<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 March 31, 1999
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
incorporation or organization) Identification No.)
</TABLE>
1155 Market Street, San Francisco, California 94103
(Address of principal executive offices)
(415) 437-1100
(Registrant's telephone number, including area code)
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 [_] 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>
Outstanding at
Title of each class March 31, 1999
------------------- -----------------
<S> <C>
Common Stock, no par value............................. 23,755,822 Shares
</TABLE>
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- -------------------------------------------------------------------------------
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
FISCAL THIRD QUARTER 1999 FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
<C> <S> <C>
ITEM 1. Financial Statements........................................... 1
Management's Discussion and Analysis of Financial Condition and
ITEM 2. Results of Operations.......................................... 8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..... 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................. 14
ITEM 2. Changes in Securities and Use of Proceeds...................... 14
ITEM 3. Defaults Upon Senior Securities................................ 14
ITEM 4. Submission of Matters to a Vote of Security Holders............ 14
ITEM 5. Other Information.............................................. 14
ITEM 6. Exhibits and Reports on Form 8-K............................... 15
SIGNATURES.............................................................. 16
</TABLE>
i
<PAGE>
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ITEM 1. Financial Statements
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1999 and
June 30, 1998.................................................. 2
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended March 31, 1999 and 1998.................. 3
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 1999 and 1998........................... 4
Notes to Condensed Consolidated Financial Statements........... 5
</TABLE>
1
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
----------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 40,671 $ 30,256
Short-term investments.................................. 19,485 16,985
Accounts receivable, net................................ 38,875 28,007
Prepaid expenses and other.............................. 11,245 8,314
-------- --------
Total current assets.................................. 110,276 83,562
Property and equipment, net............................... 16,954 14,675
Other assets.............................................. 8,039 6,463
-------- --------
$135,269 $104,700
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable............................................ $ -- $ 243
Current portion of long-term obligations................ 35 33
Accounts payable........................................ 2,053 4,520
Accrued payroll and related benefits.................... 11,515 3,702
Other accrued liabilities............................... 10,898 5,674
Deferred revenues....................................... 19,603 16,805
-------- --------
Total current liabilities............................. 44,104 30,977
-------- --------
Long-term obligations..................................... 76 102
-------- --------
Shareholders' equity:
Common stock............................................ 91,455 72,356
Shareholder notes receivable............................ (90) (440)
Cumulative translation adjustment....................... (492) (188)
Retained earnings....................................... 216 1,893
-------- --------
Total shareholders' equity............................ 91,089 73,621
-------- --------
$135,269 $104,700
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended Nine Months
March 31, Ended March 31,
--------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
License..................................... $29,687 $18,263 $79,379 $47,206
Service..................................... 6,219 4,473 17,753 10,918
------- ------- ------- -------
Total revenues............................ 35,906 22,736 97,132 58,124
------- ------- ------- -------
Cost of revenues:
License..................................... 1,350 969 3,565 2,471
Service..................................... 4,487 2,907 13,047 6,957
------- ------- ------- -------
Total cost of revenues.................... 5,837 3,876 16,612 9,428
------- ------- ------- -------
Gross margin.................................. 30,069 18,860 80,520 48,696
------- ------- ------- -------
Operating expenses:
Research and development.................... 6,260 4,047 17,808 10,773
Sales and marketing......................... 13,472 9,408 34,978 24,803
General and administrative.................. 2,881 2,194 8,094 6,075
Merger costs................................ -- -- -- 905
Non-recurring charges....................... -- -- 15,488 --
------- ------- ------- -------
Total operating expenses.................. 22,613 15,649 76,368 42,556
------- ------- ------- -------
Income from operations........................ 7,456 3,211 4,152 6,140
Interest and other income (expense), net...... 184 436 1,068 1,165
------- ------- ------- -------
Income before provision for income taxes...... 7,640 3,647 5,220 7,305
Provision for income taxes.................... 2,674 1,276 6,898 2,386
------- ------- ------- -------
Net income (loss)............................. $ 4,966 $ 2,371 $(1,678) $ 4,919
======= ======= ======= =======
Basic net income (loss) per share............. $ 0.21 $ 0.11 $ (0.07) $ 0.24
======= ======= ======= =======
Diluted net income (loss) per share........... $ 0.19 $ 0.09 $ (0.07) $ 0.18
======= ======= ======= =======
Basic weighted average common shares.......... 23,600 21,400 23,100 20,900
======= ======= ======= =======
Diluted weighted average common shares........ 26,300 26,800 23,100 26,900
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Nine
Months Ended
March 31,
------------------
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ (1,678) $ 4,919
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred stock compensation expense.................... 332 358
Depreciation and amortization.......................... 6,909 2,616
Provision for doubtful accounts........................ 200 678
Non-cash portion of Non-recurring charges.............. 8,676 --
Changes in operating assets and liabilities:
Accounts receivable.................................... (11,068) (4,814)
Prepaid expenses and other............................. (2,931) (1,827)
Accounts payable....................................... (2,467) (124)
Accrued payroll and related benefits................... 1,351 2,446
Other accrued liabilities.............................. 11,686 149
Deferred revenues...................................... 2,798 3,450
-------- --------
Net cash provided by operating activities............ 13,808 7,851
-------- --------
Cash flows from investing activities:
Purchases of short-term investments...................... (29,558) (23,611)
Sales of short-term investments.......................... 27,058 --
Purchases of property and equipment...................... (7,528) (7,015)
(Increase) decrease in other assets...................... (3,157) (1,258)
-------- --------
Net cash used in investing activities................ (13,185) (31,884)
-------- --------
Cash flows from financing activities:
Repayments of note payable............................... -- (241)
Principal payments on capital lease obligations.......... (241) (56)
Repayments of long-term obligations...................... (26) (818)
Proceeds from sales of common stock...................... 10,059 2,310
-------- --------
Net cash provided by used in financing activities.... 9,792 1,195
-------- --------
Net increase (decrease) in cash and cash equivalents....... 10,415 (22,838)
Cash and cash equivalents:
Beginning of Period...................................... 30,256 47,160
-------- --------
End of Period............................................ $ 40,671 $ 24,322
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<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 three and nine months ended
March 31, 1999 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, 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.
3. NET INCOME (LOSS) PER SHARE
In February 1998, 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 basic and diluted weighted average shares outstanding for all periods
presented in the accompanying statements of operations.
5
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
Quarter Ended Nine Months Ended
March 31, March 31,
------------- -----------------
1999 1998 1999 1998
------ ------ -------- --------
<S> <C> <C> <C> <C>
BASIC WEIGHTED AVERAGE COMMON SHARES..... 23,500 21,400 23,100 20,900
====== ====== ======== ========
Weighted average options and warrants for
common stock............................ 2,800 5,400 -- 6,000
------ ------ -------- --------
DILUTED WEIGHTED AVERAGE COMMON SHARES... 26,300 26,800 23,100 26,900
====== ====== ======== ========
</TABLE>
Potential weighted average common shares totaling approximately 3.2 million
have been excluded from diluted weighted average common shares for the nine
months ended March 31, 1999, as their inclusion would be anti-dilutive.
4. NON-RECURRING CHARGES
Executive Management Additions and Acquisition of Plato Software Corporation
In December 1998, the Company hired Ori Sasson as its Chief Executive
Officer and elected him as a member of the Board of Directors of Genesys. In
connection with the hiring of Mr. Sasson, the Company also completed the
acquisition of Plato Software Corporation, a Delaware corporation ("Plato"), a
company in which Mr. Sasson was a principal shareholder. The merger was
completed pursuant to an Agreement and Plan of Reorganization ("Merger
Agreement") dated as of December 9, 1998. As Plato did not have significant
operations or revenue prior to the acquisition, the Company has treated the
purchase as the acquisition of an asset.
Pursuant to the Merger Agreement, the Company issued 202,500 shares of its
Common Stock in exchange for all outstanding shares of Plato Common Stock, and
issued options to purchase 47,500 shares of Genesys Common Stock in exchange
for all outstanding Plato Stock options. A total of 50,000 shares have been
placed into an escrow subject to the satisfaction of all representations and
warranties under the terms and conditions of the Merger Agreement. The Company
recorded the fair value of net assets purchased from Plato, which consisted of
certain technology to be incorporated into the Genesys products, totaling
$382,000 as of December 31, 1998.
As the acquisition of Plato was consummated in connection with the election
of Ori Sasson as Chief Executive Officer and a member of the Board of
Directors of the Company, in December 1998 the Company recorded as expense the
portion of the shares and options issued that represented compensation to Mr.
Sasson and other Plato employees. Deferred compensation totaling $800,000
related to unvested options will be amortized over the remaining vesting
period of the options of approximately 4 years. In addition, the Company
recorded as expense its reimbursement to Mr. Sasson of the tax liabilities
associated with this compensation. The total amount of compensation expense
and related tax reimbursements associated with this transaction was
approximately $12.4 million, and was reflected as part of the non-recurring
charge in the Company's financial statements.
Compensation to Former President and Chief Financial Officer
The Company recorded $3.1 million of non-recurring charges in the quarter
ended December 31, 1998 related to an employment and severance agreement dated
December 11, 1998 with its former President and Chief Financial Officer.
6
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. LITIGATION
In November 1998, GeoTel Communications Corporation ("GeoTel") and the
Company settled the litigation between them concerning GeoTel's United States
Patent No. 5,546,452 on terms which both companies believe not to be material
to their financial results. Pursuant to the settlement, GeoTel will receive
license fees from Genesys for ongoing revenues generated from certain products
in exchange for a nonexclusive, irrevocable license to use the technology
covered by GeoTel's 452 Patent or any related patent in all present and future
Genesys products which incorporate such technology.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1998, 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 1998, 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 1998, 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, 1999.
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
fiscal quarter of 2000, to have a material effect on its consolidated
financial statements.
7
<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.
Executive Management Additions and Acquisition of Plato Software Corporation
In December 1998, the Company appointed Ori Sasson as its Chief Executive
Officer and elected him as a member of the Board of Directors of Genesys. In
connection with the hiring of Mr. Sasson, the Company also completed the
acquisition of Plato Software Corporation, a Delaware corporation ("Plato"), a
company in which Mr. Sasson was a principal shareholder. The merger was
completed pursuant to an Agreement and Plan of Reorganization ("Merger
Agreement") dated as of December 9, 1998. As Plato did not have significant
operations or revenue prior to the acquisition, the Company has treated the
purchase as the acquisition of an asset.
Pursuant to the Merger Agreement, the Company issued 202,500 shares of its
Common Stock in exchange for all outstanding shares of Plato Common Stock, and
issued options to purchase 47,500 shares of Genesys Common Stock in exchange
for all outstanding Plato stock options. A total of 50,000 shares have been
placed into an escrow subject to the satisfaction of all representations and
warranties under the terms and conditions of the Merger Agreement. The Company
recorded the fair value of net assets purchased from Plato, which consisted of
certain technology to be incorporated into the Genesys products, totaling
$382,000 as of December 31, 1998.
As the acquisition of Plato was consummated in connection with the election
of Ori Sasson as Chief Executive Officer and a member of the Board of
Directors of the Company, the Company recorded as expense the portion of the
shares and options issued that represented compensation to Mr. Sasson and
other Plato employees. Deferred compensation totaling $800,000 related to
unvested options will be amortized over the remaining vesting period of the
options of approximately 4 years. In addition, the Company recorded as expense
its reimbursement to Mr. Sasson of the tax liabilities associated with this
compensation. The total amount of compensation expense and related tax
reimbursements associated with this transaction was approximately
$12.4 million, and was reflected as part of a non-recurring charge in the
Company's financial statements.
8
<PAGE>
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 Nine Months
Ended Ended
March 31, March 31,
------------ -------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
License............................................ 82.7% 80.3% 81.7% 81.2%
Service............................................ 17.3 19.7 18.3 18.8
----- ----- ----- -----
Total revenues................................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
License............................................ 3.8 4.2 3.7 4.3
Service............................................ 12.5 12.8 13.4 12.0
----- ----- ----- -----
Total cost of revenues........................... 16.3 17.0 17.1 16.2
----- ----- ----- -----
Gross margin....................................... 83.7 83.0 82.9 83.8
----- ----- ----- -----
Operating expenses:
Research and development........................... 17.4 17.8 18.4 18.5
Sales and marketing................................ 37.5 41.4 36.0 42.7
General and administrative......................... 8.0 9.6 8.3 10.5
Merger-related costs............................... 0.0 0.0 0.0 1.6
Non-recurring charges.............................. 0.0 0.0 15.9 0.0
----- ----- ----- -----
Total operating expenses......................... 62.9 68.8 78.6 73.2
----- ----- ----- -----
Income from operations............................. 20.8 14.1 4.3 10.6
Interest and other income (expense), net........... 0.5 1.9 1.1 2.0
Income before provision for income taxes........... 21.3 16.0 5.4 12.6
Provision for income taxes......................... 7.4 5.6 7.1 4.1
----- ----- ----- -----
Net income (loss).................................. 13.8% 10.4% (1.7)% 8.5%
===== ===== ===== =====
</TABLE>
Revenues
License. License revenues increased by 62.6% from $18.3 million in the three
months ended March 31, 1998 to $29.7 million in the three months ended March
31, 1999. License revenues increased by 68.2% from $47.2 million in the first
nine months of fiscal 1998 to $79.4 million in the first nine months of fiscal
1999. 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 39.0% from $4.5 million in the three months ended March 31, 1998
to $6.2 million in the three months ended March 31, 1999. Service revenues
increased by 62.6% from $10.9 million in the first nine months of fiscal 1998
to $17.8 million in the first nine months of fiscal 1999. The Company's
software license agreements often provide for maintenance, consulting and
training. Accordingly, increases in licensing activity and the Company's
installed base of products have resulted in increases in revenues from
services related to maintenance, consulting and training.
Service revenues are largely dependent upon the extent to which product
implementations are performed by internal professional services personnel
versus third party organizations such as systems integrators. To the extent
9
<PAGE>
that the Company utilizes more internal resources to perform product
implementations, service revenues could increase as a percentage of total
revenues. Conversely, if the Company utilizes to a greater extent third-party
organizations such as systems integrators to implement the Company's products,
service revenues may decrease as a percentage of total revenues. Maintenance
revenues as a percentage of total revenues are expected to increase due to
continued expansion of the Company's installed base. 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 $1.4 million and $1.0 million in the three months ended March
31, 1999 and 1998, respectively, and $3.6 million and $2.5 million in the nine
months ended March 31, 1999 and 1998, 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 $235,000 and $75,000 for the three months ended
March 31, 1999 and 1998, respectively, and $646,000 and $175,000 for the nine
months ended March 31, 1999 and 1998, 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 $4.5 million and $2.9 million
in the three months ended March 31, 1999 and 1998, respectively, and $13.0
million and $7.0 million in the nine months ended March 31, 1999 and 1998,
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 March 31, 1999 and 1998, the Company's operating
expenses were $22.6 million and $15.6 million, or 63.0% and 68.8% of total
revenues, respectively. For the nine months ended March 31, 1999 and 1998,
operating expenses were $76.4 million and $42.6 million, or 78.6% and 73.2% of
total revenues, respectively.
Research and Development. Research and development expenses were $6.3
million and $4.0 million, or 17.4% and 17.8% of total revenues in the three
months ended March 31, 1999 and 1998, respectively, and $17.8 million and
$10.8 million, or 18.3% and 18.5% of total revenues in the nine months ended
March 31, 1999 and 1998, 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 $1.4 million and $800,000 of
software development costs incurred in the three months ended March 31, 1999
and 1998, respectively, and $1.9 million and $1.3 million in the nine months
ended March 31, 1999 and 1998, respectively, related to the development of its
product suite.
Sales and Marketing. Sales and marketing expenses were $13.5 million and
$9.4 million, representing 37.5% and 41.4% of total revenues in the three
months ended March 31, 1999 and 1998, respectively, and $35.0 million and
$24.8 million, or 36.0% and 42.7% of total revenues in the nine months ended
March 31, 1999 and 1998, 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
10
<PAGE>
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 has recently hired
several senior sales and marketing executives, including a Vice President of
Worldwide Field Operations, a Vice President of North American Direct Sales, a
Vice President of EMEA, a Vice President of Asia Pacific and a Vice President
of North American Channel Sales. The Company expects to hire additional
personnel in the near future, including a Vice President of Marketing. The
Company expects an increase in expenses related to the hiring of these and
other new personnel. 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 $2.9
million and $2.2 million, or 8.0% and 9.6% of total revenues in the three
months ended March 31, 1999 and 1998, respectively, and $8.1 million and $6.1
million, or 8.3% and 10.5% of total revenues in the nine months ended March
31, 1999 and 1998, 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 hired a new Chief Financial Officer in April 1999.
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 9.6% in the third quarter of
fiscal 1998 to 8.0% in the third 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.
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 nine months ended March 31, 1998. The costs consisted primarily of legal
and accounting fees.
Non-recurring Charges. In connection with the hiring of Ori Sasson as the
Company's Chief Executive Officer, in the nine months ended March 31, 1999 the
Company recorded non-recurring charges totaling $11.6 million related to
compensation and tax reimbursements paid or accrued to Mr. Sasson, and an
additional $802,000 of compensation paid or accrued to certain employees of
Plato. In addition, the Company recorded $3.1 million of non-recurring charges
related to an employment and severance agreement dated December 11, 1998 with
its former President and Chief Financial Officer.
Provision for Income Taxes
Excluding the effect of the non-recurring charges, the Company's effective
tax rate for the three and nine months ended March 31, 1999 was 35%, which the
Company estimates will be the effective tax rate for the fourth quarter of
fiscal 1999. Due to permanent limitations on the deductibility for tax
purposes of executive compensation, the Company did not record any tax benefit
related to the non-recurring charges recorded during the quarter. 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
11
<PAGE>
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 March 31, 1999, the Company's primary sources of liquidity included
cash and cash equivalents of $40.7 million and short-term investments of $19.5
million.
The Company generated cash from operating activities of $13.8 million in the
nine months ended March 31, 1999 related primarily to an increase in accrued
liabilities and deferred revenues, which was offset in part by an increase in
accounts receivable and prepaid expenses. The Company generated cash from
operating activities of $7.9 million in the nine months ended March 31, 1998
related primarily to an increase in net income and deferred revenues, offset
in part by an increase in accounts receivable.
The Company used cash for the net purchase of $2.5 million of short-term
investments in the nine months ended March 31, 1999. The Company used cash of
$7.5 million for the purchase of property and equipment in the nine months
ended March 31, 1999. The Company used cash to purchase $23.6 million of
short-term investments and $7.0 million of property and equipment in the nine
months ended March 31, 1998.
The Company generated cash of $10.1 million and $2.3 million from the sale
of common stock, primarily from the exercise of stock options, in the nine
months ended March 31, 1999 and 1998, respectively.
The Company has established subsidiaries in foreign countries, including the
United Kingdom, France, Germany, Sweden, South Africa, Canada, Russia, Japan,
Singapore, South Korea 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.
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
12
<PAGE>
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
March 31, 1999 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 upon shipment. 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.
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.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1998, GeoTel Communications Corporation ("GeoTel") and the
Company settled the litigation between them concerning GeoTel's United States
Patent No. 5,546,452 on terms which both companies believe not to be material
to their financial results. Pursuant to the settlement, GeoTel will receive
license fees from Genesys for ongoing revenues generated from certain products
in exchange for a nonexclusive, irrevocable license to use the technology
covered by GeoTel's 452 Patent or any related patent in all present and future
Genesys products which incorporate such technology.
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 1998, 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 March 31, 1999, 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
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
14
<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.
/s/ Christopher Brennan
By: _________________________________
Christopher Brennan
Chief Financial Officer
Date: May 17, 1999
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1998
<PERIOD-START> JUL-01-1998 JUL-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 40,671 30,256
<SECURITIES> 19,485 16,985
<RECEIVABLES> 38,875 28,007
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 110,276 83,562
<PP&E> 16,954 14,675
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 135,269 104,700
<CURRENT-LIABILITIES> 44,104 30,977
<BONDS> 0 0
0 0
0 0
<COMMON> 91,455 72,356
<OTHER-SE> (366) 1,265
<TOTAL-LIABILITY-AND-EQUITY> 135,269 104,700
<SALES> 97,132 58,124
<TOTAL-REVENUES> 97,132 58,124
<CGS> 16,612 9,428
<TOTAL-COSTS> 16,612 9,428
<OTHER-EXPENSES> 76,368 42,556
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 5,220 7,305
<INCOME-TAX> 6,898 2,386
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<CHANGES> 0 0
<NET-INCOME> (1,678) 4,916
<EPS-PRIMARY> (.07) .24
<EPS-DILUTED> (.07) .18
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