBLIGATIONS 638 875
----------------- ----------------
SHAREHOLDERS' EQUITY:
Common stock 63,594 63,112
Shareholder notes receivable (584) (434)
Cumulative translation adjustment (112) 124
Accumulated deficit (3,492) (6,041)
----------------- ----------------
Total shareholders' equity 59,406 56,761
----------------- ----------------
$ 86,181 $ 79,945
================= ================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------- ------------
1997 1996 1997 1996
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
REVENUES:
<S> <C> <C> <C> <C>
License $ 15,677 $ 7,029 $ 28,944 $ 10,878
Service 3,472 1,293 6,445 2,427
-------- -------- -------- --------
Total revenues 19,149 8,322 35,389 13,305
-------- -------- -------- --------
COST OF REVENUES:
License 831 339 1,502 534
Service 2,229 890 4,050 1,572
-------- -------- -------- --------
Total cost of revenues 3,060 1,229 5,552 2,106
-------- -------- -------- --------
GROSS MARGIN 16,089 7,093 29,837 11,199
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 3,667 2,161 6,726 3,930
Sales and marketing 8,445 3,324 15,395 5,471
General and administrative 2,019 1,106 3,881 2,193
Merger costs 905 -- 905 --
-------- -------- -------- --------
Total operating expenses 15,036 6,591 26,907 11,594
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS 1,053 502 2,930 (395)
INTEREST AND OTHER INCOME (EXPENSE), NET 394 74 729 205
-------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 1,447 576 3,659 (190)
PROVISION FOR INCOME TAXES 294 -- 1,110 --
-------- -------- -------- --------
NET INCOME (LOSS) $ 1,153 $ 576 $ 2,549 $ (190)
======== ======== ======== ========
BASIC NET INCOME (LOSS) PER SHARE $ 0.06 $ 0.03 $ 0.12 $ (0.01)
======== ======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE $ 0.04 $ 0.02 $ 0.09 $ (0.01)
======== ======== ======== ========
BASIC WEIGHTED AVERAGE COMMON SHARES 20,600 20,800 20,600 20,800
======== ======== ======== ========
DILUTED WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES 26,800 23,200 26,900 20,800
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED DECEMBER 31,
1997 1996
---- ----
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 2,549 $ (190)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred stock compensation expense 238 --
Depreciation and amortization 1,759 279
Provision for doubtful accounts 579 10
Changes in operating assets and liabilities:
Accounts receivable (1,811) (6,072)
Prepaid expenses and other (755) (103)
Accounts payable (266) (271)
Accounts payable to related parties -- (268)
Accrued payroll and related benefits 164 447
Other accrued liabilities 1,383 499
Deferred revenues 2,795 2,465
-------- --------
Net cash provided by (used in) operating activities 6,635 (3,204)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments, net (23,840) --
Purchases of property and equipment (4,878) (1,027)
(Increase) decrease in other assets (303) 30
-------- --------
Net cash used in investing activities (29,021) (997)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related parties -- 475
Repayments of bank line of credit (241) (133)
Principal payments on capital lease obligations (35) (17)
Repayments of long-term obligations (209) (44)
Repayments of convertible debt to related parties -- (367)
Proceeds from sales of common stock 244 3
-------- --------
Net cash used in financing activities (241) (83)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (22,627) (4,284)
CASH AND CASH EQUIVALENTS:
Beginning of Period 47,160 5,900
-------- --------
End of Period $ 24,533 $ 1,616
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
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 six months ended December 31, 1997 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, 1997 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 ECTI 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.
3. ACQUISITION
In December 1997, the Company acquired all of the outstanding common
stock of Forte Advanced Management Software, Inc. ("Forte") in exchange for
approximately 667,099 shares of the Company's common stock. The Company also
assumed Forte's outstanding options, which were converted to options to purchase
approximately 90,385 shares of the Company's common stock. The merger was
accounted for as a pooling of interests and, accordingly, the accompanying
condensed consolidated financial statements have been restated to reflect the
acquisition on a pooling of interests basis.
7
<PAGE>
Net revenue and income of the separate companies for the periods
preceding the merger were (in thousands):
<TABLE>
<CAPTION>
GENESYS FORTE ADVANCED
TELECOMMUNICATIONS MANAGEMENT
LABORATORIES, INC. SOFTWARE, INC. COMBINED
------------------ -------------- --------
Six Months Ended December 31, 1997:
<S> <C> <C> <C>
Total Revenue $ 34,150 $ 1,239 $ 35,389
Net Income (Loss) 3,008 (459) 2,549
Six Months Ended December 31, 1996:
Total Revenue $ 11,804 $ 1,501 $ 13,305
Net Income (Loss) (48) (142) (190)
</TABLE>
In accordance with SEC Staff Accounting Bulletin No. 135 and 65, the
Company is required to publish financial results of at least 30 days of post
merger combined operations in order for affiliates of the Company to change
their shareholder position. For the month ended January 31, 1998, the combined
entity generated revenues of $6.7 million and net income of $.5 million. The
results of operations for this period are not necessarily indicative of the
operating results to be expected for the full fiscal year, or any future
operating periods.
4. NET INCOME (LOSS) 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 common stock equivalents
is excluded from basic net income (loss) per share, with the exception of "cheap
stock" as defined in SAB 83, which is included in all periods prior to and
including the Company's initial public offering in June 1997. Diluted net income
(loss) per share is computed using the weighted average number of common and
common equivalent shares outstanding during the period. Common equivalent shares
consist of preferred stock (using the "if converted" method) and stock options
and warrants (using the treasury stock method). Common equivalent shares are
excluded from the dilutive computation only if their effect is anti-dilutive
except that, pursuant to the Securities and Exchange Commission Staff Accounting
Bulletins and staff policy, such computations include all common and common
equivalent shares issued within the 12 months preceding the initial filing date
of the Company's initial public offering as if they were outstanding for all
periods presented (using the treasury stock method). In addition, preferred
stock is included in the computation even when the effect of its inclusion is
anti-dilutive. The adoption of SFAS 128 did not have a material impact on the
Company's financial position or results of operation.
8
<PAGE>
Basic and Diluted Weighted Average Common and Common Equivalent Shares
presented in the accompanying statements of operations (as rounded) are
comprised of the following (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------- -----------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 19,948 11,496 19,898 11,496
Shares issued in the acquisition of Forte 667 667 667 667
SAB 83 shares:
Convertible preferred stock -- 2,752 -- 2,752
Common stock issuances -- 1,989 -- 1,989
Options for common stock -- 3,630 -- 3,630
Warrants -- 304 -- 304
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 20,615 20,838 20,565 20,838
======= ====== ====== ======
Weighted average options and warrants for
common stock 6,180 2,359 6,321 --
DILUTED WEIGHTED AVERAGE COMMON AND EQUIVALENT
SHARES OUTSTANDING 26,795 23,197 26,886 20,838
======= ====== ====== ======
</TABLE>
5. 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. 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 Company believes that it has meritorious defenses
to the asserted claims and intends to defend the litigation vigorously. The
Company does not believe that any of its current products infringe any valid
claims of GeoTel's patent. However, 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
9
<PAGE>
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 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. The Company is unable to estimate
the range of losses that may result from this matter.
6. 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 will be adopted by the Company in fiscal 1999. SOP 97-2
clarifies and amends certain provisions of Statement of Position 91-1,
"Software Revenue Recognition". The Company does not believe the adoption of
the provisions of SOP 97-2 will have a material impact on the Company's
position or results of operations.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"), which was adopted by the
Company in fiscal 1998. SFAS 129 continues the existing requirements to
disclose the pertinent rights and privileges or all securities other than
ordinary common stock but expands the number of companies subject to portions
of its requirements. The adoption of this statement will have no impact on the
Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which is required to be adopted by the Company in its first
quarter of fiscal 1999. At that time, the Company will be 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 has studied the implications of SFAS
130 and, based on its initial evaluation, does not expect it to have a material
impact on the Company's financial statements.
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 in fiscal 1999.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Genesys Telecommunications Laboratories, Inc. (the "Company") is a leading
provider of enterprise-wide platform and applications software that enables
organizations to integrate critical business information and computing resources
with telephony and other telecommunications media. 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. In addition, the Company's products enable
organizations to develop and offer new or enhanced revenue-generating products
and services. The Company believes that it is the first company to offer a suite
of open, scaleable, enterprise-wide platform and applications software solutions
to address the evolving needs of organizations for intelligent communications, a
new market paradigm known as Enterprise Computer Telephony Integration ("ECTI").
ACQUISITION OF FORTE ADVANCED MANAGEMENT SOFTWARE, INC.
In December 1997, the Company acquired all of the outstanding common stock
of Forte Advanced Management Software, Inc. ("Forte") in exchange for
approximately 667,099 shares of the Company's common stock. The Company also
assumed Forte's outstanding options, which were converted to options to purchase
90,385 shares of the Company's common stock. The merger was accounted for as a
pooling of interests and, accordingly, the accompanying condensed consolidated
financial statements have been restated to reflect the acquisition on a pooling
of interests basis.
The Company acquired Forte with the expectation that the acquisition would
result in certain benefits to Genesys. Realizing the benefits of the Forte
acquisition will depend in part upon the successful integration of the
businesses, products and employees of the Company and Forte in an efficient
manner, and there can be no assurance that such integration will not entail
substantial costs, delays or other problems or that such integration will be
successfully completed. Combining the companies will divert the attention of
management and could result in significant operational and administrative
expense. Any difficulties encountered in the integration process could have a
material adverse effect on the revenues and operating results of the Company. In
addition, the process of combining Genesys and Forte could cause the
interruption of, or a disruption in, the business activities of the constituent
companies, which could have a material adverse effect on the operations and
financial results of the combined company. Even if Forte is successfully
integrated into the Company, the acquired operations may not achieve sales,
productivity and profitability commensurate with the Company's historical
operating results or with projected results of the Company and financial
analysts and investors. Failure to achieve such projected results would have a
material adverse effect on the Company's financial performance, and in turn, on
the market value of Genesys Common Stock. There can be no assurance that the
combined company will realize any of the anticipated benefits of the Forte
acquisition or that the acquisition will enhance the Company's business or
financial performance.
The Company regularly evaluates product and technology acquisition
opportunities and it may make additional acquisitions in the future. Product and
technology acquisitions entail numerous risks, including difficulties in the
assimilation of acquired operations and products, diversion of management's
attention away from day-to-day matters and potential loss of key employees from
acquired companies. No assurance can be given as to the ability of the Company
to successfully integrate acquired operations and personnel, and the failure of
the Company to do so could have a material adverse effect on the Company's
results of operations. The Company competes for acquisition opportunities with
other companies that have significantly greater financial and management
resources than the Company. The inability to successfully identify appropriate
acquisition opportunities, consummate acquisitions or successfully integrate
acquired products, technologies, operations, personnel or businesses could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, acquisitions may divert management's
attention from other business concerns, place a strain on the Company's
management systems and resources, expose the Company to the risks of entering
markets in which it has no direct
11
<PAGE>
prior experience or to risks associated with the market acceptance of acquired
products and technologies, or result in the loss of key employees of the Company
or the acquired company. Moreover, acquisitions by the Company may result in
potentially dilutive issuances of equity securities, the incurrence of
additional debt and the recognition of amortization expenses related to goodwill
and other intangible assets, which could have a material adverse effect on its
business, financial condition and results of operations.
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 SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
License .................................. 81.9% 84.5% 81.8% 81.8%
Service .................................. 18.1 15.5 18.2 18.2
----- ----- ----- -----
Total revenues ...................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
License .................................. 4.3 4.1 4.2 4.0
Service .................................. 11.7 10.7 11.5 11.8
----- ----- ----- -----
Total cost of revenues .............. 16.0 14.8 15.7 15.8
----- ----- ----- -----
Gross Margin .................................. 84.0 85.2 84.3 84.2
----- ----- ----- -----
Operating expenses:
Research and development ................. 19.2 26.0 19.0 29.5
Sales and marketing ...................... 44.1 39.9 43.5 41.1
General and administrative ............... 10.5 13.3 11.0 16.5
Merger costs ............................. 4.7 -- 2.5 --
----- ----- ----- -----
Total operating expenses ............ 78.5 79.2 76.0 87.1
----- ----- ----- -----
Income (loss) from operations ................. 5.5 6.0 8.3 (2.9)
Interest and other income (expense), net ...... 2.1 0.9 2.0 1.5
----- ----- ----- -----
Income (loss) before provision for income taxes 7.6 6.9 10.3 (1.4)
Provision for income taxes .................... 1.6 -- 3.1 --
----- ----- ----- -----
Net income (loss) ............................. 6.0% 6.9% 7.2% (1.4)%
===== ===== ===== =====
</TABLE>
Revenues
--------
License. License revenues increased by 123.0% from $7.0 million in the
-------
three months ended December 31, 1996 to $15.7 million in the three months ended
December 31, 1997. License revenues increased by 166.1% from $10.9 million in
the first six months of fiscal 1997 to $28.9 million in the first six months of
1998. This increase was due to 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.
12
<PAGE>
Service. Service revenues primarily comprise fees from consulting,
-------
post-contract support and, to a lesser extent, training services. Service
revenues increased by 168.5% from $1.3 million in the three months ended
December 31, 1996 to $3.5 million in the three months ended December 31, 1997.
Service revenues increased by 165.6% from $2.4 million in the first six months
of fiscal 1997 to $6.4 million in the first six months of fiscal 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 $339,000 and $831,000, in the three months ended December 31, 1996
and 1997, respectively, and $534,000 and $1.5 million in the six months ended
December 31, 1996 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.
Service. Cost of service revenues primarily comprise employee-related costs
-------
incurred in providing consulting, post-contract support and training services.
Cost of service revenues were $890,000 and $2.2 million in the three months
ended December 31, 1996 and 1997, respectively, and were $1.6 million and $4.1
million in the six months ended December 31, 1996 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 December 31, 1997 and 1996, the Company's
operating expenses were $15.0 million and $6.6 million, or 78.5% and 79.2% of
total revenues, respectively. For the six months ended December 31, 1997 and
1996, the Company's operating expenses were $26.9 million and $11.6 million, or
76.0% and 87.1% of total revenues, respectively.
Research and Development. Research and development expenses were $3.7
------------------------
million and $2.2 million, or 19.2% and 26.0% of total revenues in the three
months ended December 31, 1997 and 1996, respectively and $6.7 million and $3.9
million, or 19.0% and 29.5% of total revenues in the six months ended December
31, 1997 and 1996, respectively. These expenses increased in absolute dollars
and as a percentage of total revenues 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.
13
<PAGE>
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 $450,000 of software development costs
incurred in the six months ended December 31, 1997 related to the release of its
5.0 product suite. Costs that were eligible for capitalization in the six months
ended December 31, 1996 were insignificant, and accordingly the Company charged
all software development costs to research and development expense in this
period.
Sales and Marketing. Sales and marketing expenses were $8.4 million and
-------------------
$3.3 million, representing 44.1% and 39.9% of total revenues in the three months
ended December 31, 1997 and 1996, respectively and $15.4 million and $5.5
million, or 43.5% and 41.1% of total revenues in the six months ended December
31, 1997 and 1996, respectively. These expenses increased in absolute dollars
primarily due to the Company's investment in building a direct sales force in
North America and, to a lesser extent, in Europe, 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 to develop a significant channel sales organization,
and therefore, anticipates sales and marketing expenditures will continue to
increase significantly in absolute dollars.
General and Administrative. General and administrative expenses were $2.0
--------------------------
million and $1.1 million, or 10.5% and 13.3% of total revenues in the three
months ended December 31, 1997 and 1996, respectively and $3.9 million and $2.2
million, or 11.0% and 16.5% of total revenues in the six months ended December
31, 1997 and 1996, 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, and,
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 13.3% in the second quarter of
fiscal 1997 to 10.5% in the second quarter of fiscal 1998 and from 16.5% for the
first six months of fiscal 1997 to 11.0% in the first six months of fiscal 1998,
due principally to the significant investments made by the Company in 1997 in
anticipation of significant growth during fiscal 1997 and 1998. 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.
Merger Costs. The Company incurred $905,000 of merger costs in connection
------------
with the merger of Forte Advanced Management Software, Inc. during the three and
six months ended December 31, 1997. The costs consisted primarily of legal and
accounting fees.
Provision for Income Taxes
--------------------------
The Company's effective tax rate for the three months ended December 31,
1997 was 20%. The decrease in the effective tax rate from 35% recorded in the
quarter ended September 30, 1997 is due to a one-time credit relating to the
benefit of deferred tax assets assumed in the acquisition of Forte Advanced
Management Software, Inc., which was an S-Corporation prior to the merger. In
accordance with the provisions of SFAS 109 and APB 16, such benefit is recorded
in the period in which the merger is consummated. The Company estimates that its
effective tax rate for the remainder of fiscal 1998 will be approximately 35%.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In June 1997, the Company completed its initial public offering in which it
raised approximately $41.2 million from the sale of 2,375,000 shares of common
stock and the exercise of certain Warrants. Prior to its initial public
offering, the Company had financed its operations and met its capital
expenditure requirements primarily from proceeds from related party advances, a
$1.5 million term note (of which $900,000 was converted into Series A Preferred
Stock) and the private sale of Preferred Stock, from which the Company raised
$17.2 million. At December 31, 1997, the Company's primary sources of liquidity
included cash and cash equivalents of $24.5 million and short-term investments
of $23.8 million.
The Company generated cash from operating activities of $6.6 million in
the six months ended December 31, 1997 related primarily to an increase in net
income and an increase in deferred revenues. The Company used cash in operating
activities of $3.2 million in the six months ended December 31, 1996 related
primarily to an increase in accounts receivable.
The Company used cash to purchase $23.8 million of short-term investments
and $4.9 million of property and equipment in the six months ended December 31,
1997. The Company used cash to purchase $1 million of property and equipment in
the six months ended December 31, 1996.
The Company has established subsidiaries in foreign countries, including
the United Kingdom, France, Canada, Russia, Japan 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, accordingly, the Company does not expect that the
establishment of these subsidiaries will have a material adverse effect on its
liquidity and capital resources.
In connection with the sale of Series C Preferred Stock, the Company has
committed to the expenditure of approximately $1.0 million toward the
development of certain call center technology. The Company's commitment is
cancelable by the Company in the event it encounters unforeseen technical
obstacles or business challenges. The Company does not believe that this
commitment 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; 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 size, timing and recognition of
revenue from significant orders; the length of sales and implementation cycles;
the Company's ability to integrate acquired businesses; competition; 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 ECTI market; 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.
15
<PAGE>
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. During the six months ended December 31, 1997, the
Company received a commitment from BT totaling 10 million pounds, and the
Company estimates that the deployment of this order will occur over a 12 to 24
month period. 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 per site ranges
from $100,000 to $300,000; however, certain orders during the six months ended
December 31, 1997 have 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 ECTI 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 its 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.
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.
16
<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. On June 27, 1997, the Company
received correspondence from GeoTel's counsel indicating that GeoTel had
determined not to file a request for reexamination at that time, contrary to
prior correspondences. Since then, the Company has filed a motion to partition
discovery and trial on liability into two phases: a first addressing whether the
GeoTel Patent is valid and a second, if necessary, addressing whether any of the
Company's products infringe any remaining valid claims of the GeoTel Patent. 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 patent 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.
17
<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 BancAmerica 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 December 31, 1997, 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
---------------------------------------------------
The Company's 1997 Annual Meeting of Shareholders was held on November
12, 1997 (the "Annual Meeting"). At the Annual Meeting, the shareholders voted
on the following matters:
(a) Election of Directors. The shareholders elected all nominees to
the Board of Directors at the Annual Meeting. The results of the
voting were as follows: (i) Gregory Shenkman, 12,693,075 votes
for election, 6,400 votes withheld, no abstentions and no broker
non-votes; (ii) Alec Miloslavsky, 12,693,075 votes for election,
6,400 votes withheld, no abstentions and no broker non-votes;
(iii) James Jordan, 12,693,075 votes for election, 6,400 votes
withheld, no abstentions and no broker non-votes; (iv) Bruce
Dunlevie, 12,692,075 votes for election, 7,400 votes withheld, no
abstentions and no broker non-votes; and (v) Paul D. Levy,
12,694,175 votes for election, 5,300 votes withheld, no
abstentions and no broker non-votes.
(b) Ratification of the selection of Arthur Andersen, LLP as the
Company's independent accountants for the fiscal year ending June
30, 1998. The result of the vote was: 12,657,775 votes cast for,
37,200 votes cast against, no votes withheld, 4,500 abstentions
and no broker non-votes.
ITEM 5. Other Information
-----------------
Not applicable.
18
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit
Number Exhibit
------ -------
27.1 Financial Data Schedule
(b) Reports on Form 8-K. Not applicable.
19
<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 LABORATORITORIES, INC.
Date: February 16, 1998 By: /s/ GREGORY SHENKMAN
--------------------
Gregory Shenkman
President and Chief Executive Officer
Date: February 16, 1998 By: /s/ MICHAEL J. MCCLOSKEY
------------------------
Michael J. McCloskey
Chief Operating Officer,
Chief Financial Officer and
Secretary; Vice President, Finance
and International
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1997
<PERIOD-START> JUL-01-1997 JUL-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 24,533 1,616
<SECURITIES> 23,840 0
<RECEIVABLES> 20,647 11,905
<ALLOWANCES> 1,118 700
<INVENTORY> 0 0
<CURRENT-ASSETS> 72,301 13,138
<PP&E> 15,245 2,554
<DEPRECIATION> 4,793 462
<TOTAL-ASSETS> 86,181 15,231
<CURRENT-LIABILITIES> 26,137 12,223
<BONDS> 0 0
0 0
0 0
<COMMON> 63,594 9,553
<OTHER-SE> (584) (111)
<TOTAL-LIABILITY-AND-EQUITY> 86,181 15,231
<SALES> 0 0
<TOTAL-REVENUES> 35,389 13,305
<CGS> 0 0
<TOTAL-COSTS> 5,552 2,106
<OTHER-EXPENSES> 26,907 11,594
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 729 205
<INCOME-PRETAX> 3,659 (190)
<INCOME-TAX> 1,110 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,549 (190)
<EPS-PRIMARY> 0.12 (0.01)
<EPS-DILUTED> 0.09 (0.01)
</TABLE>
