<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
-----------
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1999
Commission file number: 0-22605
GENESYS TELECOMMUNICATIONS
--------------------------
LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
California 94-3120525
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1155 Market Street, San Francisco, California 94103
(Address of principal executive office, including Zip Code)
(415) 437-1100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (no par value)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
---
The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of September 24, 1999 was approximately $773 million (based on
the closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market System for that date). Shares of Common Stock held by
each executive officer, director, and holder of 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
On September 24, 1999 approximately 25,374,145 shares of the Registrant's Common
Stock were outstanding.
1
<PAGE>
PART I
Certain statements contained in this report on Form 10-K including, without
limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects" and words of similar import, constitute "forward-
looking statements". Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in Part I, Item 1 under the heading "Risk Factors." Given these
risks and uncertainties, readers are cautioned not to place undue reliance on
such forward-looking statements.
Item 1. Business
Genesys Telecommunications Laboratories, Inc ("Genesys" or the "Company")
is a leading provider of enterprise-wide interaction management solutions for
both traditional brick and mortar organizations and e-Businesses. The Company's
products are designed to allow an organization to optimally manage its customer
interactions and employee communications to increase productivity, lower costs
and achieve greater customer satisfaction and loyalty. The company believes that
successful, long term customer relationships are the result of managing and
optimizing the individual interactions that transpire between an organization
and its customers. To accomplish this, Genesys' software solutions, rooted in
computer telephony integration technology, extend the capabilities of an
organization's internet, computer, telecommunications and database systems,
bringing together what were once disparate technologies. The Company anticipates
that as customer interactions are increasingly viewed as strategic to an
organization's mission, contact center capabilities will be extended beyond
traditional agent, site and switch boundaries, transforming the entire
enterprise into a customer interaction center.
The Genesys Suite is made up of two integrated elements: an open, scalable,
standards-based framework, and a broad integrated suite of applications, which
enable Internet and telephony-based interactions, enterprise routing, network
routing, outbound dialing and workforce management capabilities. With the
ability to integrate multiple communications media, the Genesys Suite supports
customer interactions via e-mail, the Internet and traditional voice thereby
enabling consistent customer contact regardless of the communications channel.
The open, standards-based nature of the Company's framework product allows an
organization to leverage its investments in its existing telecommunications and
computing infrastructure, software applications and employee training. The
Company's products support the integration of internally developed or
commercially available business applications, such as help desk or sales force
automation. In order to assist customers in realizing the maximum benefit from
its solutions, the Company augments its software products with a range of
professional service offerings, including implementation, training and support
services. To date, the Company has licensed its products to approximately 650
end-users worldwide.
Background
In the increasingly complex global business environment, an organization's
ability to manage the increased information demands of customers and employees
in a cost-effective manner is an important competitive advantage. In response to
these competitive pressures, the delivery of high-quality, cost-effective
services has become critical in differentiating an organization's product or
service offerings and expanding its market share. To provide higher quality
customer interactions and optimize communications with employees, organizations
need to integrate critical business information and computing resources with
telephony and other communications media.
Organizations today communicate, both internally and externally, through a
variety of media, including voice, e-mail and the Internet. Traditionally, each
of these media and their associated databases and information retrieval systems
has been developed as a point solution and treated as an independent
environment. This has limited productivity, increased costs and restricted the
ability of organizations to improve customer satisfaction and loyalty.
Recognizing the limitations of these "silos" and the inherent value of their
information assets to enhance customer interactions, organizations are seeking a
flexible means to integrate communications media and computing platforms in
order to optimize flows of information to the call/contact center, and across
the enterprise. It has now become a requirement that organizations blend media
to more optimally manage their global customer management strategies. To be most
effective, organizations need to make information available at any time it is
needed, anywhere it may be located and in any way that it may be requested.
2
<PAGE>
A number of general business trends are also contributing to the increasing
importance of integrating communications media and computing platforms. They
include:
. The increasingly global nature of business operations, which has
significantly complicated the task of managing information and providing
expertise in a real-time, cost-effective manner.
. The proliferation of distributed computing environments, which has resulted
in the broader dissemination of information--particularly through enterprise
software applications that address key business functions such as customer
service, finance, human resources, sales and marketing and supply chain
management--and increased the complexity of accessing this information.
. The deregulation of major industries, specifically telecommunications,
banking, health care and utilities, which has resulted in increased
competition, new business opportunities, and a drive to deliver new and
enhanced services as a means of competitive differentiation.
. The increase in merger/acquisition and partnering activity, which has forced
organizations to integrate complex, disparate telecommunications and
computing systems, while maintaining high-quality customer service without
disrupting or delaying access to critical business information.
. The convergence of traditional (brick and mortar) and new (e-Business)
business models, whereby established brick and mortar companies are
recognizing the need to interact with customers via the Internet and e-
Businesses are recognizing the need to add voice capabilities.
Organizations have confronted a variety of complex business and technological
issues associated with intelligently accessing customer information in a real-
time, automated and cost-effective manner. The initial response to these issues
was the establishment of formal voice-based call centers, where hundreds of
customer service representatives occupy a dedicated facility with systems
designed specifically to address high levels of customer inquiry. Typically,
these call centers have been automated at the hardware level (i.e., the
telephone switch) through automated call distribution ("ACD") and interactive
voice response ("IVR") systems. In the face of competitive pressures, the
stand-alone nature of these systems is becoming increasingly burdensome to
organizations. The appropriate person to handle certain customer interactions or
employee inquiries may no longer be a call center representative with limited,
generic training, but might instead be a more experienced or specialized
employee either in the call center or located elsewhere within the enterprise.
Providing intelligent access to these employees and furnishing them with
pertinent information at the time of the customer inquiry requires a level of
sophistication and flexibility beyond the reach of traditional ACD, IVR and call
center solutions.
Shortcomings in the traditional method that organizations have managed
customer interactions and employee communications, in combination with the
general business trends noted above, have created what the Company believes to
be a significant market opportunity for computer telephony and sophisticated
interaction management solutions with the following characteristics:
. a high-performance, scaleable and flexible platform that can readily
integrate with existing computer architectures and business applications,
thereby preserving an organization's investment in its infrastructure and
applications;
. a suite of comprehensive integrated business applications that address a
wide variety of customer needs;
. intelligent, real-time integration of and access to information matched to
customer and employee needs across different media channels and throughout
the organization; and
. a consistent level of functionality based on the underlying infrastructure.
The Company believes that solutions with these characteristics will allow most
organizations to increase productivity, lower costs and achieve greater customer
satisfaction and loyalty, as well as enable organizations to develop and offer
new or enhanced revenue-generating services.
3
<PAGE>
The Genesys Solution
Genesys believes that its solutions offer an innovative approach to computer
telephony and interaction management that addresses many of the limitations
inherent in traditional call centers. The Company's solutions provide the
following features and benefits:
Open, Scaleable and Media-Independent Platform
The Company's open platform intelligently manages the convergence of disparate
telecommunications media and heterogeneous computing environments. The Company's
platform is designed to scale with increases in the volume of customer inquiries
and growth in the number of customer service representatives and geographic
locations. The Company's platform readily integrates with a broad range of
proprietary telephone switching platforms, IVRs and major computing platforms,
operating systems and databases. With the ability to integrate multiple
communications media, the Company's platform supports customer interactions via
e-mail and the Internet, as well as traditional voice calls. In addition, the
Genesys platform is designed to integrate with products developed by third
parties and customers' internal development teams. The Genesys platform also
supports many software development and network communications standards. This
open systems approach is designed to enable an organization to leverage its
investments in its existing infrastructure, software applications and employee
training.
Broad Portfolio of Interaction Management Solutions
Genesys offers a broad array of integrated business applications that provide
a wide range of interaction management capabilities for both traditional (brick
and mortar) organizations and new e-Businesses. These applications include
network and enterprise call routing, Internet-based interaction management,
workforce management, outbound/blended dialing, and real-time and historical
reporting. These applications are designed to integrate with an organization's
existing telecommunications and computing infrastructure. Genesys also offers a
sophisticated computer telephony integration ("CTI") development environment
to enable an organization to develop its own applications and integrate
applications from other vendors into the Genesys framework.
Enhanced Customer Interactions
The Company's solutions enable an organization to improve its interactions
with its customers, resulting in increased customer satisfaction and loyalty.
For example, the Genesys enterprise routing solution may be utilized for the
real-time analysis of critical information, including a customer's account
profile, financial position and the nature of past interactions, in order to
direct incoming interactions to the representative with the skills, attributes
and experience necessary to best address the customer's needs. In addition, the
Company's products extend the boundaries of the call center to enable a customer
inquiry to be routed to more specialized personnel located throughout the
organization, regardless of their location. This becomes more 99, Genesys
introduced to the market place its integrated Internet Suite and workforce
management solutions extending the product line to meet new and existing
challenges within the enterprise. These new products are described below.
Framework
Genesys T-Server Framework. The Genesys framework is based upon T-Server
Framework, the Company's platform product, which provides an open, scalable base
for interaction management solutions. T-Server Framework integrates diverse
telephony systems, enterprise databases, agent desktop applications, call center
applications and multiple communications media (e.g. e-mail, Web-based
interactions, fax, etc.) into a unified customer interaction foundation. It is
compatible with most major PBXs, IVRs and ACDs and most major computing
platforms, operating systems and databases. T-Server Framework is designed to
scale with increases in the volume of customer inquiries, growth in the number
of customer service representatives and expansion to multiple sites in multiple
geographies. Additional features include the ability to transfer voice and data
across sites regardless of the switch type and the immediate presentation of
customer data on the agent's screen (known as a "screen pop"). Other features
include a dynamic call center configuration management feature which provides a
single point of configuration for the entire call center in real time, and the
inclusion of a Desktop Toolkit feature, which enables integration of desktop
applications on top of the Genesys platform.
4
<PAGE>
Solutions Offerings
- -------------------
Genesys' Internet Contact Center Solution. The Genesys Internet contact
center solution provides a means to handle both Internet-based and voice
interactions to create a consistent customer interface irregardless of the media
channel chosen by the customers. The solution routes incoming interactions
through a "universal queue," which treats all media interactions moving through
the contact center as manageable "events," so that the various media gateways -
ACDs, IVRs, and media servers for e-mail, chat and VOIP -- interface and speak a
common language. The Genesys Internet contact center solution supports the
following Internet-based customer communication channels:
Genesys E-Mail allows contact center agents to respond to customer e-mail
--------------
inquiries with the same personalized care as traditional voice interactions.
Genesys E-mail can automatically respond and/or suggest responses to incoming
e-mail based on business rules defined by contact center managers.
Genesys Chat enables real-time text communication through a Web browser. Web
------------
users can enter questions or comments into their browsers and view responses
from an agent in real time.
Genesys Web Call Back makes it possible for customers visiting a company's Web
---------------------
site to request a telephone call back from a contact center agent either
immediately or at a more convenient time.
Genesys Web Call Through (voice over IP) allows Web users to speak to customer
------------------------
representatives via their computer, using standard Internet phone software.
Genesys Web Collaboration allows contact center agents and customers to
-------------------------
automatically synchronize Internet browsers and simultaneously surf the
Internet. Agents can assist customers in learning how to find solutions or use
features on the Internet site.
Genesys' Network Routing Solutions. The Genesys network routing solution
enables customer or employee inquiries to be routed from the carrier's network
to a company's multiple call center sites. The Genesys solution allows contact
center managers to manage agents located at geographically dispersed sites as if
they were in one virtual contact center. When an interaction arrives at the
carrier's network, Genesys' network routing solution applies basic customer-
defined criteria to identify, segment, and route the interaction. Routing
criteria are unique for each business and can be based upon real-time
statistics, customer-stored data, or customer-defined business rules and
situations. Calls are routed dynamically to balance the load of calls across
multiple sites. The network routing solution achieves this load balancing by
continuously tracking real-time statistics, such as length of queues, call
volumes, availability of agent skill sets, etc., throughout the virtual call
center in order to match an incoming call with the best resource for that
specific moment in time. Balancing interaction volume across multiple sites
smoothes out the peaks and valleys at individual contact center sites, reducing
customer "on hold" times, along with the associated telecommunications costs.
Genesys' Enterprise Routing Solution. The Genesys enterprise routing solution
is an intelligent, data driven routing application. Using an enterprise's
business rules and objectives, the solution can route and transfer inbound voice
calls, e-mails, Web-based interactions and other forms of communications based
on a wide variety of criteria and conditions, (i) including: call information
such as caller ID, automatic number identification (ANI), dialed number
identification service (DNIS), caller-entered digits (CED) or IVR data; (ii)
customer information from enterprise databases, enterprise resource planning
applications, and customer interaction software; agent or group skill sets and
skill levels; (iii) telephony statistics for agents, groups, routing points, or
queues; (iv) particular conditions, dates or times; and (v) pre-defined service
level objectives for different categories of callers; and pre-defined disaster
recovery scenarios. The Genesys solution includes a graphical Strategy Builder
that allows call centers to design customized routing strategies. The Strategy
Builder features a drag-and-drop interface, compiler and debugger that tests and
simulates strategies before loading, flexible scheduling for strategy loading,
and the ability to redesign and load new strategies during real-time call center
operations.
Genesys' Workforce Management Solution: Genesys' workforce management
solution allows contact center managers to analyze historical customer
interaction statistics, accurately forecast customer service demands, and create
appropriate staffing schedules to optimize the desired quality of service in the
contact center. Traditional solutions are stand alone and only focused on
voice interactions. The Genesys workforce management solution is integrated to
the Genesys framework and leverages the configuration of staffing and skills
being used to manage the Interaction environment, but more importantly, a multi-
switch, -call center, -media environment of today's complex enterprise. This
new solution offers advanced capabilities to improve customer service and
minimize payroll and telecommunications expenses. The Genesys workforce
management solution also tracks adherence to staffing schedules and forecasted
customer contact volumes in real time, giving contact center managers
flexibility to make immediate, intra-day scheduling adjustments should customer
contact volumes suddenly fluctuate.
5
<PAGE>
Genesys' Outbound Dialing Solution. Genesys' outbound dialing solution is an
advanced, predictive dialing application that manages outbound campaigns and
blends inbound and outbound calling. The solution allows contact center managers
to design flexible, cost-effective outbound campaigns that increase sales,
improve customer interactions and reduce costs. For blended campaigns, the
Genesys solution is able to regulate the volume of outbound calls based on
traffic to inbound services in order to optimize agent productivity and
streamline staffing. Other features include: call-result detection, which
enables customers to undertake large-scale, high-volume outbound call campaigns
while minimizing agent downtime between calls; automated call-back management,
which initiates outbound calls in response to customer requests generated by the
Internet, IVR, ANI/DNIS, or even abandoned calls; an Outbound Scripting option
that guides agents through pre-determined sales dialog; and displays of agent
and campaign performance statistics in real time to help supervisors evaluate
campaign success.
Genesys' Historical Reporting Solution. Genesys historical reporting
solution tracks and stores data related to call center activity. It creates a
historical record for each call, tracing its path from the moment the contact
enters the call center, through transfers and conferencing, to the call's final
termination. In addition to voice calls, the Genesys solution tracks e-mail and
Web-based interactions, providing a comprehensive analysis of customer
interactions. The solution integrates with major databases such as Oracle,
Sybase, Informix, DB2, and Microsoft SQL Server. Managers can produce standard
reports or create customized reports using a Genesys tool or any third-party
reporting tool. Additional features include: the ability to analyze the entire
call center operation across multiple platforms and sites, and accessibility
from virtually any desktop with Netscape Navigator or Microsoft Internet
Explorer.
Genesys' Real-Time Reporting Solution. Designed to give call center managers
a measure of contact center effectiveness and efficiency, Genesys' real-time
reporting solution monitors real-time activities across the contact center and
provides a graphical display of these activities by agent, group or queue. The
solution provides a unified, real-time view of a company's call centers across
multiple sites, PBXs, platforms, and databases. The real-time reporting solution
offers customizable views of interaction objects (agents, agent groups, queues,
virtual queues, routing points and virtual routing points). A contact center
supervisor can monitor the current state or status of the objects throughout the
contact center to help make decisions about staffing, schedules and
call/interaction routing strategies. Administrators can create business filters
to separate statistics by customer segmentation and non-call properties and can
apply filters to statistics as needed. A new feature of the real-time
reporting suite improves reporting on business data by allowing contact center
administrators to create statistics with formulas to calculate values specific
to the contact center needs, i.e. revenue generated by a group of agents over a
specific time period. Sample statistics include: number of inbound and outbound
calls; number of calls handled; average time spent on the phone, compared to the
total time required to handle the call; number of agents in each agent state;
estimated number of calls that agents or groups can handle in an hour; number of
agents logged on and available; average speed of answer; average time to
abandon; and percentage of answered calls and percentage of abandoned calls. The
real-time reporting solution also features flexible viewing options with
customizable time profiles for calculating statistics, and object-based views of
agents, groups, and call centers, which allow supervisors to monitor one or more
agents or predetermined groups.
Genesys' real-time reporting solution also provides each contact center agent
with a real-time measure of his or her own performance. Agents can access
current status information and cumulative statistics of key performance
measures, by hour and by day. This tool allows each agent to review performance
data elements throughout a shift, and make adjustments to more effectively
allocate the agent's time and maximize his or her contribution to the call
center. The Genesys solution also allows each agent to compare his or her
performance to a group, and allows managers to set thresholds and statistical
alarms to enforce specific parameters for agents.
Customers
As of June 30 1999, Genesys had, directly or indirectly through VARs, systems
integrators and resellers, licensed its products to approximately 650 end-users
worldwide. In fiscal 1999, no customer accounted for more than 10% of total
revenues. In fiscal 1998 and 1997, MCI Telecommunications accounted for 14.1%
and 11.1%, respectively, of total revenues. See "Risk Factors--Customer
Concentration".
Sales and Marketing
The Company's sales strategy is to target large organizations through its
worldwide direct sales force as well as through a broad range of indirect
channels, including telecommunications equipment vendors, systems integrators,
VARs, ISVs and NSPs. The Company's worldwide sales headquarters is located in
San Francisco, California. Domestic sales offices are located in California,
Colorado, Florida, Georgia, Illinois, Kansas, Maryland, Massachusetts,
Minnesota, New Jersey, New York, North Carolina, Oregon, Rhode Island, Texas,
Virginia and Washington. Internationally, the Company has sales offices or other
representation in Argentina, Australia, Brazil, Canada, France, Germany, Italy,
Israel, Japan, Mexico, the Netherlands, Singapore, South Africa, South Korea,
Spain, Sweden and the United Kingdom.
6
<PAGE>
Direct Sales
The Company employs a direct sales force to market is products and services
worldwide. As of June 30, 1999, the Company's sales and marketing staff
consisted of 246 employees. Sales representatives are assigned quotas and
compensated for all revenues generated within their assigned territories and/or
accounts. The Company intends to expand its sales capabilities in the future.
Many initial sales include a pilot implementation of the Company's products,
successful completion of which is typically a prerequisite to full scale
deployment. While the sales cycle varies from customer to customer, it typically
ranges from three to nine months. See "Risk Factors--Lengthy Sales Cycle".
Indirect Sales
In order to enhance its revenue generation and implementation capabilities and
extend its market reach, the Company complements its direct sales organization
with a network of distribution partners, including systems integrators, VARs,
telecommunications equipment and computer hardware vendors, NSPs and ISVs. While
the majority of the Company's U.S. sales were direct, the percentage of reseller
sales is increasing in the U.S. market. Internationally, large proportions of
sales are executed via the indirect channel. See "Risk Factors--Dependence on
Third-Party Resellers".
. VARs and systems integrators such as Ameritech, BT, Bell Atlantic Call
Center Solutions, Cambridge Technology Partners, CapGemini, Deloitte &
Touche LLP, PWC, SAIC, SEMA and TSC market, distribute and implement the
Company's products. The VARs and systems integrators represent a critical
product delivery and implementation channel for the Company.
. Telecommunications equipment and computer hardware vendors such as Alcatel,
Compaq, NCR, Rockwell, Siemens and Unisys market and distribute Genesys
products as part of a packaged solution with their own products.
. ISV partners such as Clarify, SAP, Siebel Systems and Vantive integrate
Genesys solutions with their own software products. The Company's ISV
relationships are also an important source of sales leads.
. NSPs such as BT, MCI, NBTel and Telsstra have entered into a broad range of
relationships with the Company, including the resale of the Company's
products and the provision of services utilizing the Company's products.
International Sales
Revenues outside of the United States accounted for 49.9%, 44.7% and 33.4% for
the fiscal years ended June 30, 1999, 1998, and 1997 respectively. The Company
has international sales offices or other representation in 18 countries and
intends to continue broadening its international presence. A significant portion
of international sales is currently conducted through indirect sales channels.
The Company believes that international revenues will continue to represent a
significant portion of its total revenues. The ability of the Company to expand
internationally, however, is limited to those countries where there is
regulatory approval of the third party telephony hardware supported by the T-
Server Framework. See "Risk Factors--Risks Associated with International Sales
and Operations".
Support Services
Support services, including maintenance, implementation, consulting,
installation and training, are an important element of the overall Genesys
solution. The Company intends to devote additional resources to supporting its
customers and providing training to indirect channels as the Genesys platform
becomes more widely adopted. There can be no assurance the Company will be
successful in its efforts to provide sufficient resources to expand its customer
support capabilities. See "Risk Factors--Lengthy Sales Cycle" and
"--Dependence on Third-Party Resellers".
Professional Services
Consulting and systems integration services are provided directly by the
Company's Professional Services group, as well as through alliances with major
systems integrators, VARs and mid-tier consulting firms. The Genesys
Professional Services group offers a range of services designed to support the
customer's deployment of the Genesys Suite of products, working either directly
with the customer or in conjunction with Genesys certified partners to provide
the following types of services: scope and design, installation, development,
testing and rollout. Genesys certified partners offer a broader range of
services
7
<PAGE>
including business planning, business process reengineering, call center
operations, as well as integration, implementation, and support of Genesys
products.
Technical Support
Genesys Technical Support provides expert-level support to augment customers'
technical resources. Currently, Genesys technical support personnel deliver
services world-wide from locations in Wokingham, United Kingdom; St. John, New
Brunswick, Canada; and San Francisco, CA. Support is provided on a 8:00 a.m. to
5:00 p.m. or 7 by 24 basis, utilizing a combination of live support and pager
notification. Genesys utilizes a tracking and reporting process that is
integrated to all Genesys support locations to provide a proactive monitoring of
customer environments and events.
Educational Services
Genesys University offers curriculum that addresses the entire Genesys product
suite and a rigorous certification program to ensure the transfer of knowledge
to the attendee and skills development to be able to implement the Genesys
product suite. The certification program is offered to Genesys customers and
end-users, as well as a requirement of Genesys employees and partners
implementing Genesys products. Today, Genesys currently offers three
certification programs: a Certified Genesys Engineer (CGE) program intended for
those who will install, configure, maintain and troubleshoot enterprise-wide or
single site contact center solutions; a Certified Genesys Developer (CGD)
program intended for software developers who will develop applications supported
by the Genesys framework; and a Certified Genesys Routing Professional (CGRP)
program intended for professionals who design and implement complex business-
rules-based routing strategies for the enterprise. In addition, Genesys offers a
selection of sales and marketing courses intended for its partners and designed
to provide tools and techniques for use in the selling and marketing of Genesys
products in conjunction with partners' products or services.
Research and Development
Rapid technological change, frequent new product introductions, and changes in
customer requirements and emerging industry standards characterize the market
for the Company's products. The introduction of products embodying new
technologies and the emergence of new industry standards could render the
Company's existing products obsolete and unmarketable. The life cycles of the
Company's products are difficult to estimate. The Company's future success will
depend upon its ability to develop and introduce new products and product
enhancements on a timely basis that keep pace with technological developments
and emerging industry standards and address increasingly sophisticated
requirements of its customers. There can be no assurance that the Company will
be successful in developing and marketing new products or product enhancements
that respond to technological changes or evolving industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these new products or
product enhancements, or that its new products or product enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and market new products or product enhancements in a timely and cost-
effective manner, the Company's business, financial condition and results of
operations would be materially adversely affected.
Genesys believes that strong product development capabilities are essential to
its strategy of building an industry standard platform, maintaining the
competitiveness of its current product suite and adding new features and
functionality to the Genesys platform and applications. The Company's product
development team consists of professionals with expertise in software,
telecommunications and computer hardware. From its founding, the Company has
believed that this combination of diverse technical and communications expertise
contributes to the highly integrated functionality of its software products and
thereby provides the Company with a significant competitive advantage.
Research and development expenses were $24.4 million, $15.3 million, and $9.4
million for the fiscal years ended June 30, 1999, 1998, and 1997. In addition,
the Company capitalized software development costs totaling $4.8 million and
$1.9 million in fiscal 1999 and 1998, respectively. The Company's total research
and development staff consisted of 217 employees as of June 30, 1999. The
Company expects that it will continue to increase research and development
expenditures in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
The Company's current product development efforts are focused on enhancements
to the Genesys platform, new releases of many of the Company's applications, and
new products designed to enhance the overall strength of the Genesys Suite.
There can be no assurance that these development efforts will be completed
within the Company's anticipated schedules or that, if
8
<PAGE>
completed, they will have the features necessary to make them successful in the
marketplace. Moreover, products as complex as the Company's may contain
undetected errors or failures when first introduced or as new versions are
released. Errors in new products may be found after commencement of commercial
shipments, resulting in loss of or delay in market acceptance. Future delays in
the development or marketing of product enhancements or new products could
result in a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Solutions" and "Risk
Factors--Dependence on New Products; Rapid Technological Change".
Competition
The market for the Company's software products is highly competitive and
subject to rapid technological change, and is significantly affected by new
product introductions and other market activities of industry participants. To
date, the Company experienced significant competition and expects competition
to increase significantly in the future. The Company's principal competition
currently comes from different market segments including computer telephony
platform developers, computer telephony applications software developers and
telecommunications equipment vendors. These competitors include Aspect
Telecommunications, Cisco Systems, Inc., Davox Corporation, Dialogic
Corporation, Hewlett-Packard, IBM Corporation, IEX Corporation, Kana
Communications, Lucent Technologies, Melita International, Northern Telecom,
Quintus Corporation and Siebel Systems. The Company also competes to a lesser
extent with new or recent entrants to the marketplace. The Company's competitors
vary in size and in the scope and breadth of the products and services offered.
Many of the Company's current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing, customer
service and other resources, greater name recognition and a larger installed
base of customers than the Company. As a result, such competitors may be able to
respond to new or emerging technologies and changes in customer requirements
more expediently than the Company, or to devote greater resources to the
development, promotion and sale of products than can the Company. Current and
potential competitors have established and may in the future establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of the Company's current or
prospective customers. In addition, as the market for the Company's products
develops, a number of companies with significantly greater resources than the
Company could attempt to increase their presence in the market by acquiring or
forming strategic alliances with competitors of the Company. Accordingly, it is
likely that new competitors or alliances among competitors will emerge and may
rapidly acquire significant market share, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, because there are relatively low barriers to entry in the software
market, the Company expects additional competition. Increased competition is
likely to result in price reductions, reduced margins and loss of market share,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations. In order to be successful in the
future, the Company must respond promptly and effectively to the challenges of
technological change, changing customer requirements and competitors'
innovations. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors--Competition".
Intellectual Property
The Company's success is heavily dependent upon its proprietary technology.
The Company relies primarily on a combination of copyright, trademark and trade
secret laws, as well as nondisclosure agreements and other contractual
provisions to protect its proprietary rights. The Company presently has 16 U.S.
patents issued, and 13 for which the issue fee is paid and the patents will soon
issue. In addition, Genesys has 111 U.S. patent applications, 41 PCT
International applications, and 14 National applications in countries foreign to
the U.S. (five in Japan, six in Europe, two in Canada, and one in Australia).
See "Risk Factors--Protection of Intellectual Property."
Employees
At June 30, 1999, the Company had 730 employees worldwide, of which 217 were
primarily engaged in research and development, 172 in customer service, 246 in
sales and marketing and 95 in finance and administration. The Company's future
performance will depend significantly upon the continued contributions of its
executive officers, technical, marketing, sales and customer service personnel
and its continuing ability to attract, train and retain highly qualified
personnel. Competition for such personnel is intense, and the failure to
attract, train and retain such personnel in the future on a timely basis could
have a material adverse effect on the Company's business, financial condition
and results of operations. None of the Company's
9
<PAGE>
employees is represented by a collective bargaining agreement and the Company
has never experienced any work stoppages. See "Risk Factors--Governmental
Regulation of Immigration" and "--Management of Growth".
RISK FACTORS
In addition to the other information contained in this Annual Report, the
following additional risk factors should be considered carefully in evaluating
the Company and its business. Certain statements contained in this Annual
Report, 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. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Given
these uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements.
Potential Fluctuations in Quarterly Operating Results
The Company's quarterly operating results have varied significantly in the
past. The company's quarterly revenues and operating results may fluctuate
significantly in the future as a result of a variety of factors, many of which
are outside the Company's control. These factors include:
. market acceptance of Genesys' products;
. competition;
. the size, timing and recognition of revenue from significant orders;
. the 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 ability to integrate acquired businesses;
. 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 any specific license transaction;
. the deferral of customer orders in anticipation of new products and product
enhancements;
. 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;
. seasonal fluctuations in our sales cycles;
. changes in relationships with strategic partners;
. personnel changes;
. foreign currency exchange rate fluctuations;
. the ability to control its costs; and
. general economic factors.
The Company has a limited backlog of orders and total revenues for any future
quarter are difficult to predict. The Company's revenues and operating results
depend upon the amount and timing of customer orders that it receives in a given
quarter. In the past, Genesys has recognized a substantial portion of its
revenues in the last month of a quarter. If this trend continues, any failure
or delay to fulfill orders by the end of a particular quarter will harm its
business, financial condition and results of operations. As a result of these
and other factors, the Company believes that period-to-period comparisons of its
historical results or operations are not a good predictor of its future
performance. If the Company's future operating results are below the
expectations of stock market analysts, its stock price may decline. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
10
<PAGE>
Lengthy Sales Cycle
The long sales and implementation cycles for the Company's products may cause
revenues and operating results to vary significantly from quarter to quarter. A
customer's decision to purchase the Company's products involves a significant
commitment of its resources and a lengthy evaluation process. Throughout the
sales cycle, Genesys often spends considerable time educating and providing
information to prospective customers regarding the use and benefits of the
Company's products. The cost of the Company's products is typically only a
small portion of the related hardware, software, development, training and
integration costs associated with implementing an overall solution. As a result,
the Company's sales cycle may be lengthy. Although it varies substantially from
customer to customer, Genesys' sales cycle generally lasts from three to nine
months or more. Even after making the decision to purchase the Company's
products, its customers tend to deploy them slowly. Deployment of the Company's
products extends from a few weeks to several months depending on the complexity
of a customer's telecommunications and computing infrastructure. Deployment
also may involve a pilot implementation phase, the successful completion of
which is typically a prerequisite for full-scale deployment. This deployment
may present significant technical challenges, particularly as large numbers of
employees of a customer attempt to use the Company's products concurrently.
Because of their complexity, larger implementations, especially multi-site or
enterprise-wide implementations, can take several quarters. Genesys generally
relies upon internal resources or third-party consultants to assist in the
implementation of the Company's products. The Company has experienced
difficulty implementing customer orders on a timely basis in the past due to the
limited personnel resources available to the Company. The Company cannot
guarantee that it will not experience delays in the implementation of orders in
the future, or that third-party consultants will be available as needed by the
Company. As a result of this lengthy sales and deployment cycle, the Company
may experience a delay in the recognition of applicable license revenue. In
addition, the delays inherent in such a lengthy sales and deployment cycle raise
the risks that the Company's customers may decide to cancel or change their
orders, which could result in the loss of anticipated revenue. The Company's
business, financial condition and results of operations would suffer if the
customers reduce or delay their orders or choose not to release products using
our technology. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Sales and Marketing".
Customer Concentration
A significant portion of the Company's revenues has been recognized from a
limited number of customers. For example, in fiscal 1999, no customer accounted
for more than 10% of total revenues. In fiscal 1998 and 1997, MCI
Telecommunications accounted for 14.1% and 11.1%, respectively, of total
revenues. The Company expects that a majority of its revenues will continue to
depend on sales of products to a small number of customers. The Company also
expects that customers will vary from period-to-period. In general, the
Company's customers have acquired fully paid licenses to the installed product
and are not contractually obligated to license or purchase additional products
or services from us. If the Company fails to successfully sell its products to
one or more targeted customers in any particular period, or one or more
customers defer or cancel their orders, the Company's revenues and results of
operations could be harmed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Sales and
Marketing".
Competition
If the Company were unable to maintain its market share in the intensely
competitive software market, its financial condition and results of operations
would be harmed. Genesys' competitors include companies such as:
. computer telephony platform developers;
. computer telephony applications software developers; and
. telecommunications equipment vendors.
These competitors include Aspect Communications, Cisco Systems, Davox
Corporation, Dialogic Corporation, Hewlett-Packard, IBM Corporation, IEX
Corporation, Kana Communications, Lucent Technologies, Melita International
Corporation, Nortel Networks, Quintus Corporation and Siebel Systems. Several of
these competitors have longer operating histories, significantly greater
resources, greater name recognition and a larger customer base than the Company.
Genesys expects to continue to encounter significant competition from these and
other sources. In addition, as the market for the Company's products develops,
companies with greater resources may attempt to increase their presence in the
market by acquiring or forming strategic alliances with the Company's
competitors. If new competitors or alliances among current competitors emerge
and acquire significant market share, the Company's business and results of
operations could be seriously harmed.
11
<PAGE>
Dependence on New Products; Rapid Technological Change
Rapid technological change, frequent new product introductions, changes in
customer requirements and evolving industry standards characterize the market
for the Company's products. The introduction by competitors of products
embodying new technologies and the emergence of new industry standards could
render the Company's existing products obsolete. Genesys' future success also
will depend upon its ability to develop and manage key customer relationships in
order to introduce a variety of new products and product enhancements that
address the increasingly sophisticated needs of its customers. The Company's
failure to establish and maintain these customer relationships may adversely
affect the ability to develop new product and product enhancements. In
addition, the Company may experience delays in releasing new products and
product enhancements in the future. Material delays in introducing new products
and enhancements or the Company's inability to introduce competitive new
products may cause customers to forego purchases of the Company's products and
purchase those of competitors. Due to the complexity of Genesys' software and
the difficulty in gauging the engineering effort required to produce new
products and product enhancements, these planned products and product
enhancements can require long development and testing periods. As a result,
significant delays in the general availability of such new releases or
significant problems in the installation or implementation of such new releases
could have a material adverse effect on the Company's business, operating
results and financial condition. The Company has experienced delays in the past
releasing new products and new product enhancements. The Company cannot
guarantee that it will be successful in the future in:
. developing and marketing, on a timely and cost-effective basis, new products
or new product enhancements that respond to technological change, evolving
industry standards or customer requirements;
. avoiding difficulties that could delay or prevent the successful
development, introduction or marketing of these products; or
. achieving market acceptance for the Company's new products and product
enhancements.
Software products, like those offered by the Company, might contain errors or
defects, which are sometimes called "bugs". These bugs are particularly
common when new products are first introduced or as new versions or enhancements
to old products are released. In the past, the Company has discovered software
errors in certain of its new products after their introduction. Despite
testing, current versions, new versions or enhancements may still have defects
and errors after they are shipped to customers. The presence of such bugs could
lead to lost revenues or delays in market acceptance, which could harm the
Company's business and operating results.
Integration of Acquired Businesses into the Company; Risks Associated with
Acquisitions
The Company continually evaluates strategic acquisitions of businesses and
technologies that would complement its products or enhance its market coverage
or technological capabilities. In December 1998, Genesys acquired Plato
Software Corporation and in June 1999, it acquired Next Age Technology, Inc.
The Company may continue to make such acquisitions and investments in the future
and there are a number of risks that future transactions could entail. These
risks include the following:
. inability to successfully integrate or commercialize acquired technologies
or otherwise realize anticipated synergies or economies of scale on a timely
basis;
. the diversion of management's attention;
. the disruption of the Company's ongoing business;
. inability to retain technical and managerial personnel for both companies;
. inability to establish and maintain uniform standards, controls, procedures
and processes;
. negative response by the government or our competitors to the proposed
transactions; and
. the impairment of our relationships with employees, vendors, and/or
customers.
In addition, the Company could affect future acquisitions without shareholder
approval. Acquisitions could dilute shareholder equity, or cause the Company to
incur debt and contingent liabilities and amortize acquisition expenses related
to goodwill and other intangible assets. The occurrence of any of the foregoing
risks could have a material adverse effect on the Company's business, financial
condition and results of operations.
12
<PAGE>
Management of Growth
The Company has experienced a period of rapid growth and expansion that has
placed and will continue to place a significant strain on its resources. During
this period, the Company has experienced revenue growth, an increase in the
number of employees, an expansion in the scope of its operating and financial
systems and an expansion in the geographic area of its operations. As of June
30, 1999, the Company had approximately 730 employees, as compared to
approximately 538 on June 30, 1998 and 370 on June 30, 1997. The Company
anticipates that it will expand further to address potential growth in its
customer base and market opportunities. The Company expects to add additional
key personnel in the near future. To manage this anticipated growth, the
Company will be required to successfully do the following things:
. improve and enhance its operational, financial and management information
controls, reporting systems and procedures;
. hire, train and manage additional qualified personnel;
. expand and upgrade its core technologies; and
. effectively manage multiple relationships with customers, suppliers and
other third parties.
The Company's systems, procedures and controls may not be adequate to support
its operations. If the Company fails to improve its operational, financial and
management information systems, or to hire, train, motivate or manage its
employees, the business, financial condition and results of operations could
suffer. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Sales, Marketing and Support".
Dependence on Third-Party Resellers
The Company's success depends on its ability to continue to develop channels
with third-party resellers such as original equipment manufacturers, systems
integrators and telecommunications switch vendors. The Company has entered into
reseller agreements with some of the telecommunications switch vendors,
including those that compete with Genesys. Genesys is also seeking to establish
strategic relationships with independent software vendors. Genesys does not
have a substantial direct sales force and derives a significant portion of its
revenue from its third-party resellers. Many of these third-party resellers do
not have minimum purchase or resale requirements and can cease marketing the
Company's products at any time. These sales channels could be affected by a
number of additional factors including:
. pressures placed on third-party resellers to sell competing products;
. competing product lines offered by certain third-party resellers;
. failure to adequately support the third-party resellers;
. failure of current third-party resellers to provide the level of services
and technical support required by Genesys' customers;
. loss of a significant number of third-party resellers; and
. failure to attract and retain third-party resellers who have the expertise
necessary to successfully sell the Company's products.
13
<PAGE>
Even if Genesys is able to increase its sales through third-party reseller's,
those sales may be at more discounted rates. This would result in lower revenues
to the Company than what it would generate by licensing the same products to
customers directly.
The Company is also seeking to incorporate its products into the products
offered by telecommunications switch vendors and local and long distance network
carriers. In the near term, the Company is focused on enabling network service
providers to offer computer telephony integration services to their business
customers. The Company cannot guarantee that it will be able to establish
relationships with network service providers or telecommunication switch vendors
or that they will successfully incorporate Genesys' products into theirs. The
Company also cannot guarantee that its corporate partners or its business
customers will be interested in purchasing products that incorporate Genesys
software and are offered by network service providers or telecommunications
switch vendors. If the Company fails to develop this sales channel, its business
and results of operations could be harmed.
Dependence on Emerging Market
The market for customer interaction software, particularly across multiple
media channels, is an emerging market that is extremely competitive and highly
fragmented. This market is currently evolving and subject to rapid
technological change. The Company's success will depend in large part on
continued growth in the number of organizations adopting customer interaction
solutions across multiple media channels. The market for Genesys' products is
relatively new and undeveloped, and recent customers and prospective customers
have little experience with deploying, maintaining or managing customer
interaction solutions. If this market demand fails to develop, or develops more
slowly than the Company currently anticipates, could have a material adverse
effect on the demand for the Company's products and on its business, financial
condition and results of operations.
Risks Associated With International Sales and Operations
For the fiscal years ended June 30, 1999, 1998 and 1997, the Company derived
49.9%, 44.7% and 33.4% of its total revenues, respectively, from sales outside
the United States. The Company anticipates that a significant portion of its
revenues will continue to be concentrated in international markets for the
foreseeable future. The Company intends to expand operations in its existing
international markets and to enter new international markets, which will require
management attention and resources. The Company may not be successful in
expanding its international operations. In addition, a successful international
expansion of Genesys' software solutions will be limited to those countries
where there is regulatory approval of the third-party telephony hardware
supported by Genesys' products. The Company expects to commit additional
development resources to customizing its products for selected international
markets and to developing international sales and support channels.
Furthermore, to increase revenues in international markets, Genesys will need
to continue to establish foreign operations, to hire additional personnel to run
such operations and to maintain good relations with the Company's foreign
systems integrators and distributors. To the extent that Genesys is unable to
successfully do so, its growth in international sales will be limited. The
failure to expand international sales could have a material adverse effect on
the Company's business, operating results and financial condition.
A majority of the Company's international sales to date have been denominated
in U.S. dollars. The company does not currently engage in any foreign currency
hedging transactions. A decrease in the value of foreign currencies relative to
the United States dollar would make the Company's products more expensive in
international markets. In addition to currency fluctuation risks, international
operations involve a number of risks not typically present in domestic
operations. Such risks include:
. changes in regulatory requirements;
14
<PAGE>
. costs and risks of deploying systems in foreign countries;
. timing and availability of export licenses;
. tariffs and other trade barriers;
. political and economic instability;
. difficulties in staffing and managing foreign operations;
. potentially adverse tax consequences;
. difficulties in obtaining governmental approvals for products
. the burden of complying with a wide variety of complex foreign laws and
treaties;
. the possibility of difficult accounts receivable collections; and
. difficulties in managing distributors.
Foreign laws that may differ significantly from laws of the United States may
govern distributors' customers purchase agreements. The Company is also subject
to the risks associated with the imposition of legislation and regulations
relating to the import or export of high technology products. The Company
cannot predict whether quotas, duties, taxes or other charges or restrictions
upon the importation or exportation of its products will be implemented by the
United States or other countries, leading to a reduction in sales and
profitability in that country. Future international activity may result in
sales dominated by foreign currencies. Gains and losses on the conversion to
United States dollars of accounts receivables, accounts payable and other
monetary assets and liabilities arising from international operations may
contribute to fluctuations in the Company's operating results. Any of these
factors could materially affect the Company's business, operating results and
financial condition.
Product Concentration
Substantially all of the Company's revenues to date have been attributable to
the license of the Company's platform and related applications software and
services and, in particular, revenues from the license of the Company's platform
products accounted for 45% of total revenues in fiscal 1999. Genesys' platform
and related applications software and services are currently expected to account
for substantially all of the Company's revenues for the foreseeable future.
Consequently, a decline in pricing or demand for, or failure to achieve broad
market acceptance of, Genesys' platform and related applications software
products, as a result of competition, technological change or otherwise, would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's application products, other than the
Adante e-mail and Next Age Work Force Management products, can only be used in
conjunction with the Company's platform products. As a result, a decline in
demand for the Company's platform products would materially adversely affect
sales of the Company's application products. Furthermore, if customers
experience problems with the Company's platform products, it would adversely
affect their ability to utilize the Company's application products. The
Company's future financial performance will depend in part on the successful
development, introduction and customer acceptance of new and enhanced versions
of its platform and related applications software products. There can be no
assurance that the Company will continue to be successful in marketing its
platform products, related applications software or any new or enhanced
products. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Solutions".
Government Regulation of Immigration
As of June 30, 1999, over 26% of the Company's employees, including
approximately 57% of the Company's technical staff, are foreign citizens.
Accordingly, the Company must comply with the immigration laws of the United
States. Most of the Company's foreign employees are working in the United States
under H-1 temporary work visas ("H-1 Visas"). An H-1 Visa allows the holder to
work in the United States for three years and, thereafter, to apply for a three-
year extension. If the H-1 Visa holder has not become a Lawful Permanent United
States Resident obtained some other legal status permitting continued
15
<PAGE>
employment before expiration of this six-year period, the holder must spend at
least one year abroad before reapplying for an H-1 Visa. Furthermore, Congress
and administrative agencies with jurisdiction over immigration matters have
periodically expressed concerns over the level of immigration into the United
States. The inability of the Company to utilize the continued services of such
employees would have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Ability to Integrate with Third-Party Technology
The Company's products currently integrate with most major telephony systems
and interoperate across most major computing platforms, operating systems and
databases. If the Company's platform did not readily integrate with major
telephone systems and computing platforms, operating systems or databases, (for
instance, as a result of technology enhancements or upgrades of such systems)
the Company could be required to redesign its platform product to ensure
compatibility with such systems. The Company cannot guarantee that it would be
able to redesign its products or that any redesign would achieve market
acceptance. If the Company's platform products did not integrate with third-
party technology, there would be a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Architecture" and "--Solutions".
Year 2000
Many computer systems experience problems handling dates beyond the year 1999.
The Company has designed and tested current versions of its products for use in
the year 2000 and beyond, and believes that they are year 2000 compliant.
However, some of Genesys' customers might be running older versions of the
Company's products that might not be year 2000 compliant. It is possible that
Genesys may experience increased expenses in addressing mitigation issues for
these customers. In addition, the Company's products frequently are integrated
into larger networks involving sophisticated hardware and software products
supplied by other vendors. Each of the Company's customers' networks involves
different combinations of third party products. The Company cannot evaluate
whether all of their products are year 2000 compliant. Genesys may face claims
based on year 2000 problems in other companies' products or based on issues
arising from the integration of multiple products within the overall network.
Although no such claims have been made, the Company may in the future be
required to defend its products in legal proceedings, which could be expensive
regardless of the merits of such claims.
If the Company's suppliers, vendors, major distributors, partners, customers
and service providers fail to correct their year 2000 problems, these facilities
could result in an interruption in, or a failure of, the Company's normal
business activities of operations. If a year 2000 problem occurs, it may be
difficult to determine which party's products have caused the problem. These
failures could interrupt the Company's operations and damage its relationships
with its customers. Due to the general uncertain inherent in the year 2000
problem resulting from the readiness of third party suppliers and vendors, the
Company is unable to determine at this time whether year 2000 failure could harm
its business and financial results.
Genesys' customers' purchasing plans could be affected by year 2000 issues if
they need to expend significant resources to fix their existing systems to
become year 2000 compliant. This situation may reduce funds available to
purchase products until after the year 2000, which may reduce the Company's
revenue.
Protection of Intellectual Property
The Company's success depends heavily on its ability to protect its software
and other proprietary technology. The Company relies primarily on a combination
of copyright, trademark and trade secret laws, as well as nondisclosure
agreements and other contractual provisions to protect its proprietary rights.
Genesys currently holds four issued patents and has a number of United States
and foreign patent applications pending. There can be no assurance that any of
the Company's patent applications will be approved, that the Company will
develop additional proprietary products or technologies that are patentable,
that any issued patent will provide the Company with any competitive advantages
or will not be challenged by third parties or that the patents of others will
not have an adverse effect on the Company's ability to do business. Furthermore,
others may independently develop similar or superior products, duplicate the
Company's products or, if patents are issued to the Company, design around the
patents issued to the Company. If third parties were successful in using their
patents to challenge or compete with Genesys, its business could be seriously
harmed.
As part of its confidentiality procedures, Genesys generally enters into
nondisclosure agreements with its employees, consultants and other third parties
who provide technical services to the Company or who have access to confidential
information of the Company. In addition, the Company limits access to and
distribution of its software, documentation and
16
<PAGE>
other proprietary information. The Company also relies in part on "shrink-wrap"
and "click-wrap" licenses, although these licenses are not signed by the end
user and, therefore, may be unenforceable under the laws of certain
jurisdictions.
The measures described above however, afford Genesys only limited protection.
Unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult. Although the Company
is unable to determine the extent to which piracy of its software products
exists; software piracy may become a problem. In addition, effective protection
of intellectual property rights may be unavailable or limited in certain foreign
countries in which the Company currently sells products and countries Genesys
may target to expand its sales efforts. Accordingly, there can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop similar or
superior technology.
There has also been a substantial amount of litigation in the software
industry regarding intellectual property rights. The Company has from time to
time received claims that it is infringing third parties' intellectual property
rights, and there can be no assurance that third parties will not in the future
claim infringement by the Company with respect to current or future products,
trademarks or other proprietary rights. The Company expects that software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Although
the Company is not aware that any of its products or proprietary rights
infringes upon the proprietary rights of third parties, the Company may be
subject to infringement claims in the future. Furthermore, there can be no
assurance that former employers of Genesys' present and future employees will
not assert claims that such employees have improperly disclosed confidential or
proprietary information to the Company. Any such claims, with or without merit,
could be time-consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays, cause the
Company to lose or defer sales or require the Company to pay money damages or
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to Genesys or
at all, which could have a material adverse effect on Genesys' business,
financial condition and results of operations.
17
<PAGE>
Item 2. Properties
The Company's headquarters are located in approximately 82,000 square feet of
office space in San Francisco, California under a lease, which expires on
September 30, 2002. The Company also leases space for its sales and support
offices in California, Colorado, Florida, Georgia, Illinois, Kansas, Maryland,
Massachusetts, Minnesota, New Jersey, New York, North Carolina, Oregon, Rhode
Island, Texas, Washington and Virginia, as well as for offices in 18 foreign
countries. The Company believes that its existing facilities are adequate for
its current needs and that additional space will be available as needed.
Item 3. Legal Proceedings
The Company is a party to routine litigation incident to its business.
Management believes that none of these legal proceedings will have a material
adverse effect on the Company's consolidated financial statements taken as a
whole or results of operations of the Company.
GeoTel Litigation. On December 17, 1996, GeoTel Communications Corporation
("GeoTel") filed a lawsuit in the United States District Court for the
District of Massachusetts naming the Company as defendant, and alleging
infringement of a patent issued to GeoTel entitled "Communications System Using
a Central Controller to Control at Least One Network and Agent System", U.S.
Patent No. 5,546,452 (the "GeoTel Patent"). On November 20, 1998, the Company
and GeoTel entered into a settlement agreement concerning the patent dispute on
terms that neither company believes are material to its financial results.
Pursuant to the settlement, GeoTel will receive a pre-determined license fee,
paid over a fixed period of time, for 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. The license fee is expensed in the period in which
it is paid, which approximates the useful life of the licensed technology.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on May 21, 1999 (the "May
Stockholders Meeting"), the stockholders of the Company voted on and approved
the following proposals:
Proposal 1. To elect five directors to the Board of Directors to serve until
the next Annual Meeting;
Proposal 2. To ratify the selection of Arthur Andersen LLP as the Company's
independent public accountants for the fiscal year ending June 30,
1999; and
Proposal 3. To approve an amendment to the Company's 1997 Stock Incentive Plan
(the "1997 Plan") to increase the number of shares of Common Stock
authorized for issuance under the 1997 Plan by 2,500,000 shares.
Information on the Board of Directors.
The following directors were elected at the May Stockholders Meeting to serve
until the next Annual Meeting, which is currently scheduled for November 19,
1999:
. Gregory Shenkman, Chairman
. Alec Miloslavsky, Vice Chairman
. Ori Sasson
. Bruce Dunlevie
. Paul Levy
18
<PAGE>
May Stockholders Meeting Results.
Proposal 1. Election of Directors
<TABLE>
<CAPTION>
Director In favor Withheld Broker non-votes
- --------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Gregory Shenkman 17,301,348 109,250 n/a
Alec Miloslavsky 17,303,287 107,311 n/a
Ori Sasson 17,303,867 106,731 n/a
Bruce Dunlevie 17,252,159 158,439 n/a
Paul Levy 17,252,159 158,439 n/a
</TABLE>
Proposal 2. Ratification of Independent Public Accountants
<TABLE>
<CAPTION>
For Against Abstain Broker non-votes
- --------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
17,382,080 25,971 2,547 0
</TABLE>
Proposal 3. Amendment to the 1997 Stock Incentive Plan
<TABLE>
<CAPTION>
For Against Abstain Broker non-votes
- --------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
8,239,666 4,136,658 9,296 5,024,978
</TABLE>
19
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their respective position and age as
of August 31, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------------ ----------- ----------------------------------------------------------
<S> <C> <C>
Ori Sasson 37 President and Chief Executive Officer
Alec Miloslavsky 36 Vice Chairman of the Board and Chief Technical Officer
Christopher D. Brennan 42 Chief Financial Officer and Senior Vice President,
Finance & Administration
Richard C. DeGolia 49 Senior Vice President, Business Development and Strategic
Planning, Acting General Counsel and Corporate Secretary
Donald W. Hunt 43 Senior Vice President, Field Operations, Americas and
Asia Pacific
Noelle Leca 42 Senior Vice President, Worldwide Marketing
Ad P. Nederlof 52 Senior Vice President, Field Operations, EMEA
Yuri Shtivelman 43 Senior Vice President, Product Development
</TABLE>
Mr. Sasson joined the Company in December 1998 as its President and Chief
Executive Officer. Prior to joining the Company, Mr. Sasson was Chief Executive
Officer and President of Scopus Technology, Inc. from March 1991 until July
1998, when Siebel Systems, Inc acquired Scopus.
Mr. Miloslavsky co-founded the Company and has served as its Chief Technical
Officer since the Company's formation in October 1990, as a director since
January 1993 and as Vice Chairman of the Board since March 1997. Prior to co-
founding the Company, Mr. Miloslavsky worked as an independent software
consultant.
Mr. Brennan joined the Company in April 1999 as its Chief Financial Officer
and Senior Vice President, Finance & Administration. Prior to joining the
Company, Mr. Brennan was Chief Financial Officer and Corporate Secretary of
Diamond Lane Communications from September 1997 to April 1999. Prior to that,
he was with UB Networks, a wholly owned subsidiary of Newbridge Networks, having
been acquired from Tandem Computers, most recently as President and Chief
Operating Officer, from April 1994 to July 1997.
Mr. DeGolia joined the Company in September 1996 as Vice President, Business
Development. In February 1999, Mr. DeGolia was promoted to Vice President,
Business Development and Strategic Planning and Corporate Secretary. In July
1999, Mr. DeGolia was promoted to Senior Vice President, Business Development
and Strategic Planning; Corporate Secretary and Acting General Counsel. From
August 1985 to September 1996, Mr. DeGolia was an attorney with Wilson, Sonsini,
Goodrich & Rosati, PC, a law firm located in Silicon Valley. Mr. DeGolia holds a
B.A. in American Studies from the University of California at Berkeley and a
J.D. from Harvard University.
Mr. Hunt joined the Company in January 1999 as its Senior Vice President,
Field Operations, Americas and Asia Pacific. Before joining the Company, Mr.
Hunt was Vice President, North America Sales of Informix Software, Inc. from
February 1997 to January 1999. Prior to that, Mr. Hunt was with Open Market as
Vice President Sales for the Americas (North America and Latin America) from
April 1996 to February 1997. Mr. Hunt was North American ISV Sales Director of
Sun Microsystems, Inc. from October 1989 to April 1996.
Ms. Leca joined the Company in July 1999 as Senior Vice President, Worldwide
Marketing. Prior to joining the Company, Ms. Leca was Vice President of
Engineering at Commerce One from August 1997 to December 1999. From March
20
<PAGE>
1996 to August 1997, she was Vice President and General Manager with
International Network Services. Prior to March 1996, she was employed at Sybase
Inc. from October 1989 to January 1996 in a variety of management roles, most
recently as Vice President, Office of the COO.
Mr. Nederlof joined the Company in April 1999 as its Senior Vice President,
Field Operations, EMEA. Prior to joining the Company, Mr. Nederlof was
President and COO of Richter Systems from December 1996 to February 1999.
Before that he was Vice President, Northern Europe for Oracle Corporation from
August 1991 to December 1996.
Mr. Shtivelman joined the Company in July 1996 as Vice President, Product
Development. In July 1999, Mr. Shtivelman was promoted to Senior Vice President,
Product Development. From 1986 to 1996, Mr. Shtivelman was employed in various
capacities by Northern Telecom, most recently as Assistant Vice President,
Meridian 1 Advanced Technology. Mr. Shtivelman holds an M.S. in mathematics from
Moscow University.
21
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's Common Stock commenced trading on the Nasdaq National Market on
June 16, 1997 and is traded under the symbol "GCTI". As of August 31, 1999,
there were approximately 290 holders of record of the Common Stock. The
following table sets forth for the periods indicated the high and low closing
sale prices for the Common Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
High Low
------------------------------
<S> <C> <C>
Fiscal 1998
First Quarter $39.625 $24.250
Second Quarter $36.875 $24.375
Third Quarter $38.125 $24.000
Fourth Quarter $39.750 $26.375
Fiscal 1999
First Quarter $35.000 $16.250
Second Quarter $30.125 $ 9.125
Third Quarter $28.000 $10.688
Fourth Quarter $25.000 $11.500
- ----------------------------------------------------------------
</TABLE>
The Company has never paid cash dividends on its capital stock. The Company
currently anticipates that it will retain all available funds for use in its
business and does not anticipate paying any cash dividends.
22
<PAGE>
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
notes thereto included elsewhere in this Annual Report on Form 10-K. The
consolidated statement of operations data for the three years in the period
ended June 30, 1999 and the consolidated balance sheet data at June 30, 1999 and
1998 are derived from, and are qualified by reference to, the consolidated
financial statements included elsewhere in this Annual Report on Form 10-K that
have been audited by and reported on by Arthur Andersen LLP, independent public
accountants, and should be read in conjunction with those consolidated financial
statements and notes thereto. The consolidated balance sheet data at June 30,
1997, 1996 and 1995, and the consolidated statement of operations data for
fiscal 1996 and 1995 are derived from audited consolidated financial statements
not included herein.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Year ended June 30,
1999 1998 1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues:
License $113,620 $68,973 $31,919 $ 8,567 $3,077
Service 25,488 15,695 5,619 3,462 1,403
---------------------------------------------------------
Total revenues 139,108 84,668 37,538 12,029 4,480
---------------------------------------------------------
Cost of revenues:
License 4,980 3,342 1,615 548 123
Service 18,761 10,554 3,881 2,568 1,190
---------------------------------------------------------
Total cost of revenues 23,741 13,896 5,496 3,116 1,313
---------------------------------------------------------
Gross margin 115,367 70,772 32,042 8,913 3,167
---------------------------------------------------------
Operating expenses:
Research and development 24,378 15,308 9,382 4,511 959
Sales and marketing 51,177 35,705 16,042 3,998 705
General and administrative 11,587 8,462 5,432 4,397 1,343
Non-recurring charges 15,488 905 -- -- --
Purchased in process R&D 6,600 -- -- -- --
---------------------------------------------------------
Total operating expenses 109,230 60,380 30,856 12,906 3,007
---------------------------------------------------------
Income (loss) from operations 6,137 10,392 1,186 (3,993) 160
Interest and other income (expense), net 1,182 1,552 237 (115) (6)
---------------------------------------------------------
Income before provision for income taxes 7,319 11,944 1,423 (4,108) 154
Provision for income taxes 9,942 4,010 649 -- --
---------------------------------------------------------
Net income (loss) $ (2,623) $ 7,934 $ 774 $(4,108) $ 154
=========================================================
Basic net income (loss) per share(1) $(0.11) $0.37 $0.05 $(0.39) $0.03
=========================================================
Diluted net income (loss) per share(1) $(0.11) $0.30 $0.04 $(0.39) $0.03
=========================================================
Basic weighted average common shares(1) 23,328 21,590 14,148 10,484 4,668
=========================================================
Diluted weighted average common shares(1) 23,328 26,747 20,299 10,484 4,668
=========================================================
- ------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Year ended June 30,
1999 1998 1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data (In thousands):
Cash and cash equivalents $ 44,271 $ 30,256 $47,160 $ 5,900 $ 213
Short-term investments 17,426 16,985 -- -- --
Working capital (deficiency) 77,255 52,585 47,028 2,251 (1,990)
Total assets 147,507 104,700 79,945 12,632 2,931
Long-term obligations 66 102 875 367 955
Shareholders' equity (deficit) 109,968 73,621 56,761 2,624 (2,504)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the method of calculation.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company was incorporated in California on October 11, 1990 and is involved
in the design, development, marketing and support of a suite of Computer
Telephony Integration ("CTI") products, including platform and applications
software that enable organizations to integrate critical business information
and computing resources with telephony and other telecommunications media.
Prior to shipping its first product, the Company generated revenues primarily
from one-time consulting projects. In 1991, the Company began shipping its
platform software product. From 1991 to 1994, the Company transitioned from a
consulting services company to a product company. Since 1994 the Company has
significantly expanded through the establishment of wholly owned subsidiaries
and the acquisition of other businesses, products and services.
Most of the Company's revenues to date have been derived from license fees
from customers who have received a perpetual license to the Company's products.
License fees are generally based on the specific products licensed and on a per
user basis. The Company's license revenues represented 81.7%, 81.5% and 85.0% of
total revenues in fiscal 1999, 1998 and 1997, respectively. The Company
currently expects that license revenues will continue to account for a
substantial majority of the Company's revenues for the foreseeable future. The
remainder of revenues is expected to be primarily attributable to maintenance
and other service revenues, including consulting and training revenues. As a
result, factors adversely affecting the pricing of or demand for the Company's
licensed software products would have a material adverse effect on the Company's
business, financial condition and results of operations.
Substantially all of the Company's revenues to date have been attributable to
the license of the Company's platform and related applications software and
services. Revenues from the license of the Company's platform products accounted
for 45% of total license revenues in fiscal 1999. The Company's platform and
related applications and services are currently expected to account for
substantially all of the Company's revenues for the foreseeable future.
Consequently, a decline in demand for, or failure to achieve broad market
acceptance of, the Company's platform and related applications software
products, as a result of competition, technological change or otherwise, would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's application products can only be used
in conjunction with the Company's platform products. As a result, a decline in
demand for the Company's platform products would adversely affect sales of the
Company's application products. Furthermore, if customers experience problems
with the Company's platform products, it may limit the customers' ability to
utilize the Company's application products. The Company's future financial
performance will depend in part on the successful development, introduction and
customer acceptance of new and enhanced versions of its platform and related
applications software products. There can be no assurance that the Company will
continue to be successful in marketing its platform products, related
applications software or any new or enhanced products.
License revenues are recognized upon shipment if there is persuasive evidence
of an agreement, the fee is fixed or determinable, collection is probable and
vendor specific objective evidence exists to allocate the total arrangement fee
between all elements. If a software license agreement provides for acceptance
criteria that extend beyond the published specifications of the applicable
product, then revenues are recognized upon the earlier of customer acceptance or
the expiration of the acceptance period. If a software license agreement
provides for the delivery of software products and significant customization and
modification services, product and service revenue is recognized on a percentage
of completion basis in relation to costs
24
<PAGE>
incurred in the arrangement. Fees for consulting and training services are
generally charged separately from the Company's software products and are
recognized as the services are performed. Maintenance revenues primarily consist
of fees for ongoing support and product updates, are generally determined as a
percentage of license fees, and are recognized ratably over the term of the
maintenance contracts, which to date have typically ranged from 12 to 24 months.
In its first fiscal quarter of 1999, the Company adopted the provisions of
Statement of Position 97-2 "Software Revenue Recognition" ("97-2"), accordingly,
in fiscal 1999 the Company recognized revenue in accordance with 97-2. Prior to
fiscal year 1999 and the adoption of 97-2, the Company recognized revenues in
accordance with Statement of Position 91-1, "Software Revenue Recognition". The
adoption of SOP 97-2, as amended, did not have a material impact on the
Company's business practices or revenue recognition. See Note 2 of Notes to
Consolidated Financial Statements.
A relatively small number of customers have in the past and can in the future
account for a significant percentage of the Company's revenues in a given fiscal
year. In fiscal 1999, no customer accounted for more than 10% of total revenues.
In fiscal 1998 and 1997, one customer accounted for 14.1% and 11.1%,
respectively, of total revenues. Licensing of the Company's products to a
limited number of customers may continue to account for a large percentage of
revenues for the foreseeable future. The decision to license the Company's
software products is typically an enterprise-wide decision by prospective
customers and generally requires the Company to provide a significant level of
education to prospective customers regarding the use and benefits of the
Company's products. In addition, the implementation of the Company's products
involves a significant commitment of resources by prospective customers and
typically involves substantial integration efforts, which may be performed by
the Company, the customer or third party vendors. The cost of the Company's
product is typically only a small portion of the related hardware, software,
development, training and integration costs of implementing a CTI solution. For
these and other reasons, the sales and implementation cycles associated with the
license of the Company's products is often lengthy and is subject to a number of
significant delays over which the Company has little or no control. Given these
factors and the expected customer concentration, the loss of a major customer or
any reduction or delay in sales to or implementations by such customers could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company markets its products in North America and internationally through
VARs and through its direct sales force. International revenues accounted for
49.9%, 44.7% and 33.4% of total revenues in fiscal 1999, 1998 and 1997,
respectively. The Company is increasing its international sales force, primarily
in Europe and the Asia Pacific region, and is seeking to establish distribution
relationships with appropriate strategic partners. As a result, failure to
increase international sales could have a material adverse effect on the
Company's business, operating results and financial condition. The Company
expects that international revenues will continue to account for a significant
portion of total revenues in the future.
The Company's revenues have increased in each of the last twelve quarters,
although given its recent rapid growth, historical growth rates cannot be relied
upon as indicative of future growth, if any. Prior growth rates in the Company's
revenues should not be considered indicative of future revenue growth rates or
operating results. Future operating results will depend upon many factors,
including the demand for and market acceptance of the Company's products, the
level of product and price competition, the ability of the Company to develop,
market and deploy new, high-quality products and control costs, the ability of
the Company to expand its direct sales force and indirect distribution channels,
the Company's success in attracting and retaining key personnel, the
uncertainty, recent emergence and acceptance of the market for the Company's
products, and technological changes in the market for the Company's products.
There can be no assurance that any of the Company's business or strategies will
be successful or that the Company will be able to achieve or sustain
profitability on a quarterly or annual basis.
In June 1999, the Company acquired all of the outstanding common stock of Next
Age Technologies, Inc., a California corporation ("Next Age"). Next Age
software products are designed to optimize the management, staffing, scheduling
and productivity of contact center employees. Pursuant to the Merger Agreement,
the Company issued 556,557 shares of its Common Stock in exchange for all
outstanding shares of Next Age Common Stock, and issued options to purchase
25,068 shares of the Company's Common Stock in exchange for all outstanding Next
Age Stock options. A total of 97,918 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 merger was accounted for as a
purchase; accordingly, the Company allocated the purchase price based upon the
estimated fair value of the assets and liabilities assumed. The valuation was
based on accepted appraisal methodologies used at the time of the allocation.
The results of operations of Next Age are included in the Company's financial
statements from the date of acquisition forward.
The total purchase price was $14.6 million. Management estimates that $6.6
million of the purchase price represents acquired in-process technology that has
not yet reached technological feasibility and has no alternative future use.
25
<PAGE>
Accordingly, this amount was immediately charged to expense upon consummation of
the acquisition (see Note 2 of Notes to Consolidated Financial Statements).
Additionally, the Company allocated $2.2 million, $0.9 million, and $4.9 million
of the purchase price to acquired software, workforce and trade names, and
goodwill, respectively. These intangible assets are being amortized on a
straight-line basis over three to seven years.
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 four 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.
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
90,349 shares of the Company's common stock. The merger was accounted for as a
pooling of interests and, accordingly, the accompanying consolidated financial
statements have been restated to reflect the acquisition on a pooling of
interests basis.
26
<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 indicated.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Year Ended June 30,
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Revenues:
License 81.7% 81.5% 85.0%
Service 18.3 18.5 15.0
------------------------------------
Total revenues 100.0 100.0 100.0
------------------------------------
Cost of revenues:
License 3.6 3.9 4.3
Service 13.5 12.5 10.3
------------------------------------
Total cost of revenues 17.1 16.4 14.6
------------------------------------
Gross margin 82.9 83.6 85.4
------------------------------------
Operating expenses:
Research and development 17.5 18.1 25.0
Sales and marketing 36.8 42.2 42.7
General and administrative 8.3 10.0 14.5
Merger costs -- 1.0 --
Non-recurring charges 11.1 -- --
Purchased in process R&D 4.7 -- --
------------------------------------
Total operating expenses 78.4 71.3 82.2
------------------------------------
Income from operations 4.5 12.3 3.2
Interest and other income (expense), net 0.8 1.8 0.6
------------------------------------
Income before provision for income taxes 5.2 14.1 3.8
Provision for income taxes 7.1 4.7 1.7
------------------------------------
Net income (loss) (1.9)% 9.4% 2.1%
====================================
- -------------------------------------------------------------------------------------------
</TABLE>
Revenues
License. License revenues were $113.6 million, $69.0 million and $31.9
million in fiscal 1999, 1998 and 1997, respectively, representing increases of
65% from fiscal 1998 to fiscal 1999, and 116% from fiscal 1997 to fiscal 1998.
These increases were 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.
Service. Service revenues primarily comprise fees from consulting, post-
contract support and training services. Service revenues were $25.5 million,
$15.7 million and $5.6 million, in fiscal 1999, 1998 and 1997, respectively,
representing increases of 62% from fiscal 1998 to fiscal 1999 and 179% from
fiscal 1997 to fiscal 1998. The Company's software license agreements often
provide for maintenance and for consulting and training. Accordingly, increases
in licensing activity 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
implementation services are performed by the Company's internal professional
services personnel versus third party organizations such as systems integrators.
To the extent 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.
27
<PAGE>
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 $5.0 million, $3.3 million and $1.6 million in fiscal 1999, 1998
and 1997, respectively. These increases in absolute dollar amounts relate
primarily to increases in the volume of products shipped by the Company, and the
resulting increases in documentation material costs and personnel necessary to
assemble and ship the products.
Service. Cost of service revenues primarily consist of employee-related
costs incurred in providing consulting, post-contract support and training
services. Cost of service revenues were $18.8 million, $10.6 million and $3.9
million in fiscal 1999, 1998 and 1997, respectively. These increases in absolute
dollars were 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
The Company's operating expenses were $109.2 million, $60.4 million and $30.9
million, or 78.5%, 71.3% and 82.2% of total revenues in fiscal 1999, 1998 and
1997, respectively. Excluding the impact of $15.5 million of non-recurring
charges and $6.6 million of purchased in process R&D expensed in fiscal 1999,
operating expenses would have been $87.1 million, or 63.0% of total revenues in
fiscal 1999. The Company expects that it will continue to invest in its
Research and Development and Sales and Marketing organizations, as well as
strengthen its infra-structure, accordingly, the Company expects operating
expenditures will increase in absolute dollars.
Research and Development. Research and development expenses were $24.4
million, $15.3 million and $9.4 million, or 17.5%, 18.1% and 25.0% of total
revenues in fiscal 1999, 1998 and 1997, respectively. These expenses increased
in absolute dollars primarily as a result of an increase in personnel to support
the Company's product development activities. The Company expects that it will
continue to devote substantial resources to research and development,
accordingly, the Company expects that research and development expenditures will
continue to increase in absolute dollars but remain at similar percentages of
total revenues as in fiscal 1999 and 1998.
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 $4.8 million of software development costs
incurred during fiscal 1999. The fiscal 1999 costs related primarily to the
purchase of $2.2 million of existing technology in connection with the Next Age
acquisition, as well as the release of products included in the Company's
product suite. The Company capitalized approximately $1.9 million of software
development costs incurred during fiscal 1998, primarily related to the release
of new products included in its 5.0 and 5.1 product suites, and approximately
$450,000 of software development costs incurred during fiscal 1997 related to
the initial release of its 5.0 product suite. Prior to fiscal 1997, costs that
were eligible for capitalization were insignificant, and accordingly the Company
charged all software development costs to research and development expense in
the period in which it was incurred.
Sales and Marketing. Sales and marketing expenses were $51.2 million, $35.7
million and $16.0 million, representing 36.8%, 42.2% and 42.7% of total revenues
in 1999, 1998 and 1997, respectively. These expenses increased in absolute
dollars primarily due to the Company's investment in building a direct sales
force in North America and in Europe. From July 1, 1997 to June 30, 1999, the
Company increased the number of its sales and marketing personnel from
approximately 130 to 246 worldwide, and incurred higher commission expenses
related to higher sales levels. 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 continue to invest in
its 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 $11.6
million, $8.5 million and $5.4 million, or 8.3%, 10.0% and 14.5% of total
revenues in fiscal 1999, 1998 and 1997, respectively. These expenses increased
in absolute dollars during these periods principally due to the addition of
staff and information system investments to support the growth of the Company's
business during these periods. The Company expects to continue to increase its
general and administrative
28
<PAGE>
staff and to incur other costs necessary to manage a growing organization.
Accordingly, the Company expects general and administrative expenses to continue
to increase in absolute dollars.
Purchased In-Process Research and Development ("IPR&D"). Purchased IPR&D
expenses were $6.6 million, representing 4.7% of total revenues, in fiscal 1999.
In connection with the Next Age acquisition, the Company immediately charged to
expense $6.6 million representing purchased IPR&D that had not yet reached
technological feasibility and had no alternative future use. See "Notes to
Consolidated Financial Statements." The allocation of the IPR&D was evaluated
based on the SEC's current views regarding valuation methodologies. The value
was determined by estimating the costs to develop the purchased IPR&D into
commercially viable products, estimating the resulting net cash flows from each
project, excluding the cash flows related to the portion of each project that
was incomplete at the acquisition date, and discounting the net cash flows back
to their present value. Each of the project forecasts were based upon future
discounted cash flows, taking into account the stage of development of each in-
process project, the cost to develop that project, the expected income stream,
the life cycle of the product ultimately developed, and the associated risks.
In each case, the selection of the applicable discount rate was based on
consideration of the Company's weighted average costs of capital, as well as
other factors including the useful life of each technology, profitability levels
of each technology, the uncertainty of technology advances that were known at
the time, and the stage of completion of each technology. If the projects are
not successfully developed, the sales and profitability of the Company may be
adversely affected in future periods. Additionally, the value of other
intangible assets may be impaired.
Non-Recurring Charges. Non-recurring charges were $15.5 million, representing
11.1% of total revenues, in fiscal 1999. In connection with the hiring of its
Chief Executive Officer, Ori Sasson, and the acquisition of Plato in December
1998, the Company recorded non-recurring charges totaling $11.8 million related
to compensation, consisting of common stock valued at $5.6 million and $6.2
million of tax reimbursements paid or accrued to Mr. Sasson and an additional
$0.6 million of compensation paid or accrued to other Plato employees. In
addition, the Company recorded $3.1 million of the non-recurring charges related
to an employment and severance agreement dated December 11, 1998 with the
Company's former President and Chief Financial Officer. Non-recurring charges,
related to the acquisition of Forte in December 1997, were $1.0 million,
representing 1% of total revenues, in fiscal 1998.
Provision for Income Taxes
The Company's effective tax rate for the year ended June 30, 1999 was 136%
which reflects the utilization of research tax credits as well as the non-
deductibility for income tax purposes of both non-recurring compensation charges
and the purchased in-process research and development costs. Excluding the
impact of the non-deductible, non-recurring charges and purchased in-process
research and development costs, the Company's effective tax rate for fiscal 1999
was 35%. In the quarter ended December 31, 1998, the Company incurred certain
non-recurring compensation charges related to the hiring of its Chief Executive
Officer and the acquisition of Plato Software Corporation. In the quarter ended
June 30, 1999, the Company expensed certain non-deductible in-process research
and development costs related to the purchase of Next Age. The provision for
income taxes for the year ended June 30, 1998 is based on an effective tax rate
of approximately 34%. In the quarter ended December 31, 1997, the Company
recorded a one-time credit relating to the benefit of deferred tax assets
assumed in the acquisition of Forte, which was an S-Corporation prior to the
merger. The provision for income taxes for the year ended June 30, 1997 is
based on an effective tax rate of approximately 28% that reflects the estimated
realization of deferred tax assets, primarily net operating loss carry forwards
and research and development tax credit carry forwards. The Company has net
deferred tax assets of approximately $1.6 million and $2.0 million as of June
30, 1999 and 1998, respectively.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which requires companies to
record derivative financial instruments on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The key criterion
for hedge accounting is that the hedging relationship must be highly effective
in achieving offsetting changes in fair value or cash flows. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 - an
Amendment of FASB Statement No. 133." SFAS No. 137 defers the effective date of
SFAS No. 133, such that SFAS No. 133 shall be
29
<PAGE>
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. This Statement will not have a material impact on the financial condition
or results of the operations of the Company.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2, `Software Revenue Recognition,'" which defers for one
year the application of certain provisions of SOP 97-2, which limits what is
considered vendor-specific objective evidence of the fair value of the various
elements in a multiple element arrangement. All other provisions of SOP 97-2
remain in effect. This SOP was effective as of March 31, 1998. In December
1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, `Software Revenue
Recognition' With Respect to Certain Transactions," which amends of SOP 97-2,
"Software Revenue Recognition," to require recognition of revenue using the
"residual value method" under certain conditions. Effective December 15, 1998,
SOP 98-9 amends SOP 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, `Software Revenue Recognition,'" to extend the deferral of the application
of certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of this SOP are
effective for transactions entered into in fiscal years beginning after March
15, 1999. The Company has adopted SOP 97-2, as amended. The adoption of SOP
97-2 did not have a material impact on the Company's business practices or
revenue recognition.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. SOP 98-1 applies to all non-governmental entities and is
effective for financial statements for fiscal years beginning after December 15,
1998. SOP 98-1 will not have a material impact on the financial condition or
results of the operations of the Company.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." For purposes of this SOP, start-up activities are defined broadly
as those one-time activities related to opening a new facility, introducing a
new product or service, conducting business in a new territory, conducting
business with a new class of customer or beneficiary, initiating a new process
in an existing facility, or commencing some new operation. Start-up activities
include activities related to organizing a new entity (commonly referred to as
organization costs). This SOP provides guidance on accounting for the costs of
start-up activities. SOP 98-5 is effective for financial statements for fiscal
years beginning after December 15, 1998. SOP 98-5 will not have a material
impact on the financial condition or results of the operations of the Company.
Year 2000
Many computer systems experience problems handling dates beyond the year 1999.
The Company has designed and tested current versions of its products for use in
the year 2000 and beyond, and believes that they are year 2000 compliant.
However, some of Genesys' customers might be running older versions of the
Company's products that might not be year 2000 compliant. It is possible that
Genesys may experience increased expenses in addressing mitigation issues for
these customers. In addition, the Company's products frequently are integrated
into larger networks involving sophisticated hardware and software products
supplied by other vendors. Each of the Company's customers' networks involves
different combinations of third party products. The Company cannot evaluate
whether all of their products are year 2000 compliant. Genesys may face claims
based on year 2000 problems in other companies' products or based on issues
arising from the integration of multiple products within the overall network.
Although no such claims have been made, the Company may in the future be
required to defend its products in legal proceedings, which could be expensive
regardless of the merits of such claims.
If the Company's suppliers, vendors, major distributors, partners, customers
and service providers fail to correct their year 2000 problems, these facilities
could result in an interruption in, or a failure of, the Company's normal
business activities of operations. If a year 2000 problem occurs, it may be
difficult to determine which party's products have caused the problem. These
failures could interrupt the Company's operations and damage its relationships
with its customers. Due to the general uncertain inherent in the year 2000
problem resulting from the readiness of third party suppliers and vendors, the
Company is unable to determine at this time whether year 2000 failure could harm
its business and financial results.
Genesys' customers' purchasing plans could be affected by year 2000 issues if
they need to expend significant resources to fix their existing systems to
become year 2000 compliant. This situation may reduce funds available to
purchase products until after the year 2000, which may reduce the Company's
revenue.
30
<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 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. Prior to its initial public offering, the
Company had raised $17.2 million from the sale of Preferred Stock. At June 30,
1999, the Company's primary sources of liquidity included cash and cash
equivalents of $44.3 million and short-term investments of $17.4 million.
The Company generated cash from operating activities of $18.6 million in
fiscal 1999 and $14.0 million in fiscal 1998 related primarily to income from
operations and increases in deferred revenues and accrued liabilities. The
Company used cash from operating activities of $175,000 in fiscal 1997. The
increased use of cash for operating activities in fiscal 1997 was attributable
primarily to an increase in accounts receivable of approximately $13.4 million,
offset in part by an increase in deferred revenues of approximately $7.7
million.
The Company used cash for the purchase of property and equipment totaling $9.3
million, $12.6 million and $7.2 million in fiscal 1999, 1998 and 1997,
respectively.
The Company generated cash of $9.0 million and $3.4 million from financing
activities in fiscal 1999 and 1998, respectively, related to proceeds from the
exercise of stock options and the sale of stock under the Employee Stock
Purchase Plan. The Company generated cash of $49.9 million from financing
activities in fiscal 1997 primarily related to its initial public offering and
the sale of Series C Preferred Stock.
The Company has established subsidiaries in foreign countries, including
Australia, Canada, France, Germany, Italy, Japan, the Netherlands, Singapore,
South Africa, Spain, Sweden and the United Kingdom, 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.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Disclosures about Market Risk
Interest Rate Risk. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's investment portfolio. The
Company's investments consist primarily of tax-exempt debt securities, are
classified as available for sale and are stated at fair value. The Company is
averse to principal loss and seeks to preserve its invested funds by limiting
default risk, market risk and reinvestment risk.
Table of Investment Securities:
<TABLE>
<CAPTION>
(in thousands) Principal Average
Amount Interest Rate
---------------------------------------
<S> <C> <C>
Cash and cash equivalents $44,271 3.0%
Short-term investments 17,426 3.12%
---------------------------------------
Total cash and investment securities $61,697
</TABLE>
31
<PAGE>
Currency Rate Risk. The Company's subsidiaries primarily operate in foreign
markets and predominantly have their local currencies as their functional
currencies. These subsidiaries do not have third party borrowings in currencies
other than their local currencies, and therefore there are no appropriate
quantitative disclosures.
The Company's primary currency rate risk exposures relates to:
. The Company's decentralized operations, whereby approximately 50% of the
Company's revenues are derived from operations outside the United States,
denominated in currencies other than the U.S. dollar.
. The Company's investments in foreign subsidiaries being primarily directly
from the U.S. parent, resulting in U.S. dollar investments in foreign currency
functional companies, and
. The location of the Company's operating subsidiaries in a number of countries
that have seen significant exchange rate changes against the U.S. dollar.
Currency rate risks are managed primarily through the Company's financial
management of operations on a decentralized basis; individual markets are not
necessarily impacted by changes in currency exchange rates. Subsidiaries
operating in high or hyper-inflationary environments protect margins by
adjusting prices based on U.S. pricing conversion methods. The Company does
not use forward contracts. All foreign currency transactions are marked to
market at the end of the period with unrealized gains and losses included in
other income (expense). The unrealized cumulative translation loss was $384,000
and $312,000 for fiscal years 1999 and 1998, respectively.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements:
<TABLE>
<CAPTION>
Page Description
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
34 Report of Independent Public Accountants
35 Consolidated Balance Sheets--June 30, 1999 and 1998
36 Consolidated Statements of Operations for the years ended June 30, 1999, 1998 and 1997
37 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1999, 1998 and 1997
39 Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997
41 Notes to Consolidated Financial Statements
</TABLE>
32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Genesys Telecommunications Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of Genesys
Telecommunications Laboratories, Inc. (a California Corporation) and
subsidiaries as of June 30, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended June 30, 1999. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Genesys Telecommunications
Laboratories, Inc. and subsidiaries as of June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1999, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a)2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
San Jose, California
July 20, 1999
33
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
June 30,
1999 1998
--------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 44,271 $ 30,256
Short-term investments 17,426 16,985
Accounts receivable, net of allowance for doubtful accounts of $875 and $789,
Respectively 44,802 28,007
Prepaid expenses and other 8,229 8,314
--------------------------
Total current assets 114,728 83,562
PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation and
Amortization 17,026 14,675
INTANGIBLES, net 8,190 1,694
OTHER ASSETS 7,563 4,769
--------------------------
$147,507 $104,700
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ -- $ 243
Current portion of long-term obligations 65 33
Accounts payable 3,328 4,520
Accrued payroll and related benefits 5,585 3,702
Other accrued liabilities 7,236 5,674
Deferred revenues 21,259 16,805
--------------------------
Total current liabilities 37,473 30,977
--------------------------
LONG-TERM OBLIGATIONS, net of current portion 66 102
--------------------------
SHAREHOLDERS' EQUITY:
Common stock, no par value:
Authorized--120,000,000 shares
Issued and outstanding--24,844,309 shares in 1999
and 22,415,222 shares in 1998 112,920 73,576
Shareholder notes receivable (686) (440)
Accumulated comprehensive loss (572) (188)
Deferred stock compensation (964) (1,220)
Retained earnings (accumulated deficit) (730) 1,893
--------------------------
Total shareholders' equity 109,968 73,621
--------------------------
$147,507 $104,700
==========================
- --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
34
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
For the Years Ended June 30,
1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
REVENUES:
License $113,620 $68,973 $31,919
Service 25,488 15,695 5,619
-------------------------------------
Total revenues 139,108 84,668 37,538
-------------------------------------
COST OF REVENUES:
License 4,980 3,342 1,615
Service 18,761 10,554 3,881
-------------------------------------
Total cost of revenues 23,741 13,896 5,496
-------------------------------------
GROSS MARGIN 115,367 70,772 32,042
-------------------------------------
OPERATING EXPENSES:
Research and development 24,378 15,308 9,382
Sales and marketing 51,177 35,705 16,042
General and administrative 11,587 8,462 5,432
Non-recurring charges 15,488 905 --
Purchased in process research and development 6,600 -- --
-------------------------------------
Total operating expenses 109,230 60,380 30,856
-------------------------------------
INCOME FROM OPERATIONS 6,137 10,392 1,186
OTHER INCOME (EXPENSE):
Interest income (expense), net 1,678 1,552 --
Other, net (496) -- 237
-------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 7,319 11,944 1,423
PROVISION FOR INCOME TAXES 9,942 4,010 649
-------------------------------------
NET INCOME (LOSS) $ (2,623) $ 7,934 $ 774
=====================================
BASIC NET INCOME (LOSS) PER SHARE $(0.11) $0.37 $0.05
=====================================
DILUTED NET INCOME (LOSS) PER SHARE $(0.11) $0.30 $0.04
=====================================
BASIC WEIGHTED AVERAGE COMMON SHARES 23,328 21,590 14,148
=====================================
DILUTED WEIGHTED AVERAGE COMMON SHARES 23,328 26,747 20,299
=====================================
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
35
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Shareholder
Preferred Stock Common Stock Notes
Shares Amount Shares Amount Receivable
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES, JUNE 30, 1996 2,797,878 $ 8,995 11,986,099 $ 628 $(112)
Exercise of stock options -- -- 895,561 347 (108)
Issuance of Common Stock -- -- 608,500 466 (234)
Issuance of Common Stock in connection with
initial public offering -- -- 2,375,000 38,268 --
Issuance of Common Stock in connection with the
acquisition of a subsidiary -- -- 675,000 2,025 --
Issuance of Series C Preferred Stock 854,363 9,101 -- -- --
Exercise of Warrants -- -- 420,282 2,500 --
Conversion of Preferred Stock into Common Stock (3,652,241) (18,096) 3,652,241 18,096 --
Issuance of Common Stock Warrants -- -- -- 650 --
Repurchase of Common Stock -- -- (112,500) (9) --
Cumulative Translation Adjustment -- -- -- -- --
Payment on shareholder notes receivable -- -- -- -- 20
Deferred stock compensation -- -- -- 1,838 --
Amortization of deferred stock compensation -- -- -- -- --
Net income -- -- -- -- --
--------------------------------------------------------------------------
BALANCES, JUNE 30, 1997 -- -- 20,500,183 64,809 (434)
Exercise of stock options -- -- 1,844,466 3,501 (90)
Common stock issued under employee stock
purchase plan -- -- 70,573 1,081 --
Cumulative Translation Adjustment -- -- -- -- --
Payment on shareholder notes receivable -- -- -- -- 84
Amortization of deferred stock compensation -- -- -- -- --
Income tax benefit of disqualifying dispositions -- -- -- 4,185 --
Net income -- -- -- -- --
--------------------------------------------------------------------------
BALANCES, JUNE 30, 1998 -- -- 22,415,222 73,576 (440)
Exercise of stock options -- -- 1,794,854 7,729 (686)
Common stock issued under employee stock --
purchase plan -- 140,176 2,265 --
Issuance of Common Stock in connection --
with hiring CEO and Plato acquisition -- 202,500 5,963 --
Issuance of Common Stock in connection --
with Next Age acquisition -- 556,557 12,998 --
Repurchase of Common Stock -- -- (265,000) (24) --
Valuation of stock options accelerated -- -- -- 3,370 --
Cumulative Translation Adjustment -- -- -- -- --
Payment on shareholder notes receivable -- -- -- -- 440
Amortization of deferred stock compensation -- -- -- -- --
Income tax benefit of disqualifying dispositions -- -- -- 7,043 --
Net loss -- -- -- -- --
---------------------------------------------------------------------------
BALANCES, JUNE 30, 1999 -- $ -- 24,844,309 $112,920 $(686)
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Total
Accumulated Deferred Shareholders'
Comprehensive Stock Accumulated Equity Comprehensive
Income/(Loss) Compensation Deficit (Deficit) Income/(Loss)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES, JUNE 30, 1996 -- $ (73) $(6,815) $ 2,623
Exercise of stock options -- -- -- 239
Issuance of Common Stock -- -- -- 232
Issuance of Common Stock in connection with
initial public offering -- -- 38,268
Issuance of Common Stock in connection with the 2,025
acquisition of a subsidiary -- -- --
Issuance of Series C Preferred Stock -- -- -- 9,101
Exercise of Warrants -- -- -- 2,500
Conversion of Preferred Stock into Common Stock -- -- -- --
Issuance of Common Stock Warrants -- -- -- 650
Repurchase of Common Stock -- -- -- (9)
Cumulative Translation Adjustment 124 -- -- 124 $ 124
Payment on shareholder notes receivable -- -- -- 20
Deferred stock compensation -- (1,838) -- --
Amortization of deferred stock compensation -- 214 -- 214
Net income -- -- 774 774 774
----------------------------------------------------------------------
BALANCES, JUNE 30, 1997 124 (1,697) (6,041) 56,761 $ 898
===========
Exercise of stock options -- -- -- 3,411
Common stock issued under employee stock
purchase plan -- -- 1,081
Cumulative Translation Adjustment (312) -- -- (312) $ (312)
Payment on shareholder notes receivable -- -- -- 84
Amortization of deferred stock compensation -- 477 -- 477
Income tax benefit of disqualifying dispositions -- -- -- 4,185
Net income -- -- 7,934 7,934 7,934
----------------------------------------------------------------------
BALANCES, JUNE 30, 1998 (188) (1,220) 1,893 73,621 $ 7,622
===========
Exercise of stock options -- -- -- 7,043
Common stock issued under employee stock
purchase plan -- -- 2,265
Issuance of Common Stock in connection
with hiring CEO and Plato acquisition -- -- 5,963
Issuance of Common Stock in connection
with Next Age acquisition -- -- 12,998
Repurchase of Common Stock -- -- -- (24)
Valuation of stock options accelerated -- -- -- 3,370
Cumulative Translation Adjustment (384) -- -- (384) $ (384)
Payment on shareholder notes receivable -- -- -- 440
Amortization of deferred stock compensation -- 256 -- 256
Income tax benefit of disqualifying dispositions -- -- -- 7,043
Net loss -- -- (2,623) (2,623) (2,623)
----------------------------------------------------------------------
BALANCES, JUNE 30, 1999 $(572) $ (964) $ (730) $109,968 $(3,007)
===================================================================
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
36
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
For the Years Ended June 30,
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,623) $ 7,934 $ 774
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Amortization of deferred stock compensation 256 477 214
Depreciation and amortization 8,780 6,405 1,423
Provision for doubtful accounts 622 889 212
Valuation of stock options accelerated 3,370 -- --
Non-cash portion of non-recurring charges related to hiring CEO
and acquisition of Plato 5,963 -- --
Write-off of in-process research and development 6,600 -- --
Changes in operating assets and liabilities, net of acquisitions
accounted for as a purchase (See Note 4):
Accounts receivable (17,304) (10,599) (13,366)
Prepaid expenses and other (55) (4,434) (2,442)
Accounts payable (1,209) 1,813 1,198
Accounts payable to related parties -- -- (268)
Accrued payroll and related benefits 1,748 1,954 879
Other accrued liabilities 7,763 4,874 3,513
Deferred revenues 4,341 4,653 7,688
--------------------------------
Net cash provided by (used in) operating activities 18,252 13,966 (175)
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (35,514) (45,509) --
Sale of short-term investments 35,073 28,523 --
Purchases of property and equipment (9,056) (12,551) (7,162)
Increase in other assets (3,414) (4,384) (1,055)
Cost to acquire subsidiary -- -- (100)
--------------------------------
Net cash used in investing activities (12,911) (33,921) (8,317)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank line of credit -- 2 4,536
Loan to related party (390) -- --
Repayment of bank line of credit -- -- (4,592)
Principal payments on long-term obligations (33) (1,216) (151)
Repayments of advances from related parties -- -- (25)
Repayment of convertible debt to related parties -- -- (367)
Repayment of promissory note (243) -- --
Payment of shareholder notes receivable, net 440 84 20
Repurchases of Common Stock (24) -- (9)
Proceeds from sales of preferred stock -- -- 9,101
Proceeds from sales of common stock 9,308 4,492 41,239
--------------------------------
Net cash provided by financing activities 9,058 3,362 49,752
--------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (384) (311) --
--------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,015 (16,904) 41,260
CASH AND CASH EQUIVALENTS:
Beginning of Year 30,256 47,160 5,900
--------------------------------
End of Year $ 44,271 $ 30,256 $ 47,160
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 71 $ 48 $ 42
Cash paid for taxes $ 772 $ 2,366 $ 194
================================
ADDITIONAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Equipment capital lease $ -- $ -- $ 175
Prepaid insurance financing -- -- 588
Common Stock issued to acquire subsidiary -- -- 2,193
Fair market value of warrants issued -- -- 650
Conversion of preferred stock into common stock -- -- 18,096
Issuance of Common Stock for shareholder notes receivable 685 90 342
Income tax benefit of disqualifying dispositions 7,042 4,185 --
Common Stock issued to acquire Plato 5,963 -- --
Common Stock issued to acquire Next Age 12,998 -- --
Valuation of stock options accelerated 3,370 -- --
- -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
37
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
1. THE COMPANY
Genesys Telecommunications Laboratories, Inc. (formerly Enhanced Voice
Processing, Inc.), was incorporated in California on October 11, 1990. Genesys
Telecommunications Laboratories, Inc. and subsidiaries (the "Company") are
involved in the design, development, marketing and support of a suite of
Computer Telephony Integration ("CTI") products, including platform and
applications software that enable organizations to integrate critical business
information and computing resources with telephony and other telecommunications
media. The Company's products are marketed primarily in North America, Europe
and Asia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Genesys
Telecommunications Laboratories, Inc. and its subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.
Foreign Currency Translation
The functional currency of the Company's subsidiaries is the local currency.
Accordingly, the Company applies the current rate method to translate the
subsidiaries' financial statements into U.S. dollars. Translation adjustments
are included as a separate component of shareholders' equity in the accompanying
consolidated financial statements.
Foreign exchange gains and losses resulting from foreign currency transactions
are recorded in other income (expense) in the accompanying consolidated
financial statements and were not material in any of the periods presented.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
Impairment of Long Lived Assets
The Company reviews long lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. As of June 30, 1999, no
impairment losses have been incurred.
Revenue Recognition
The Company generates revenues from licensing the rights to use its software
products directly to end-users and indirectly through value-added resellers
("VARs"). The Company also generates revenues from sales of post-contract
support, consulting and training services performed for customers who license
the Company's products.
The Company recognizes revenues and records estimated warranty and returns
reserves from software license agreements with end users and VARs according to
the provisions of Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition," as amended, which superseded SOP No. 91-1. License revenues are
recognized upon shipment if there is persuasive evidence of an agreement, the
fee is fixed or determinable, collection is probable and vendor specific
objective evidence exists to allocate the total arrangement fee between all
elements. If a software license agreement provides for
38
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
acceptance criteria that extend beyond the published specifications of the
applicable product, then revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period. If a software license
agreement provides for the delivery of software products and significant
customization and modification services, product and service revenue is
recognized on a percentage of completion basis in relation to costs incurred in
the arrangement.
Customers who purchase post-contract customer support services under
maintenance agreements have the right to receive unspecified product updates,
upgrades and enhancements. Customers that do not purchase post-contract customer
support must purchase product updates, upgrades and enhancements under separate
agreements that are subject to the criteria of the Company's revenue recognition
policy.
Revenues from post-contract customer support services are recognized ratably
over the term of the support period. If post-contract customer support services
are included free or at a discount in a license agreement, such amounts are
allocated out of the license fee at their fair market value based on the value
established by independent sale of such post-contract customer support services
to customers. Consulting revenues are primarily related to implementation
services performed on a time and materials basis under separate service
arrangements related to the installation of the Company's software products.
Revenues from consulting and training services are recognized as services are
performed.
Cost of license revenues includes the costs of product media, product
duplication and manuals, as well as allocated labor and overhead costs related
to preparation and shipment of the product. Cost of service revenues consists
primarily of salaries, benefits and allocated overhead costs related to
consulting personnel and the customer service department.
Deferred revenues include software license fees and services that have been
invoiced to the customer for which the revenue earnings process has not been
completed.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less at the time of purchase to be cash equivalents. The
Company's investments consist of tax-exempt debt securities and certificates of
deposit with original maturities of three months or less and money market
accounts.
Short-term Investments
The Company's investments, which consist primarily of tax-exempt debt
securities, are classified as available-for-sale and stated at fair value. The
difference between cost and fair value of all of the Company's short-term
investments is insignificant. Such investments are recorded at fair value and
unrealized gains and losses, if material, are recorded as a separate component
of equity until realized. Interest income is recorded using an effective
interest rate, with associated premium or discount amortized to "investment
income." The cost of securities sold is based upon the specific identification
method. All available-for-sale securities are classified as current assets and
mature within 12 months.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated useful lives of the related assets (or over the lease term if it is
shorter for leasehold improvements), which range from 3 to 5 years. Property and
equipment leased under capital leases is amortized over the lesser of its useful
life or the lease term.
Software Development Costs
The Company capitalizes internally generated software development costs in
compliance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed." Capitalization of computer software development costs begins upon
the establishment of technological feasibility for the product. The Company
capitalized approximately $4.8 million of software development in fiscal 1999,
$1.9 in fiscal
39
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1998 and $450,000 in fiscal 1997. The $4.8 million capitalized in fiscal 1999
includes the $2.2 million of purchased software recorded as a result of the Next
Age acquisition (See Note 4). Net software development costs are included in
other assets.
Amortization of capitalized software development costs begins when the
products are available for general release to customers, and is computed on a
product-by-product basis as the greater of: (a) the ratio of current gross
revenues for a product to the total of current and anticipated future gross
revenues for the product; or (b) the straight-line method over the remaining
estimated economic life of the product (generally three years). The Company
amortized $995,000 of capitalized software development costs in fiscal 1999 and
$256,000 in fiscal 1998. No amortization was recorded in fiscal 1997 as these
costs were incurred and capitalized near the end of the fiscal year.
Research and development costs, not capitalized under SFAS 86, are expensed as
incurred.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," requires companies to report
an additional measure of income on the income statement or to create a new
financial statement that shows the new measure of income. Comprehensive income
includes foreign currency translation gains and losses and unrealized gains and
losses on equity securities that have been previously excluded from net income
and reflected instead in stockholders' equity. The Company has integrated the
presentation of comprehensive income (loss) with the Consolidated Statement of
Shareholders' Equity.
Intangibles
Intangibles include goodwill, which represents the amount of purchase price in
excess of the fair value of the tangible net assets in acquisitions completed by
the Company and are amortized on a straight-line basis over a period of five to
seven years. Goodwill is evaluated quarterly for impairment and written down to
net realizable value if necessary. No impairment has been recorded to date.
Intangible assets also include tradenames and assembled work forces that are
amortized on a straight-line basis over a period of five to seven years.
Intangible assets consist of the following at June 30 (in thousands):
- ----------------------------------------------------------------------
1999 1998
-------- --------
Goodwill $7,953 $2,093
Workforce and trade names 934 --
------ ------
8,887 2,093
Less: Accumulated amortization (697) (399)
------ ------
$8,190 $1,694
====== ======
- ----------------------------------------------------------------------
40
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Non-Recurring Charges
In connection with the hiring of the Company's Chief Executive Officer, Ori
Sasson, and the acquisition of Plato in December 1998 (see Note 4), the Company
recorded non-recurring charges totaling $11.8 million related to compensation,
consisting of common stock valued at $5.6 million and $6.2 million of tax
reimbursements paid or accrued to Mr. Sasson and an additional $0.6 million of
compensation paid or accrued to other Plato employees. In addition, the Company
recorded $3.1 million related to an employment and severance agreement with the
Company's former President and Chief Financial Officer as a result of
acceleration of unvested stock options. As of June 30, 1999 the Company had
paid all tax reimbursements to Ori Sasson.
Additionally, during fiscal 1999, the Company recorded $300,000 related to
other employment and severance agreements that called for the acceleration of
unvested stock options.
Purchased In-Process Research and Development ("IPR&D")
In connection with the acquisition of Next Age Technologies, Inc. ("Next
Age"), the Company allocated $6.6 million to purchase IPR&D for the year ended
June 30, 1999 (see Note 4). This amount was expensed because the IPR&D projects
identified had not yet reached technological feasibility and had no alternative
future use.
The allocation to IPR&D during the year ended June 30, 1999 was evaluated
based on the SEC's current views regarding valuation methodologies. The value
allocated to IPR&D was determined by estimating the costs to develop the
purchased technology into commercially viable products, estimating the resulting
net cash flows from each project, excluding the cash flows related to the
portion of each project that was incomplete at the acquisition date, and
discounting the net cash flows back to their present value. Each of the project
forecasts were based upon future discounted cash flows, taking into account the
stage of development of each in-process project, the cost to develop that
project, the expected income stream, the life cycle of the product ultimately
developed, and the associated risks. In each case, the selection of the
applicable discount rate was based on consideration of the Company's weighted
average costs of capital, as well as other factors including the useful life of
each technology, profitability levels of each technology, the uncertainty of
technology advances that were known at the time, and the stage of completion of
each technology. If the projects are not successfully developed, the sales and
profitability of the Company may be adversely affected in future periods.
Additionally, the value of other intangible assets may be impaired. Following
is a discussion of the allocation to IPR&D during the year ended June 30, 1999.
At the acquisition date, Next Age was conducting development, engineering, and
testing activities associated with the following future versions and products
(collectively, "the Products"); a) Single-site Workforce Manager, b) Multi-site
Workforce Manager, c) Multi-site/Multimedia Workforce Manager and d) Next
Generation Workforce Manager. Next Age products are designed to optimize the
management, staffing, scheduling and productivity of contact center employees.
Upon completion, Single-site and Multi-site Workforce Manager will be made
available to customers with an SQL server database. Multi-site/Multimedia
Workforce Manager is expected to provide users with additional functionality and
the ability to transfer information data through web-based and e-mail-based
channels. Next Generation Workforce Manager is expected to allow users to
channel the flow of data through Internet based platforms. At the acquisition
date, Next Age was approximately 70%, 60%, 80% and 25% complete with development
of the Single-site Workforce Manager, Multi-site Workforce Manager, Multi-
site/Multimedia Workforce Manager and Next Generation Workforce Manager,
respectively. The Company expects that the Products will be completed in fiscal
2000, after which the Company expects to begin generating economic benefits from
the value of the completed IPR&D. Revenues attributable to the Products were
estimated to be $10.4 million in fiscal 2000 and $23.9 million in fiscal 2001.
IPR&D revenue, as a percentage of total projected Company revenue, was expected
to peak in fiscal 2002 and decline thereafter as new product technologies were
expected to be introduced by the Company. Operating expenses average 65% over
the projection period. The costs to complete the IPR&D were expected to be $2.3
million in fiscal 2000 and $4.5 million in fiscal 2001. Risk-adjusted discount
rates of 26% to 30% were utilized to discount projected cashflows.
Net Income (Loss) Per Share
Basic net income (loss) per share is calculated based on the weighted average
number of common share outstanding during the period. Diluted net income 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 computation of dilutive net loss per share as their effect is anti-
dilutive.
41
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO 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>
- ------------------------------------------------------------------------------------------------------------
Year Ended June 30,
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Weighted average common shares outstanding 23,328 20,923 13,481
Shares issued in acquisition of Forte -- 667 667
------------------------------------------
BASIC WEIGHTED AVERAGE COMMON SHARES 23,328 21,590 14,148
==========================================
Convertible Preferred Stock -- -- 3,090
Weighted average options and warrants for common stock -- 5,157 3,061
------------------------------------------
DILUTED WEIGHTED AVERAGE COMMON SHARES 23,328 26,747 20,299
==========================================
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Approximately 3,226,000 common stock equivalents were excluded from diluted
weighted average common shares for the year ended June 30, 1999 as their effect
would have been anti-dilutive.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
requires companies to record derivative financial instruments on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. In June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133--an Amendment of FASB Statement No. 133." SFAS
No. 137 defers the effective date of SFAS No. 133, such that SFAS No. 133 shall
be effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. This statement will not have a material impact on the financial
condition or results of the operations of the Company.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2,
`Software Revenue Recognition,'" which defers for one year the application of
provisions SOP 97-2, which limits what is considered vendor-specific objective
evidence of the fair value of the various elements in a multiple element
arrangement. All other provisions of SOP 97-2 remain in effect. This SOP was
effective as of March 31, 1998. In December 1998, the AICPA issued SOP 98-9,
"Modification of SOP 97-2, `Software Revenue Recognition' With Respect to
Certain Transactions," which amends paragraphs 11 and 12 of SOP 97-2, "Software
Revenue Recognition," to require recognition of revenue using the "residual
value method" under certain conditions. Effective December 15, 1998, SOP 98-9
amends SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2,
`Software Revenue Recognition,'" to extend the deferral of the application of
certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning
on or before March 15, 1999. All other provisions of this SOP are effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
Company has adopted SOP 97-2, as amended. The adoption of SOP 97-2 did not have
a material impact on the Company's business practices or revenue recognition.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. SOP 98-1 applies to all non-governmental entities and is
effective for financial statements for fiscal years beginning after December 15,
1998. SOP 98-1 will not have a material impact on the financial condition or
results of the operations of the Company.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." For purposes of this SOP, start-up activities are defined broadly
as those one-time activities related to opening a new facility, introducing a
new product or service, conducting business in a new territory, conducting
business with a new class of customer or beneficiary, initiating a new process
in an existing facility, or commencing some new operation. Start-up activities
include activities related to
42
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
organizing a new entity (commonly referred to as organization costs). This SOP
provides guidance on accounting for the costs of start-up activities. SOP 98-5
is effective for financial statements for fiscal years beginning after December
15, 1998. SOP 98-5 will not have a material impact on the financial condition or
results of the operations of the Company.
3. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a concentration
of credit risk principally consist of accounts receivable. As of June 30, 1999,
approximately 17% of accounts receivable were concentrated with two customers
and as of June 30, 1998, approximately 15% of accounts receivable were
concentrated with two customers. The Company generally does not require
collateral on accounts receivable, as the majority of the Company's customers
are large, well established companies. The Company provides reserves for credit
losses and such losses have been insignificant in all periods presented in the
accompanying consolidated financial statements.
For cash equivalents, the carrying amount approximates fair value because of
the short maturity of those instruments. For debt, the fair value is estimated
based on market prices for similar debt instruments, and the carrying amount
approximates fair value. Substantially all of the Company's cash and cash
equivalents are held in five financial institutions.
4. ACQUISITIONS
In June 1999, the Company acquired all of the outstanding common stock of Next
Age Technologies, Inc., a California corporation ("Next Age"). Next Age
software products are designed to optimize the management, staffing, scheduling
and productivity of contact center employees. Pursuant to the terms of the
acquisition, the Company issued 556,557 shares of its Common Stock in exchange
for all outstanding shares of Next Age Common Stock, and issued options to
purchase 25,068 shares of the Company's Common Stock in exchange for all
outstanding Next Age Stock options. A total of 97,918 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 merger was accounted
for as a purchase; accordingly, the Company allocated the purchase price based
upon the estimated fair value of the assets and liabilities assumed. The
valuation was based on accepted appraisal methodologies used at the time of the
allocation.
The total purchase price was $14.6 million. Management estimates that $6.6
million of the purchase price represents acquired in-process technology that has
not yet reached technological feasibility and has no alternative future use.
Accordingly, this amount was immediately charged to expense upon consummation of
the acquisition (see Note 2). Additionally, the Company allocated $2.2 million,
$0.9 million, and $4.9 million of the purchase price to acquired software,
workforce and trade names, and goodwill, respectively. These intangible assets
are being amortized on a straight-line basis over four to seven years.
The results of operations of Next Age are included in the Company's financial
statements from the date of acquisition forward. Comparative pro forma
financial information has not been presented, as the operations of Next Age were
not material to the Company's consolidated financial statements.
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
43
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 four 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 in fiscal 1999. (See Note 2)
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
90,349 shares of the Company's common stock. The merger was accounted for as a
pooling of interests and, accordingly, the consolidated financial statements
have been restated to reflect the acquisition on a pooling of interests basis.
Net revenue and income of the separate companies, accounted for as a pooling
of interests, for the years ended June 30, 1998 and 1997 were (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Genesys Forte Advanced
Telecommunications Management
Laboratories, Inc. Software, Inc. Combined
-------------------------------------------------
<S> <C> <C> <C>
Year Ended June 30, 1998:
Total Revenue $81,516 $3,152 $84,668
Net Income (Loss) 8,485 (551) 7,934
Year Ended June 30, 1997:
Total Revenue $34,889 $2,649 $37,538
Net Income (Loss) 1,616 (842) 774
- -------------------------------------------------------------------------------------
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Year Ended June 30,
1999 1998
-----------------------------
<S> <C> <C>
Computer and office equipment $ 16,576 $13,048
Furniture and fixtures 2,306 2,056
Leasehold improvements and other 11,731 6,411
-----------------------------
30,613 21,515
Less: accumulated depreciation and amortization (13,587) (6,840)
-----------------------------
$ 17,026 $14,675
=============================
- ------------------------------------------------------------------------------------
</TABLE>
Included in property and equipment are assets acquired under capital lease
obligations with an original cost of approximately $282,000 as of both June 30,
1999 and 1998, respectively. Accumulated amortization on the leased assets was
approximately $135,000 and $176,500 at June 30, 1999 and 1998, respectively.
44
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. COMMITMENTS AND LONG-TERM OBLIGATIONS
In June 1997, the Company entered into a long-term note payable with a vendor.
The note is unsecured and bears interest at 6.74% per annum. The note was paid
in full during fiscal 1999.
The Company leases its facilities under noncancellable operating lease
agreements, which expire on various dates through September 2003.
Minimum future payments under noncancellable capital and operating leases as
of June 30, 1999 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Fiscal Year Capital Operating
- ----------- Leases Leases
- ------------------------------------------------------------------------------------------
<S> <C> <C>
2000 $ 59 $ 3,873
2001 58 2,788
2002 29 2,594
2003 -- 1,044
2004 and thereafter -- 2,731
------------------------------
Total minimum payments 146 $13,030
============
Less: Amount representing interest at 6.74% to 19% (15)
---------------
Present value of minimum payments 131
Less: Current portion (65)
---------------
Long-term portion $ 66
===============
- ------------------------------------------------------------------------------------------
</TABLE>
Rent expense was approximately $4,099,000, $3,574,000 and $1,155,000 in fiscal
1999, 1998 and 1997, respectively.
7. LITIGATION
On December 17, 1996, GeoTel Communications Corporation ("GeoTel") filed a
lawsuit in the United States District Court for the District of Massachusetts
naming the Company as defendant, and alleging infringement of a patent issued to
GeoTel entitled "Communications System Using a Central Controller to Control at
Least One Network and Agent System", U.S. Patent No. 5,546,452 (the "GeoTel
Patent"). On November 20, 1998, the Company and GeoTel entered into a
settlement agreement concerning the patent dispute on terms that neither company
believes are material to its financial results. Pursuant to the settlement,
GeoTel will receive a pre-determined license fee for certain products paid over
a fixed period of time in exchange for a nonexclusive, irrevocable license to
use the technology covered by the GeoTel Patent or any related patent in all
present and future Genesys products which incorporate such technology. The
license fee is expensed in the period in which it is paid, which approximates
the useful life of the licensed technology .
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
June 30, 1999, the Company was not a party of any legal proceedings that, if
decided adversely to the Company, would, individually or in the aggregate, have
a material adverse effect on the Company's business, financial condition or
results of operations.
8. RELATED PARTY TRANSACTIONS
In April 1999, the Company provided Next Age with a loan to borrow up to $1.5
million, of which $390,000 was outstanding at the time of the acquisition of
Next Age (see Note 4). In connection with the acquisition, the $390,000
outstanding loan was forgiven and taken into consideration as part of the Next
Age acquisition purchase price.
45
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. COMMON STOCK AND PREFERRED STOCK
In June 1997, the Company completed its initial public offering of 2,375,000
shares of Common Stock at $18.00 per share. In connection with the initial
public offering, all outstanding shares of Preferred Stock automatically
converted into Common Stock. In addition, the Company issued 420,282 shares of
Common Stock in connection with the exercise of certain warrants prior to the
closing of the offering.
Restricted Stock Purchase Agreements
Since inception, the Company has sold an aggregate of 6,281,500 shares of
Common Stock to certain employees in connection with their employment and to
certain vendors. All of these shares were sold at the fair market value as of
the date of purchase as determined by Board of Directors. All of these shares
are subject to stock repurchase agreements whereby the Company has the right to
repurchase unvested shares upon termination of employment or engagement at the
original price paid for the shares. Vesting generally occurs 25% on the first
anniversary date of employment or engagement and monthly thereafter over the
following 36 months. As of June 30, 1999, an aggregate of 773,500 shares of
Common Stock have been repurchased under these agreements, and 372,312 shares
are subject to the Company's repurchase right at prices ranging from $0.0167 to
$0.375 per share.
Stock Plans
In March 1997, the Board adopted the 1997 Stock Incentive Plan (the "1997
Plan"), which serves as a successor to the Company's 1995 Stock Option Plan
(the "1995 Plan"). All shares issued under the 1995 Plan were transferred to
the 1997 Plan upon the effectiveness of the Company's initial public offering.
The Company has reserved shares of Common Stock for issuance under the 1997 Plan
equal to the sum of (i) the shares which remained available for issuance under
the 1995 Plan, including the shares subject to outstanding options thereunder,
and (ii) an additional increase of 2,400,000 shares. During 1999, the Company's
shareholders approved an additional increase of 2,500,000 shares. In addition,
upon the completion of each fiscal year of the Company, beginning with the 1999
fiscal year, the share reserve will automatically be increased on the first
trading day of July each year by a number of shares equal to five percent (5%)
of the total number of shares of Common Stock outstanding on the last trading
day of the immediately preceding calendar month. Accordingly, on July 1, 1998,
the share reserve was automatically increased by 1,120,761 shares.
The 1997 Plan is divided into four separate components: (i) the Discretionary
Option Grant Program, under which eligible individuals in the Company's employ
or service (including officers and other employees, non-employee Board members
and independent consultants) may, at the discretion of the Plan Administrator,
be granted options to purchase shares of Common Stock at an exercise price not
less than the fair market value on the grant date, (ii) the Stock Issuance
Program, under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly, either through the
purchase of such shares at a price not less than the fair market value at the
time of issuance or as a fully-vested bonus for services rendered the Company,
(iii) the Salary Investment Option Grant Program, under which executive officers
and other highly compensated employees may elect to apply a portion of their
base salary to the acquisition of special below-market stock option grants, and
(iv) the Automatic Option Grant Program, under which option grants will
automatically be made at periodic intervals to eligible non-employee Board
members to purchase shares of Common Stock at an exercise price equal to the
fair market value on the grant date.
Under the Company's 1997 Plan, the Board of Directors may grant incentive and
nonqualified stock options to employees, directors and consultants. The exercise
price per share for an incentive stock option cannot be less than the fair
market value on the date of grant. The exercise price per share for a
nonqualified stock option cannot be less than 85% of the fair market value on
the date of grant. Options granted under the Option Plan generally expire ten
years after the date of grant and vesting generally occurs 25% on the first
anniversary date of employment or engagement and monthly thereafter over the
following 36 months. As of June 30, 1999, a total of 14,313,595 shares of
Common Stock have been authorized for grant under the 1997 Plan.
46
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On October 13, 1998, the Company simultaneously cancelled and re-issued
2,418,769 options to purchase shares of the Company's Common Stock issued under
its 1997 Plan during a re-pricing of employee stock options, excluding stock
options issued to executive officers and directors. Stock options that were re-
priced had a weighted average exercise price of $26.47 per share and were re-
issued at $12.50 per share.
In June 1999, the Company acquired Next Age and assumed Next Age's outstanding
options granted under its stock option plan ("Next Age Plan"), which were
converted to options to purchase 25,068 shares of the Company's Common Stock. In
December 1998, the Company acquired Plato and assumed Plato's outstanding
options granted under its stock option Plan ("Plato Plan"), which were converted
to options to purchase 42,500 shares of the Company's Common Stock. On December
31, 1997, the Company acquired Forte and assumed Forte's outstanding options
granted under its stock option plan ("Forte Plan"), which were converted to
options to purchase 90,349 shares of the Company's Common Stock. No further
options are available for future grant under the Next Age, Plato or Forte stock
option plans, and the Company has reserved for issuance shares of its Common
Stock for the exercise of these stock options.
In addition to stock option grants made under the plans described above,
during fiscal 1999, the Company's Board of Directors' Compensation Committee
made discretionary stock option grants to certain of its executive officers and
key employees that were outside of any plan. The number of discretionary stock
option grants issued as of June 30, 1999 was 3,080,000. Vesting generally occurs
25% on the first anniversary date of employment or engagement and monthly
thereafter over the following 36 months. Future discretionary grants may be
made if the Compensation Committee deems it necessary to attract the services of
key individuals essential to the Company's long-term growth and success.
47
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Details of option activity under the 1997 Plan (including activity under the
1995 Plan); Forte Plan; Next Age Plan; Plato Plan; and the discretionary grants
(collectively, the "Plans") are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Shares Options Outstanding
--------------- ---------------------------------
Available Number of Weighted
For Grant Shares Price Per Share Average
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, June 30, 1996 676,334 2,636,500 $ 0.02 - $ .23 $ 0.04
Authorized 7,380,000 -- -- --
Granted (5,695,500) 5,695,500 $ 0.38 - $18.00 $ 5.66
Exercised -- (895,561) $ 0.02 - $ 7.50 $ 0.39
Canceled 212,436 (212,436) $ 0.02 - $10.00 $ 0.66
-----------------------------------------------------------------------
Balances, June 30, 1997 2,573,270 7,224,003 $ 0.02 - $18.00 $ 4.41
Authorized -- -- -- --
Granted outside of 1997 -- 90,349 $ 12.00 - $12.00 $12.00
Plan
Granted under 1997 Plan (2,166,100) 2,166,100 $26.375 - $31.25 $28.11
Exercised -- (1,844,466) $ 0.02 - $18.00 $ 1.58
Canceled 517,041 (517,041) $ 0.02 - $30.00 $ 9.24
-----------------------------------------------------------------------
Balances, June 30, 1998 924,211 7,118,945 $ 0.02 - $18.00 $12.05
Authorized 3,620,761 -- -- --
Granted outside of 1997 -- 3,148,108 $ 0.40 - $21.75 $12.89
Plan
Granted under 1997 Plan (7,139,829) 7,139,829 $ 0.40 - $31.13 $14.23
Exercised -- (1,794,854) $ 0.02 - $15.00 $ 4.30
Canceled 4,473,717 (4,473,717) $ 0.02 - $31.25 $19.84
-----------------------------------------------------------------------
Balances, June 30, 1999 1,878,860 11,138,311 $ 0.02 - $29.75 $12.17
=======================================================================
- ----------------------------------------------------------------------------------------------------
</TABLE>
Shares granted outside of the 1997 Plan include the Forte Plan, Next Age Plan,
Plato Plan and the discretionary grants. For fiscal 1999, the price per share
information for options canceled reflect exercise prices prior to the October
1998 repricing of non-executive employee stock options.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
Exercise at June 30, Remaining Exercise June 30, Exercise
Prices 1999 Life Price 1999 Price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.0167 - $ 10.0000 1,846,143 7.34 $ 3.1452 842,774 $ 3.0954
$ 11.4375 - $ 11.4375 2,845,750 9.73 $11.4375 75,000 $11.4375
$ 12.0000 - $ 12.0000 696,892 9.74 $12.0000 52,884 $12.0000
$ 12.5000 - $ 12.5000 2,818,959 9.25 $12.5000 247,942 $12.5000
$ 14.0000 - $ 29.7500 2,930,567 7.75 $18.2925 261,405 $15.1398
- -------------------------------------------------------------------------------------------------------
$ 0.0167 - $ 29.7500 11,138,311 8.69 $12.1744 1,480,005 $ 7.5357
- -------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted average fair values of options granted during fiscal 1999,
1998 and 1997 was $14.34, $12.00 and $12.00, respectively.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Shares Subject to Repurchase
- -----------------------------------------------------------------------------
Number Subject to
Repurchase at Weighted Average
Purchase Price June 30,1999 Repurchase Price
- -----------------------------------------------------------------------------
<S> <C> <C>
$0.0167 296,062 $0.0167
$0.2250 65,000 $0.2250
$0.3750 11,250 $0.3750
- -----------------------------------------------------------------------------
$0.0167 - $0.3750 372,312 $0.0807
- -----------------------------------------------------------------------------
</TABLE>
As of June 30, 1999, 263,339 shares were vested and exercisable under the
stock purchase provisions of the Plans.
In connection with the issuance of stock options and common stock to employees
and consultants, the Company has recorded deferred compensation in the aggregate
amount of approximately $1.9 million, representing the difference between the
deemed fair value of the Company's common stock and the issue price of the
common stock or the exercise price of stock options at the date of grant. The
Company is amortizing the deferred compensation expense over the applicable
vesting period, which is typically four years. For fiscal 1999, 1998 and 1997,
amortization expense was approximately $532,000, $477,000 and $176,000,
respectively.
Had compensation cost been determined under a fair value method described
below, the Company's net income (loss) and net income (loss) per share would
have resulted in the following pro forma amounts (in thousands except per share
amounts):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Year Ended June 30,
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Net income (loss):
As reported $ (2,624) $ 7,934 $ 774
Pro forma $(27,643) $(3,271) $ (747)
Basic net income (loss) per share:
As reported $ (0.11) $ 0.37 $ 0.05
Pro forma $ (1.19) $ (0.15) $(0.05)
Diluted net income (loss) per share:
As reported $ (0.11) $ 0.30 $ 0.04
Pro forma $ (1.19) $ (0.15) $(0.05)
- ----------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant under the 1997 Plan is estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions used for grants: risk-free rates ranging from 5-7% and corresponding
to government securities with original maturities similar to the vesting
periods; expected dividend yield of 0%; expected lives of 3 years beyond vest
dates; and expected volatility of 77%, 56% and 115% in fiscal 1999, 1998 and
1997, respectively.
1997 Employee Stock Purchase Plan
In March 1997, the Board adopted the 1997 Employee Stock Purchase Plan (the
"Purchase Plan"). The Company has reserved 500,000 shares of Common Stock for
issuance under the Purchase Plan. The Purchase Plan enables eligible employees
to purchase common stock at 85% of the lower of the fair market value of the
Company's common stock on the first or the last day of each offering period. As
of June 30, 1999, 210,749 shares had been purchased under the Purchase Plan.
49
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Issuance of Warrants
Warrants Issued to Series C Shareholders
Concurrent with the closing of the sale of Series C Preferred Stock to two
corporate investors, the Company issued warrants for the purchase of 449,664
shares of Common Stock to one investor exercisable at a price of $35.00 per
share and 44,965 shares of Common Stock to the other investor exercisable at a
price of 110% of the fair market value of Common Stock on the date such shares
vest. The warrants expire in February 2004 and February 2000, respectively. Each
of these warrants becomes exercisable upon the achievement of certain sales and
development objectives specified in the warrant agreements. In accordance with
SFAS 123 and related interpretations at the time, the Company recorded the
aggregate estimated fair value of the warrants of $650,000 in February 1997, and
will amortize the value of the warrants to cost of license revenues as the sales
and development milestones are achieved. Amortization of the warrants is
computed as the greater of (a) the ratio of current gross revenues generated to
total revenue milestones under the agreement or (b) the straight-line method
over the life of the agreement with MCI. Amortization expense recorded in fiscal
1999 and 1998 was approximately $162,500 and $203,000, respectively.
Shares Reserved for Issuance
As of June 30, 1999, the Company has reserved shares of Common Stock for
future issuance as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Number of
Shares
---------------
<S> <C>
Employee stock purchase plan. 289,251
Exercise of stock options 13,017,171
Exercise of warrants 494,629
---------------
13,801,051
===============
- ---------------------------------------------------------------
</TABLE>
10. INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Year Ended June 30,
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $6,704 $3,738 $ 1,106
State 1,108 544 150
Foreign 1,785 68 461
--------------------------------------------------------
Total 9,597 4,350 1,717
--------------------------------------------------------
Deferred:
Federal 397 (350) (1,107)
State (51) 10 39
--------------------------------------------------------
Total 346 (340) (1,068)
--------------------------------------------------------
Total Provision $9,943 $4,010 $ 649
========================================================
- ------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The actual provision for income taxes differs from the statutory income tax
provision as follows (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Year Ended June 30,
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Statutory federal tax $2,562 $4,180 $ 793
State tax, net of federal benefit 302 528 124
Change in valuation allowance -- (278) (868)
Foreign taxes 70 68 460
Tax exempt interest income (469) (560) --
Non-deductible compensation 6,061 -- --
In-process research & development 2,576 -- --
Research & development credits (917) -- --
Other (242) 72 140
-----------------------------------------
$9,943 $4,010 $ 649
=========================================
- ------------------------------------------------------------------------------------------
</TABLE>
The components of the net deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Year Ended June 30,
1999 1998
----------------------------
<S> <C> <C>
Reserves and accruals not currently deductible $1,288 $1,343
Tax credit carryforwards 342 633
----------------------------
Net deferred tax asset $1,630 $1,976
============================
- -----------------------------------------------------------------------------------------
</TABLE>
The net deferred tax asset is included in other current assets in the
accompanying consolidated balance sheet.
11. MAJOR CUSTOMERS
The following customers accounted for 10% or more of total revenues in the
periods indicated:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
For the Years
Ended June 30,
1999 1998 1997
----------------------------
<S> <C> <C> <C>
Customer A * 14.1% 11.1%
- -------------------------------------------------------------
</TABLE>
* Less than 10% of total revenues
12. SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS
No. 131"), "Disclosures about Segments of an Enterprise and Related
Information", in fiscal 1999. SFAS No. 131 established standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to stockholders. It also established standards for related disclosures
about products and services and geographic areas. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision makers, or decision making group, in deciding how to allocate resources
and in assessing performance. The Company's chief operating decision making
group is the Executive Committee, which is comprised of the Chief Executive
Officer, the Chief Financial Officer and various Vice
51
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Presidents of the Company. The Company is organized geographically and by line
of business. The Company has two major lines of business operating segments:
license and service. The Company also evaluates certain subsets of business
segments by service categories. While the Executive Committee evaluates results
in a number of different ways, the line of business management structure is the
primary basis for which it assesses financial performance and allocates
resources. The Company does not track assets by operating segments.
Consequently, it is not practical to show assets by operating segments.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
For the Years Ended June 30,
1999 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
License $113,620 $68,973 $31,919
Service revenue
Professional service 13,603 7,360 2,817
Maintenance service 11,885 8,335 2,802
-------------------------------------------------------
Total service revenue 25,488 15,695 5,619
-------------------------------------------------------
$139,108 $84,668 $37,538
=======================================================
Cost of revenue:
License $ 4,980 $ 3,342 $ 1,615
Service 18,761 10,554 3,881
-------------------------------------------------------
$ 23,741 $13,896 $ 5,496
=======================================================
- ------------------------------------------------------------------------------------------------------
</TABLE>
Geographic information:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Year ended June 30 (in thousands):
1999 1998 1997
------------------------------------------------------------------------------------------------------
Long Lived Long Lived Long Lived
Revenues Assets Revenues Assets Revenues Assets
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 69,628 $104,925 $47,295 $ 82,959 $25,107 $69,847
United Kingdom 29,416 22,039 17,835 12,341 6,902 6,780
France 8,407 8,739 6,683 3,467 -- --
Germany 5,744 4,136 -- -- -- --
Canada 7,954 4,323 7,196 4,312 3,559 2,710
Japan 2,647 1,797 1,580 1,230 -- --
Other Foreign Countries
15,312 1,548 4,079 391 1,970 608
------------------------------------------------------------------------------------------------------
Total $139,108 $147,500 $84,668 $104,700 $37,538 $79,945
------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Revenues generated from international sales of the Company's products, which
includes export shipments originating in the United States to unaffiliated
customers and sales to unaffiliated customers from the Company's foreign
offices, represented 49.9%, 44.7% and 33.4% of total revenues in fiscal 1999,
1998 and 1997, respectively.
13. SUBSEQUENT EVENTS (UNAUDITED)
On Wednesday, September 28, 1999, a press release was issued announcing that
Alcatel has entered into a definitive agreement to acquire Genesys. The planned
stock-for-stock transaction values Genesys at approximately $1.5 billion, on the
basis of the current ten day average of Alcatel American Depository Shares (ADS)
stock price of $28.
52
<PAGE>
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The acquisition will be made by a merger under which shareholders of Genesys
will be given 1.667 Alcatel ADS in exchange for one Genesys share. There is a
"collar" on the deal so that the value for each given Genesys share will not
exceed $55 or be less than $45. The Alcatel ADS is a U.S. Security that
represents one-fifth of an Alcatel share and is listed on the NYSE. Completion
of the acquisition is subject to the expiration or termination of applicable
waiting periods under appropriate antitrust laws and approval by Genesys
shareholders. The deal is expected to be completed in January 2000.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
53
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to the Company's executive
officers is included under the caption "Executive Officers of the Registrant" in
Part I.
There are five members of the Board of Directors of the Company. The term of
office of each Director is one year. The number of Directors of the Company
shall be no less than four nor more than seven, the exact number of directors
shall be fixed from time to time within such limit set by the Board of Directors
or shareholders. The number of directors presently authorized is five members.
Directors hold office until the end of their terms and until their succesors
have been elected and qualified.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
NAME PRINCIPAL POSITIONS IN LAST FIVE YEARS AGE DIRECTOR SINCE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gregory Shenkman Mr Shenkman co-founded the Company and has served as a director 37 January
since January 1993. Mr. Shenkman has served as Chairman of the 1993
Board of Directors since December 1998. Mr Shenkman served as the
Company's President and Chief Executive Officer from its
formation in October 1990 until July 1998.
Ori Sasson Mr. Sasson joined the Company in December 1998 as its President 37 December
and Chief Executive Officer and a director. Prior to joining the 1998
Company, Mr. Sasson was Chief Executive Officer and President of
Scopus Technology, Inc., a customer relationship management
software company, from March 1991 until July 1998, when Scopus
was acquired by Siebel Systems, Inc.
Alec Miloslavsky Mr. Miloslavsky co-founded the Company and has served as its 36 January
Chief Technical Officer since the Company's formation in October 1993
1990, as a director since January 1993 and as Vice Chairman of
the Board since March 1997. Prior to co-founding the Company, Mr.
Miloslavsky worked as an independent software consultant.
Bruce Dunlevie Mr. Dunlevie is a General Partner of Benchmark Capital LLC, a 42 July 1996
venture capital firm co-founded by Mr. Dunlevie in May 1995. Mr.
Dunlevie is also a General Partner of Merrill, Pickard, Anderson
& Eyre. Mr. Dunlevie also served as Vice President and General
Manager of the Personnel Computer Division of Everex Systems,
Inc., a personal computer manufacturer.
Paul Levy In 1981, Mr. Levy co-founded and currently serves as Chairman of 43 February 1997
Rational Software Corporation ("Rational"), a software company
providing products that automate componet-based development of
software. Prior to April 1999, Mr. Levy served as Chief Executive
Officer of Rational and prior to September 1996 he served as
President of Rational. Since August 1996, he has served as a
director of Peerless Systems Corporation, a provider of Software
based imaging systems for the digital document product
marketplace.
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
There are no family relationships among the directors and executive officers
of the Company.
54
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires certain persons,
including the Company's directors and officers to file reports of ownership and
changes in ownership in the Company's securities with the SEC. To the Company's
knowledge, based solely on a review of the copies of such reports and amendments
thereto furnished to the Company, all Section 16(a) filing requirements
applicable to its officers, directors and greater than ten percent beneficial
owners were complied with during the year ended June 30, 1999, except for late
filings by new executive officers Christopher Brennan, Donald Hunt, Ad Nederlof
and Yuri Shtivelman of Form 3's to report their beneficial ownership, Donald
Hunt of a Form 4 to report a purchase of the Company's Common Stock in February
and Gregory Shenkman of a Form 5.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides certain summary information regarding the
compensation earned in each of the 1997, 1998 and 1999 fiscal year, for
services rendered in all capacities to the Company and its subsidiaries during
each such fiscal year by (i) Mr. Sasson, who was serving as the Company's Chief
Executive Officer on the last day of the 1999 fiscal year, (ii) Mr. McCloskey,
who served as the Company's President and Chief Financial Officer in addition to
his other responsibilities, through February 12, 1999, (iii) Mr. Shenkman, who
served as the Company's Chief Executive Officer through July 24, 1998, and (iv)
each of the other four most highly compensated executive officers of the Company
who were serving as such on the last day of the 1999 fiscal year and whose
salary and bonus for such fiscal year exceeded $100,000. In addition, included
in the table is John McNulty who would have been among the four most highly
compensated executive officers of the Company on the last day of the 1999 fiscal
year had he continued to serve as an executive officer through such date. The
individuals included in the table will be collectively referred to as the "Named
Executive Officers". There were no restricted stock grants in fiscal 1999. The
Company does not have a Long-Term Incentive Plan.
55
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation
-------------------------------- ------------
Securities
Other Annual Underlying All Other
Salary Bonus Compensation Options Compensation
Name and Principal Position Year ($) ($) ($) (2) (#) ($) (3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ori Sasson 1999 168,269 -- 6,225,000 900,000 5,580,000
President and Chief Executive Officer (1) 1998 -- -- -- -- --
1997 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Gregory Shenkman 1999 9,276 -- -- 7,500 37,500
Chairman of the Board of Directors and Former 1998 180,000 -- -- -- --
President and Chief Executive Officer (4) 1997 135,510 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Michael McCloskey 1999 116,132 -- -- 150,000 71,250
Former President, Chief Financial Officer and 1998 180,000 -- -- -- --
Chief Operating Officer (5) 1997 142,645 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Alec Miloslavsky 1999 202,500 40,000 -- -- --
Vice Chairman of the Board of Directors and 1998 180,000 -- -- -- --
Chief Technical Officer 1997 133,333 -- -- 150,000 --
- ------------------------------------------------------------------------------------------------------------------------
Richard DeGolia 1999 202,500 40,000 -- 100,000 --
Senior Vice President, Business Development 1998 180,000 -- -- -- --
and Strategic Planning, Corporate Secretary 1997 142,500 -- -- -- --
and Acting General Counsel
- ------------------------------------------------------------------------------------------------------------------------
Donald Hunt 1999 114,262 -- 30,000 350,000 --
Senior Vice President, Field Operations (6) 1998 -- -- -- -- --
Americas and Asia Pacific 1997 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Yuri Shtivelman 1999 175,705 60,000 -- 100,000 --
Senior Vice President, Product Development 1998 144,567 -- -- -- --
1997 138,912 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
John McNulty 1999 228,124 -- -- --
Former Vice President, Sales (7) 1998 185,000 -- -- -- --
1997 69,375 -- -- 240,000 --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Sasson joined the Company as Chief Executive Officer in December 1998.
(2) Mr. Sasson was paid $6,225,000 in tax reimbursements in connection with
the acquisition of Plato (see "Certain Relationships and Related
Transactions"). Mr. Hunt was paid $30,000 in commissions during fiscal
1999.
(3) The value of the Common Stock issued to Mr. Sasson in connection with his
hiring as Chief Executive Officer and the acquisition of Plato was
5,580,000. (See "Notes to Consolidated Financial Statements, No. 2 Non-
Recurring Charges"). Mr. Shenkman was paid $37,500 in consulting fees
pursuant to the terms of his mutual executive separation agreement. Mr.
McClosky was paid $71,250 in consulting fees pursuant to the terms of his
employment and
56
<PAGE>
severance agreement. See "Employment Contracts, Termination of Employment
and Change of Control Agreements".
(4) Mr. Shenkman resigned as President and Chief Executive Officer in July
1998. Mr. Shenkman continues to serve as Chairman of the Board of the
Directors of the Company. See "Employment Contracts, Termination of
Employment and Change of Control Agreements".
(5) Mr. McCloskey resigned his position as an executive officer of the Company
in February 1999. See "Employment Contracts, Termination of Employment and
Change of Control Agreements."
(6) Mr. Hunt joined the Company as Senior Vice President on January 4, 1999.
(7) Mr. McNulty resigned his position as an executive officer of the Company
and accepted a non-executive position in January 1999. See "Employment
Contracts, Termination of Employment and Change of Control Agreements".
OPTIONS/SARS GRANTED IN LAST FISCAL YEAR
The following table provides information on stock option grants during
fiscal year 1999 to the Named Executive Officers. No Stock Appreciation Rights
("SARs") were granted or outstanding during the 1999 fiscal year.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Number of Potential Realizable
Securities % of Total Value At Assumed Annual
Underlying Options/SARs Exercise or Rates of Stock Price
Options/SARS Granted to Base Appreciation Option ($)(4)
Granted Employees in Price Epiration --------------------------
Name (#)(1) Fiscal Year (2) ($/Sh) Date (3) 5% ($)(4) 10% ($)(4)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ori Sasson 900,000 8.7878 $14.7500 2/17/09 $2,860,845 $6,160,928
Gregory Shenkman 7,500 * $20.2500 5/21/09 $ 95,513 $ 242,050
Michael McCloskey 150,000 1.4646 $12.5000 10/13/08 $1,179,177 $2,988,267
Alec Miloslavsky -- -- -- -- -- --
Richard DeGolia 100,000 * $11.4375 3/23/09 $ 719,298 $1,822,843
Yuri Shtivelman 100,000 * $11.4375 3/23/09 $ 719,298 $1,822,843
Donald Hunt 300,000 2.9293 $11.4375 3/23/09 $2,157,895 $5,468,529
50,000 * $11.4375 3/23/09 $ 359,649 $ 911,421
John McNulty -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Less than (1%)
57
<PAGE>
(1) All options listed in the above table have an exercise price equal to the
fair market value of the Company's Common Stock as determined by the
closing price on the date of grant. The stock option grants made in fiscal
1999 to the named executive officers vest 25% on the first anniversary date
of employment or grant and monthly thereafter over the following 36 months,
except for the grants to Mr. Sasson, Mr. Shenkman and the 50,000 share
grant to Mr. Hunt. Mr. Sasson's option vests monthly over a four year
period commencing on December 8, 1998, Mr. Sasson's first date of
employment with the Company. Mr. Shenkman's option is immediately
exercisable and subject to repurchase by the Company, if exercised prior to
vesting, and the option fully vests, and the repurchase right lapses, one
year from the date of grant. Mr. DeGolia's and Mr. Shtivelman's options for
100,000 shares are immediately exercisable and subject to repurchase by the
Company, if exercised prior to vesting. These options shall vest, and the
Company's repurchase rights lapse accordingly, 25% as of January 1, 2000
and monthly thereafter over the following 36 months. Mr. Hunt's 50,000
share option is immediately exercisable and fully vested as of the date of
grant. See "Employment Contracts, Termination of Employment and Change in
Control Arrangements".
(2) A total of 10,287,937 shares were granted in form of incentive and non-
qualified stock options during fiscal 1999.
(3) All stock options granted are made for a term of ten years from the date of
grant.
(4) The dollar amounts under these columns are the result of calculations at
the assumed 5% and 10% rates mandated by the Securities and Exchange
Commission and, therefore, are not intended to forecast possible future
appreciation, if any, of the Company's stock price. The Company did not
use an alternative formula for a grant date valuation, as the Company is
not aware of any formula that will determine with reasonable accuracy a
present value based on future unknown or volatile factors. No gain to the
optionee is possible without an increase in stock price, which will benefit
all stockholders commensurably. A zero percent gain in stock price will
result in zero dollars for the optionee.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The table below provides information with respect to the Named
Executive Officers concerning the unexercised options held by them as of the end
of the 1999 fiscal year.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Shares Number of Securities Underlying Value of Unexercised
Acquired Value Unexercised Options/SARs At in-The-Money Options at
On Exercise Realized Fiscal Year-End Fiscal Year-End
Name (#) ($) (1) (#) (2) ($) (3)
-------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ori Sasson 0 $ 0 112,500 787,500 $1,153,125 $8,071,875
Gregory Shenkman 0 $ 0 7,500 0 $ 35,625 $ 0
Michael McCloskey (4) 0 $ 0 0 0 $ 0 $ 0
Alec Miloslavsky 0 $ 0 87,500 62,500 1,531,250 $1,093,750
Richard DeGolia 0 $ 0 100,000 0 $1,356,250 $ 0
Donald Hunt 0 $ 0 50,000 300,000 $ 678,125 $4,068,750
Yuri Shtivelman 90,000 $1,209,375 100,000 0 $1,356,250 $ 0
John McNulty 0 $ 0 0 100,000 $ 0 $1,250,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
(1) The value realized on exercise of the stock option is the difference
between the exercise price of the shares exercised and the fair market
value of the shares on the date of exercise.
(2) The stock options listed in the above table vest (i) 25% on the first
anniversary of the (a) date of employment if to a new employee or (b) the
grant date if to an existing employee and (ii) monthly thereafter over the
following 36 months, except for the grants to Mr. Sasson, Mr. Shenkman, and
the 50,000 share grant to Mr. Hunt. Mr. Sasson's option vests monthly over
a four year period commencing on December 8, 1998, Mr. Sasson's first date
of employment with the Company. Mr. Shenkman's option is immediately
exercisable and subject to repurchase by the Company if exercised prior to
vesting. The option fully vests, and the Company's repurchase rights lapse,
one year from the date of grant. Both Mr. DeGolia's and Mr. Shtivelmans
option for 100,000 shares each are immediately exercisable and subject to
repurchase by the Company, if exercised prior to vesting. The options vest,
and the Company's repurchase rights lapse accordingly, 25% as of January 1,
2000 and monthly thereafter over the following 36 months. Mr. Hunt's option
for 50,000 shares is immediately exercisable and fully vested as of date of
grant. See "Employment Contracts, Termination of Employment and Change in
Control Arrangements".
(3) The value of unexercised in-the-money options at the end of the fiscal year
is calculated by multiplying the number of exercisable in-the-money shares
by the difference between the closing price ($25.00) of the Company's
Common Stock on June 30, 1999 (the last trading day of the fiscal year), as
reported on the Nasdaq National Market and the exercise price per share of
the shares. A portion of the shares subject to these options are unvested
and subject to repurchase provisions as described in footnote (2) above.
(4) Pursuant to the terms of Mr. McCloskey's stock option agreement, zero
shares were vested on the date of Mr. McCloskey's termination with the
Company; therefore, all shares were cancelled and zero shares remained
outstanding at fiscal year end.
Director Compensation
Except for grants of stock options, directors of the Company do not
receive compensation for services rendered as a director. In addition, the
Company does not pay cash compensation for committee participation or special
assignments of the Board of Directors. Non-employee Board members receive option
grants at periodic intervals under the Automatic Option Grant Program of the
1997 Plan and are also eligible to receive discretionary option grants under the
Discretionary Option Grant Program of such plan.
Under the Automatic Option Grant Program of the 1997 Plan, each
individual who first becomes a non-employee Board member, whether through
appointment by the Board or upon election by the shareholders, will receive two
option grants at the time of his or her initial appointment or election,
provided such individual has not otherwise been in the prior employ of the
Company. One such option grant will be for 30,000 shares of Common Stock and the
other for 20,000 shares of Common Stock. In addition, at each Annual
Shareholders Meeting, each
59
<PAGE>
individual who is to continue to serve as a non-employee Board member will
receive an option grant for 7,500 shares of Common Stock, whether or not such
individual has been in the prior employ of the Company. Each automatic option
grant will have an exercise price per share equal to the fair market value per
share of Common Stock on the grant date and will have a maximum term of 10
years, subject to earlier termination following the optionee's cessation of
Board service. Each automatic option will be immediately exercisable for all of
the option shares; however, any shares purchased upon exercise of the option
will be subject to repurchase, at the option exercise price paid per share,
should the optionees service as a non-employee Board member cease prior to
vesting in those shares. The shares subject to each 30,000-share grant will vest
as to 25% of the option shares on each of the first, second, third and fourth
anniversaries of the option grant date, provided the optionee continues to serve
as a non-employee Board member. The shares subject to each 20,000-share grant
will vest as to 25% of the option shares on each of the fifth, sixth, seventh
and eighth anniversaries of the option grant date, provided the optionee
continues to serve as a non-employee Board member. However, vesting of the
shares subject to each 20,000-share grant will be subject to acceleration after
the close of each fiscal year, beginning with the 1998 fiscal year, in the event
that the optionee has served on a committee of the Board of Directors in such
fiscal year. Vesting of 2,500 shares will accelerate with respect to each
committee of the Board of Directors on which the optionee has served, up to a
maximum of two committees, and will be conditioned on the optionee having
attended at least 75% of the meetings held by such committee during the fiscal
year. The shares to be accelerated will be those shares which would otherwise
have been the first shares to vest in accordance with the four (4)-year vesting
schedule described above. The shares subject to each annual 7,500-share grant
will vest upon the optionee's completion of one year of Board service measured
from the grant date.
Employment Contracts, Termination of Employment and Change in Control
Arrangements
Ori Sasson. Effective December 9, 1998, the Company entered into an
----------
employment agreement with Mr. Sasson in connection with his employment as
President and Chief Executive Officer of the Company. Pursuant to this
agreement. The Company agreed to pay Mr. Sasson with the following compensation:
a base salary of $300,000 per year; an annual target bonus for each fiscal year,
based upon attainment of certain performance objectives, targeted at 40% of his
base salary; health care coverage; a $10,000,000 dollar life insurance policy;
and a disability policy. In addition, Mr. Sasson was granted an option to
purchase 900,000 shares of Common Stock on February 17, 1999 at an exercise
price of $14.75 per share, the fair market value per share of Common Stock on
that date. The option becomes exercisable over a four-year period in 48 equal
monthly installments beginning on December 9, 1998. If Mr. Sasson's employment
is terminated by the Company, or if he resigns due to a change in his title or a
material reduction in his duties or level of compensation, or ceases to report
directly to the entire Board of Directors, or his salary is reduced by 15% or
more without his written consent, or if the Company moves it's headquarters more
than 40 miles outside of San Francisco, CA ("Constructive Termination"), Mr.
Sasson will become entitled to payment of two years of salary and acceleration
of two years of stock option vesting. Should Mr. Sasson's employment terminate
due to death or disability, then he will become entitled to acceleration of two
years of stock option vesting. In addition, should Mr. Sasson's employment
terminate for any of the reasons described above, he will have an extended
period of one year following such termination in which to exercise his
outstanding stock options and he will be entitled to continued life insurance
coverage and health insurance coverage for so long as is permitted by law, with
the COBRA payments for the first 18 months of such health insurance coverage to
be paid by the Company. Mr. Sasson agreed not to compete with the Company or
solicit customers, suppliers or employees of the Company for a period of two
years following his termination of employment with the Company.
Change in Control Provisions. If Mr. Sasson's employment is
terminated; whether by the Company, or by Constructive Termination, within 12
months after a change in control of the Company, whether by merger, asset sale,
tender or exchange offer for more than 50% of the Company's outstanding voting
securities (change of control), then, in addition to receiving the salary and
bonus payments described above, all of Mr. Sasson's outstanding options will
immediately vest. In addition, should Mr. Sasson resign voluntarily within six
months following a change in control of the Company, he will become entitled to
payment of two years of salary
60
<PAGE>
and acceleration of two years of stock option vesting. In addition, should Mr.
Sasson's employment terminate for any of the reasons described above, he will
have an extended period of one year following such termination in which to
exercise his outstanding stock options and he will be entitled to continued life
insurance coverage and health insurance coverage for so long as is permitted by
law, with the COBRA payments for the first 18 months of such health insurance
coverage to be paid by the Company.
Richard C. DeGolia. On March 5, 1996, the Company entered into an
------------------
employment agreement with Mr. DeGolia. Pursuant to the agreement, Mr. DeGolia
would receive a base salary of $15,000 per month and a bonus as determined by
the Board of Directors. In addition, Mr. DeGolia purchased 396,000 shares of the
Company's Common Stock at a purchase price equal to the fair market value on the
date of grant. Beginning March 1, 1996 these shares vest over four years, at a
rate of 25% of the shares on February 18, 1997 and 1/36th of the shares at the
end of each month thereafter. In September 1996, Mr. DeGolia was awarded the
right to purchase 36,000 shares of Common Stock at the fair market value on the
date of grant, which right was exercised in November 1996 through the issuance
of a full recourse interest bearing promissory note for the amount of the
purchase price. The note was paid off in full in fiscal 1998. Mr. DeGolia vested
25% of the shares on September 30, 1997 and the balance vests, subject to
certain change in control provisions, in a series of 36 equal monthly
installments thereafter.
Change in Control Provisions. Mr. DeGolia's restricted stock purchase
agreements provide that all of the unvested shares subject to certain agreements
shall vest in full if there is a change of control and the acquiror fails to
provide Mr. DeGolia with both cash compensation and operational responsibility
that is at least equal to what he had prior to the acquisition. Mr. DeGolia's
stock option grant, dated March 23, 1999, for 100,000 shares at $11.4375 per
share, provides that in the event of (i) a change in control; and (ii) the
acquiror fails to provide Mr. DeGolia with both cash compensation and
operational responsibility that are at least equal to what he had prior to the
acquisition, then all of his unvested shares will be accelerated as of the
closing date of the acquisition and become fully vested immediately prior to the
closing of the acquisition. In addition, all unvested shares will be fully
accelerated immediately in the event of a Change of Control and upon Involuntary
Termination within 18 months of such change in control. An Involuntary
Termination includes any involuntary dismissal or a voluntary resignation
following (a) a material reduction in operational responsibility, or (b) a
reduction in compensation by more than 15%, or (c) a relocation by more than 50
miles.
Donald Hunt. Effective January 4, 1999, the Company entered into an
-----------
employment agreement with Mr. Hunt in connection with his employment as Senior
Vice President, Worldwide Field Operations. Pursuant to this agreement, Mr. Hunt
will be provided with the following compensation: a base salary of $230,000 per
year and an annual commission/bonus potential of up to $120,000 for each fiscal
year, based upon attainment of certain performance objectives. In addition, Mr.
Hunt was granted, on March 23, 1999, two options to purchase a total of 350,000
shares of Common Stock, with each having an exercise price of $11.4375, under
the Company's 1997 Plan. The first option for 300,000 shares of Common Stock
becomes exercisable at a rate of 25% of the shares at the end of the first year
and 1/36th of the shares at the end of each month thereafter. The second option
for 50,000 shares of Common Stock vests immediately. If the Company terminates
Mr. Hunt's employment, other than for cause, he will become entitled to payment
of six months of his base salary and COBRA continuation benefits. Should Mr.
Hunt's employment terminate due to death or disability, then he will become
entitled to acceleration of two years of stock option vesting. Mr. Hunt agreed
not to compete with the Company or solicit customers, suppliers or employees of
the Company for a period of six months following his termination of employment
with the Company.
Change in Control Provisions. Mr. Hunt's stock option grant, dated
March 23, 1999, for 300,000 shares at $11.4375 per share, provides that in the
event of (i) a change in control; and (ii) the acquiror fails to provide Mr.
Hunt with both cash compensation and operational responsibility that are at
least equal to what he had prior to the acquisition, then all of his unvested
shares will be accelerated as of the closing date of the acquisition and become
fully vested immediately prior to the closing of the acquisition. In addition,
all unvested shares will be fully accelerated immediately in the event of a
Change of Control and upon Involuntary Termination within 18 months of such
change in control. An Involuntary Termination includes any involuntary dismissal
or a voluntary
61
<PAGE>
resignation following (a) a material reduction in operational responsibility, or
(b) a reduction in compensation by more than 15%, or (c) a relocation by more
than 50 miles.
Yuri Shtivelman. On June 6, 1996, the Company entered into an
---------------
employment agreement with Yuri Shtivelman in connection with his employment as
Vice President, Corporate Strategy. Pursuant to the agreement, Mr. Shtivelman
was provided the following compensation: a base salary of $10,833.33 per month;
and an annual performance bonus of up to 20% based upon the attainment of both
individual performance goals and the Company's financial performance and
condition. In addition, Mr. Shtivelman was granted (i) the right to purchase
240,000 shares of the Company's Common Stock at a purchase price of $0.225, the
fair market value on the date of Board approval, that vests over a four year
period, at a rate of 25% of the shares at the end of the first year and 1/36th
of the shares monthly thereafter; and (ii) an option to purchase 90,000 shares
of the Company's Common Stock at a purchase price of $0.375, the fair market
value on the date of grant that vest over a two year period, begininning the
date of his hire, at a rate of 50% of the shares at the end of each year,
thereafter.
Change in Control Provisions. In the event of a change in control and
the acquiror fails to provide Mr. Shtivelman with both cash compensation and
operational responsibility that is at least equal to what he had prior to the
acquisition, then all of his unvested shares, of both the restricted stock and
the option referenced above, will be accelerated as of the closing date of the
acquisition and become fully vested immediately prior to the closing of the
acquisition. In addition, Mr. Shtivelman's stock option grant, dated March 23,
1999, for 100,000 shares at $11.4375 per share, provides that in the event of
(i) a change in control, as defined above, and (ii) the acquiror fails to
provide Mr. Shtivelman with both cash compensation and operational
responsibility that is at least equal to what he had prior to the acquisition,
then all of his unvested shares will be accelerated as of the closing date of
the acquisition and become fully vested immediately prior to the closing of the
acquisition. In addition, all unvested shares will be fully accelerated
immediately in the event of a Change of Control and upon Involuntary Termination
within 18 months of such change in control. An Involuntary Termination includes
any involuntary dismissal or a voluntary resignation following (a) a material
reduction in operational responsibility, or (b) a reduction in compensation by
more than 15%, or (c) a relocation by more than 50 miles.
Gregory Shenkman. On July 24, 1998, Mr. Shenkman resigned from his
----------------
position as President and Chief Executive Officer of the Company and entered
into to a mutual executive separation agreement with the Company. Pursuant to
the agreement, Mr. Shenkman agreed to continue to provide services to the
Company as a consultant for a period of up to six months during which period Mr.
Shenkman received monthly compensation of $15,000 per month, which is comparable
to his compensation as an employee, and continued to vest his outstanding stock
options and restricted shares in accordance with their original terms. Mr.
Shenkman ceased to serve as a consultant to the Company in January 1999 but
continues to serve as the Chairman of the Board of Directors.
62
<PAGE>
Michael McCloskey. On December 11, 1998, the Company0 entered into an
-----------------
employment and severance agreement with Mr. McCloskey. Pursuant to that
agreement, Mr. McCloskey resigned from his position as Chief Financial Officer
of the Company but agreed to serve as President until the earlier to occur of
(i) June 30, 1999, (ii) the date on which the Company engaged an individual or
individuals who would act as Vice President, Finance and Chief Financial Officer
and Vice President, World-Wide Sales or (iii) termination of the agreement for
any other reason. As of December 11, 1998, the effective date of the agreement,
130,000 restricted shares held by Mr. McCloskey, which were otherwise unvested
as of that date, accelerated and became fully vested shares of Common Stock.
During the period of the employment agreement, Mr. McCloskey continued to
receive the base salary and other employee benefits previously paid to him and
continued to vest in his outstanding stock options and the remaining 70,000
unvested shares of restricted stock pursuant to their original terms. In the
event Mr. McCloskey's employment terminated by reason of death or disability
prior to June 30, 1999, the base salary discussed above would become payable and
the number of option shares and restricted shares would vest. In the event of
Mr. McCloskey's involuntary termination prior to June 30, 1999, including a
voluntary resignation for good reason, Mr. McCloskey would continue to receive
his base salary and health benefits through June 30, 1999. In the event of an
early termination of the employment agreement by reason of Mr. McCloskey's
voluntary resignation, Mr. McCloskey would continue to provide services to the
Company under a consulting arrangement until June 30, 1999, pursuant to which he
would receive monthly compensation comparable to his compensation as an employee
and would continue to vest in his outstanding stock options and restricted stock
in accordance with their original terms. In February 1999, Mr. McCloskey's
employment agreement terminated by reason of Mr. McCloskey's voluntary
resignation. Pursuant to the terms of the agreement, Mr. McCloskey continued to
provide consulting services to the Company until June 30th.
John McNulty. On April 29, 1999, the Company entered into an
------------
employment and mutual separation agreement with John McNulty, whereby the
Company shall continue to employ Mr. McNulty through December 31, 1999 at a
salary of $265,000 annually, but shall do so as its Sales Strategist, Key
Accounts and Channel Markets rather than as Vice President, Sales, and the
Company shall not terminate Mr. McNulty's employment prior to December 31, 1999,
except for cause. Under the agreement, "cause" shall mean either (i) an act of
fraud or other intentional dishonesty by Mr. McNulty involving the Company or
its business or (ii) a breach of the agreement by Mr. McNulty. Upon the
execution of the Agreement, Mr. McNulty agreed to repay his promissory note to
the Company in the amount of $101,503.04. Mr. McNulty agreed not to solicit or
encourage any employee to leave the Company's employ for any reason or to
interfere in any other manner with employment relationships existing between the
Company and its employees. In addition, in connection with Mr. McNulty's stock
option for 100,000 shares, he agreed that the 68,750 shares, which would have
been unvested as of December 31, 1999, may be canceled and returned to the 1997
Plan's share reserve upon execution of the agreement rather than on the last day
of Mr. McNulty's employment with the Company. The remaining 31,250 shares shall
continue to vest in accordance with the original terms and conditions of the
option agreement. In connection with the 240,000 shares of restricted stock held
by him, Mr. McNulty agreed that the 55,000 shares, which would have been
unvested as of December 31, 1999, could be repurchased by the Company at any
time from the date the execution of the agreement. Genesys paid the repurchase
price by canceling the Full Recourse, Secured Promissory Note, dated February
24, 1997, with respect to $20,625 of the principal outstanding under the Note.
The remaining 185,000 shares of the restricted stock shall vest in accordance
with the original purchase agreement.
Change in Control Provisions. The purchase agreement for the
restricted stock, referred to above, provides that in the event of (i) the
acquisition of the Company as defined in the purchase agreement and (ii) the
acquiror fails to provide Mr. McNulty with both cash compensation and
operational responsibility that is at least equal to what he had prior to the
acquisition, then all of his unvested shares will be accelerated as of the
closing date of the acquisition and become fully vested immediately prior to the
closing of the acquisition. However, in the employment and mutual separation
agreement, Mr. McNulty expressly waived his right to accelerated vesting of the
55,000 restricted shares that would have vested after December 31, 1999.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
Report of the Compensation Committee of the Board of Directors on Executive
Compensation
The Compensation Committee of the Board of Directors (the
"Committee") is currently comprised of two non-employee directors, Bruce
Dunlevie and Paul D. Levy. James Jordan, also a non-employee director, served
as a member of the Committee until his resignation from the Board in December
1998.
The Committee administers the Company's compensation policies and
programs and has primary responsibility for executive compensation matters,
including the establishment of the base salaries of the Company's executive
officers, the approval of individual bonuses and bonus programs for executive
officers and the administration of certain employee benefit programs. In
addition, the Committee has responsibility for administering the Company's 1997
Stock Incentive Plan (the "1997 Plan") under which stock option grants and
63
<PAGE>
direct stock issuances may be made to executive officers and other employees.
The following is a summary of policies which the Committee applies in setting
the compensation levels for the Company's executive officers.
General Compensation Policy. The overall policy of the Committee is to
offer the Company's executive officers competitive compensation opportunities
based upon their personal performance, the financial performance of the Company
and their contribution to that performance. One of the primary objectives is to
have a substantial portion of each executive officer's compensation contingent
upon the Company's financial success as well as upon such executive officer's
own level of performance. Each executive officer's compensation package is
comprised of two principal elements: (i) base salary, determined on the basis
of the individual's position and responsibilities with the Company, the level of
his or her performance, and the financial performance of the Company, and (ii)
long-term stock-based incentive awards designed to strengthen the mutuality of
interests between the executive officers and the Company's shareholders.
Generally, as an executive officer's level of responsibility increases, a
greater portion of that individual's total compensation will be dependent upon
the Company's performance and stock price appreciation rather than base salary.
In a limited number of cases the Committee may also make incentive performance
awards payable in cash, based upon a formula which takes into account Company
and individual performance.
Factors. The primary factors which were taken into consideration in
establishing the components of each executive officer's compensation package for
the 1999 fiscal year are summarized below. However, the Committee may, in its
discretion, apply entirely different factors, such as different measures of
financial performance, for future fiscal years.
Base Salary. In setting the base salary for each executive officer,
the Committee reviewed published compensation survey data for its industry. The
base salary for each officer reflects the salary levels for comparable positions
in published surveys as well as the individual's personal performance and
internal alignment considerations. The relative weight given to each factor
varies with each individual in the sole discretion of the Compensation
Committee. Each executive officer's base salary is adjusted each year on the
basis of (i) the Compensation Committee's evaluation of the officer's personal
performance for the year and (ii) the competitive marketplace for persons in
comparable positions. The Company's performance and profitability may also be a
factor in determining the base salaries of executive officers.
Long-Term Stock-Based Incentive Compensation. From time to time, the
Committee makes option grants to the Company's executive officers under the 1997
Plan. In addition to stock option grants under the 1997 Plan, the Committee
made discretionary stock option grants to certain new executive officers and key
employees that were outside of any plan. Future discretionary grants may be
made if the Committee deems it necessary to attract the services of key
individuals essential to the Company's long-term growth and success. All equity
grants are designed to align the interests of each executive officer with those
of the shareholders and provide each individual with a significant incentive to
manage the Company from the perspective of an owner with an equity stake in the
business. Each grant allows the officer to acquire shares of the Company's
Common Stock at a fixed price per share (the market price on the grant date)
over a specified period of time (up to ten (10) years), thus providing a return
to the executive officer only if the market price of the shares appreciates over
the option term and the officer continues in the Company's employ. The
Committee takes into account the number of vested and unvested options and
restricted shares held by the executive officer in order to maintain an
appropriate level of equity incentive for that individual.
CEO Compensation. Mr. Sasson's base salary for the 1999 fiscal year
was determined by the Committee to be competitive with the compensation paid to
the chief executive officers of the companies at similarly-sized companies. In
addition, Mr. Sasson was awarded 900,000 options in the 1999 fiscal year. See
"Employment Contracts, Termination of Employment and Change of Control
Arrangements" and "Certain Relationships and Related Transactions".
Compliance with Internal Revenue Code Section 162(m). Section 162(m)
of the Internal Revenue Code generally disallows a tax deduction to publicly-
held companies for compensation paid to certain executive
64
<PAGE>
officers, to the extent that compensation exceeds $1 million per officer in any
year. The compensation paid to the Company's executive officers for the 1999
fiscal year did not exceed the $1 million limit per officer. In addition, the
1997 Plan is structured so that any compensation deemed paid to an executive
officer in connection with the exercise of his or her outstanding options under
such plan will qualify as performance-based compensation which will not be
subject to the $1 million limitation However, compensation deemed paid to an
executive officer in connection with the exercise of options granted outside the
1997 Plan will not qualify as performance-based compensation for purposes of
Section 162(m) and will accordingly be included in the calculation of the $1
million limitation for that officer. The Committee has decided at this time not
to take any other action to limit or restructure the elements of cash or equity
compensation payable to the Company's executive officers. The Committee will
reconsider this decision should the individual compensation of any executive
officer approach the $1 million level.
Submitted by the Compensation Committee of the Company's Board of Directors:
Bruce Dunlevie
Paul D. Levy
Stock Performance Graph
- -----------------------
Below is a line graph comparing the cumulative total shareholder returns for the
Company's Common Stock over the last three years. The Company became a public
reporting company on June 17, 1997. The graph depicted below shows the
Company's stock price as an index assuming $100 invested on June 17, 1997, along
with the composite prices of companies listed in the Nasdaq Stock Market (U.S.)
Index and the Hambrecht & Quist Index. The Company's fiscal year ends on June
30th. The total return assumes the reinvestment of dividends. The Company has
never paid cash dividends on its capital stock. The Company currently
anticipates that it will retain all available funds for use in its business and
does not anticipate paying any cash dividends. The graph is an historical
representation of past performance only and is not necessarily indicative of
future returns to shareholders.
65
<PAGE>
COMPARISON OF THREE YEAR CUMULATIVE TOTAL RETURN
[COMPARISON CHART HERE]
<TABLE>
<CAPTION>
June 17, 1997 June 1997 June 1998 June 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Genesys Telecommunications Laboratories, Inc. 100 154 184 139
Nasdaq Stock Market (U.S.) 100 100 132 188
Hambrecht & Quist Technology 100 99 125 202
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee of the Company's Board of
Directors are named as above in the Compensation Committee Report. No member of
the Committee was at any time during the 1999 fiscal year or at any other time
an officer or employee of the Company.
No current executive officer of the Company has ever served as a
member of the board of directors or compensation committee of any other entity
that has or has had one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.
66
<PAGE>
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF SECURITIES
The following table sets forth certain information known to the
Company with respect to beneficial ownership of the Company's Common Stock as of
September 24, 1999 for (i) all persons who are beneficial owners of more than
five percent of the Company's Common Stock, (ii) each director, (iii) each of
the executive officers named in the Summary Compensation Table of the section of
this Proxy Statement entitled "Executive Compensation and Related Information,"
and (iv) all current executive officers and directors as a group as of September
24, 1999.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Number of
Shares
Beneficially Percent
Owned (1) Owned (2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Gregory Shenkman (3) 3,009,750 11.9%
1155 Market Street
San Francisco, CA 94103
Alec Miloslavsky (4) 2,740,250 10.8%
1155 Market Street
San Francisco, CA 94103
Ori Sasson (5) 260,108 *
Richard DeGolia (6) 214,720 *
Donald Hunt (7) 25,529 *
Paul D. Levy (8) 102,500 *
Bruce Dunlevie (9) 464,972 1.8%
Michael J. McCloskey (10) 0 *
John McNulty (11) 24,167 *
Yuri Shtivelman (12) 242,670 *
All current officers and directors as a group 7,084,726 27.2%
(11 Persons) (13)
- ---------------------------------------------------------------------------------------------------
</TABLE>
- ------------
* Less than one percent.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock. The number of shares beneficially owned includes Common Stock of
which such individual has the
67
<PAGE>
right to acquire beneficial ownership either currently or within 60 days
after September 24, 1999, including, but not limited to, upon the exercise
of an option.
(2) Percentage of beneficial ownership is based upon 25,374,145 shares of
Common Stock, all of which were outstanding on September 24, 1999. For each
individual, this percentage includes Common Stock of which such individual
has the right to acquire beneficial ownership either currently or within 60
days of September 24, 1999, including, but not limited to, upon the
exercise of an option; however, such Common Stock shall not be deemed
outstanding for the purpose of computing the percentage owned by any other
individual. Such calculation is required by General Rule 13d-3(d)(1)(i)
under the Securities Exchange Act of 1934.
(3) Mr. Shenkman. Includes 354,000 shares held by Dmitry Shenkman, Trustee of
-------------
the Michelle Shenkman 1996 Trust u/t/a dated March 18, 1996, Michelle
Shenkman is Mr. Shenkman's daughter; 354,000 shares held by Dmitry
Shenkman, Trustee of the Nikita Anthony Shenkman 1996 Trust u/t/a dated
March 18, 1996, Nikita is Mr. Shenkman's child; 928,000 shares held by
Gregory and Yelena Shenkman, Trustees of the Shenkman Family Trust u/t/a
dated March 7, 1996 and 500,000 shares held by Shenkman Partners. L.P., a
California limited partnership of which Mr. Shenkman is a general partner.
Also includes 7,500 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days.
(4) Mr. Miloslavsky. Includes 360,000 shares held by Larry Miloslavsky and
----------------
Anatoly Elkinbard, Trustees of the Miloslavsky 1996 Irrevocable Trust u/t/a
dated March 13, 1996; 350,000 shares held by Miloslavsky Partners, L.P., a
California limited partnership of which Mr. Miloslavsky is a general
partner and 110,000 shares held by Larry and Linda Miloslavsky, Trustee of
the Joshua Trobnika Miloslavsky 1996 Trust u/t/a dated March 15,1996. Also
includes 100,000 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after
September 24, 1999.
(5) Mr. Sasson. Includes 40,000 shares held by the DAS Trust UTA 9-24-98 and
-----------
40,000 shares held by the EIS Trust UTA 9-24-98, of which Mr. Sasson is the
trustee. Includes 206,250 shares issuable upon exercise of options that
are currently exercisable or will become exercisable within 60 days after
September 24, 1999.
(6) Mr. DeGolia Includes 114,131 shares held by Richard C. DeGolia or Jennifer
-----------
H. DeGolia, as Trustees of the RJ Family Trust u/t/a dated 6/16/95 of which
54,750 are unvested and subject to repurchase by the Company. Includes
100,000 unvested shares that are exercisable and, to the extent exericised,
subject to repurchase by the Company, at the purchase price paid per share,
in the event of Mr. DeGolia's early termination of service with the
Company.
(7) Mr. Hunt. Includes 25,000 shares issuable upon exercise of options that are
---------
currently exercisable or will become exercisable within 60 days after
September 24, 1999.
(8) Mr. Levy. Includes 30,000 unvested shares that are subject to repurchase by
---------
the Company at the purchase price paid per share, in the event Mr. Levy
resigns from the Company's Board of Directors. Also includes 37,500
unvested shares issuable upon exercise of options that are currently
exercisable and if exercised would be subject to the Company's right of
repurchase.
(9) Mr. Dunlevie. Includes 407,472 shares beneficially owned by entities
-------------
affiliated with Benchmark Capital Management Co., LLC., of which Mr.
Dunlevie is a managing member. Also includes 57,500 shares issuable upon
exercise of options that are currently exercisable or will become
exercisable within 60 days after September 24, 1999 and if exercised would
be subject to the Company's right of repurchase.
(10) Mr. McCloskey. Mr. McCloskey holds zero shares of record.
--------------
(11) Mr. McNulty. Includes 4,167 unvested shares which are subject to repurchase
------------
by the Company, at the purchase price paid per share, in the event of Mr.
McClosky's early termination of service with the Company.
68
<PAGE>
(12) Mr. Shtivelman. Includes 50,000 shares that remain subject to vesting and
---------------
repurchase by the Company and 1,800 shares held by his daughter. Also
includes 100,000 unvested shares that are exercisable and, to the extent
exercised, subject to repurchase by the Company, at the purchase price paid
per share, in the event of Mr. Shtivelman's early termination of service
with the Company.
(13) All current officers and directors as a group Includes (i) 783,750 shares
issuable upon exercise of stock options that are exercisable or will become
exercisable within 60 days after September 24, 1999 and (ii) 134,750
unvested shares which are subject to repurchase by the Company, at the
purchase price paid per share, in the event of the officer's early
termination of service with the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the hiring its Chief Executive Officer, Ori Sasson
and the acquisition of Plato in December 1998, the Company recorded
non-recurring charges totaling $11.8 million related to compensation, consisting
of common stock valued at $5.6 million and $6.2 million of tax reimbursements
paid or accrued to Mr. Sasson and an additional $0.6 million of compensation
paid or accrued to other Plato employees. In addition, the Company recorded $3
million of non-recurring charges related to an employment and severance
agreement with Michael McCloskey, the Company's former President and Chief
Financial Officer. See "Notes to Consolidated Financial Statements, No. 2,
Non-Recurring Charges" and "Employment Contracts, Termination of Employment and
Change in Control Arrangements."
69
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of Documents filed as part of this Annual Report on Form 10-K.
1. The following consolidated financial statements of the Company are
filed in Part II, Item 8 of this Report on Form 10-K:
Report of Independent Public Accountants
Consolidated Balance Sheets--June 30, 1998 and 1997
Consolidated Statements of Operations for the years ended June 30, 1998,
1997 and 1996
Consolidated Statements of Shareholders' Equity for the years ended June
30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended June 30, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
The following financial statement schedule of the Company is filed in Part
IV, Item 14(d) of this Annual Report on Form 10-K:
Schedule II--Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the consolidated financial statements or
notes thereto.
3. Exhibits.
3.1(4) Restated Articles of Incorporations, filed with the California
Secretary of State on June 27, 1997
3.2(2) Amended and Restated Bylaws
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2(1) Specimen Common Stock certificate
4.3(1) Series A Preferred Stock Purchase Agreement, dated March 29, 1996
among Genesys and the investors named therein.
4.4(1) Common Stock Purchase Warrant, dated April 26, 1996 between
Genesys and Benchmark Capital Partners, L.P.
70
<PAGE>
4.5(1) Series B Preferred Stock Purchase Agreement, dated June 13, 1996
among Genesys and the investors named therein.
4.6(1) Securities Purchase Agreement, dated February 26, 1997, between
Genesys and MCI Telecommunications Corporation ("MCI").
4.7(1)(5) Warrant to Purchase Share of Series C Preferred Stock, dated
February 26, 1997, between Genesys and MCI.
4.8(1) Series C Preferred Stock and Warrant Purchase Agreement, dated
February 26, 1997, between Genesys and Intel Corporation
("Intel").
4.9(1)(5) Warrant to Purchase Shares of Series Preferred Stock, dated
February 26,1997, between Genesys and Intel.
4.10(1) Stock Exchange Agreement, dated February 26, 1997, between Genesys
and Bruncor, Inc. ("Bruncor").
4.11(1) Registration Rights Agreement, dated February 26, 1997, among
Genesys and the investors named therein.
10.1(1) Credit Line with Imperial Bank, dated October 28, 1996.
10.2(1) Facilities Lease, dated July 1, 1996, between Genesys and 1155
Market Partners, with modifications, dated January 21, 1997 and
January 30, 1997.
10.3(1)(5) Master Software License Agreement, dated January 31,
1996,including Addendum to Master License Agreement, dated
February 1, 1996, as amended on February 26, 1997 by and between
Genesys and MCI.
10.4(1)(5) Software Maintenance Agreement, dated January 31, 1996, as amended
on February 26, 1997 by and between Genesys and MCI.
MANAGEMENT CONTRACT, COMPENSATORY PLAN, CONTRACT OR ARRANGEMENT
(Exhibits 10.5-10.21)
10.5(1) Form of Indemnification Agreement entered into between Genesys and
its directors and officers.
10.6(1) 1995 Stock Option Plan, as amended.
10.7(1) Form of Registrant's Restricted Stock Purchase Agreement.
10.8(1) 1997 Stock Incentive Plan and underlying agreements.
10.9(1) Employee Stock Purchase Plan and underlying agreements.
10.10(3) Form of Written Compensation Agreement, Notice of Grant and Option
Agreement.
10.11(3) Plato Software Corporation 1998 Share Option Plan and underlying
agreements.
10.12(3) Next Age Technologies, Inc. 1998 Equity Incentive Plan and
underlying agreements.
10.13(2) Mutual Executive Separation and Independent Consulting Agreement
by and between Genesys and Gregory Shenkman, dated October 27,
1998.
10.14(2) Employment and Severance and Independent Consulting Agreement by
and between Genesys and Michael McCloskey, dated December 11,
1998.
71
<PAGE>
10.15(2) Employment Offer Letter by and between Genesys and Ori Sasson,
dated December 9, 1998.
10.16(4) Employment Offer Letter by and between Genesys and Richard
DeGolia, dated March 5, 1996.
10.17(4) Employment Offer Letter by and between Genesys and Yuri
Shtivelman, dated June 6, 1996.
10.18(4) Employment Offer Letter by and between Genesys and Donald Hunt,
executed December 12, 1998.
10.19(4) Employment Offer Letter by and between Genesys and Christopher
Brennan, dated April 8, 1999.
10.20(4) Employment Offer Letter by and between Genesys and Ad P. Nederlof,
dated February 5, 1999.
21.1(4) Subsidiaries of Genesys.
23.1 Consent of Independent Public Accountants.
27(4) Financial Date Schedule (submitted for SEC use only).
- ------------------------------------------------------------------------------
(1) Incorporated by reference to Genesys' Registration Statement on Form S-1
filed on April 3, 1997 (File No. 333-24479).
(2) Incorporated by reference herein to Genesys' Form 10-Q for the quarter
ended December 31, 1998 and filed on February 16, 1999.
(3) Incorporated by reference herein to Genesys' Form S-8 filed on July 12,
1999.
(4) Incorporated by reference herein to Genesys' Form 10-K for the fiscal year
ended June 30, 1999 and filed on September 28, 1999.
(5) Confidential treatment requested as to certain portions of these exhibits
(b) Reports on Form 8-K.
None.
72
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on October 27, 1999.
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
By: /s/ Ori Sasson
-------------------------------------
Ori Sasson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Ori Sasson President, Chief Executive Officer and October 27, 1999
- ---------------------------------------- Director
Ori Sasson
/s/ Alec Miloslavsky Chief Technical Officer and Vice October 27, 1999
- ---------------------------------------- Chairman of the Board
Alec Miloslavsky
/s/ Christopher Brennan Chief Financial Officer, Senior Vice October 27, 1999
- ---------------------------------------- President, Finance & Administration and
Christopher Brennan Principal Financial Officer
/s/ Stacey M. Wilhelmsen Corporate Controller and Principal October 27, 1999
- ---------------------------------------- Accounting Officer
Stacey M. Wilhelmsen
/s/ Gregory Shenkman Chairman of the Board October 27, 1999
- ----------------------------------------
Gregory Shenkman
/s/ Bruce Dunlevie Director October 27, 1999
- ----------------------------------------
Bruce Dunlevie
Director October 27, 1999
- ----------------------------------------
Paul Levy
</TABLE>
73
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Allowance for Balance at
Doubtful Accounts Beginning of Additions Charged Balance at End
Year ended June 30 Period to Expense Write-Offs Other of Period
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 $789,000 $621,944 $ (566,430) $30,366 $874,880
1998 $377,000 $889,000 $ (477,000) -- $789,000
1997 $426,000 $212,000 $ (261,000) -- $377,000
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
As independent public accountants, we hereby consent to the incorporation of our
report dated July 20, 1999 with respect to the consolidated financial statements
and schedule included in this Form 10-K/A Amendment No. 1 to the Company's
previously filed Registration Statements on Form S-8 (File No. 333-33773, File
No. 333-47609 and File No. 333-82655) and on Form S-3 (File No. 333-80881).
ARTHUR ANDERSEN LLP
San Jose, California
October 28, 1999
