SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------- -------
COMMISSION FILE NUMBER 000-22605
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3120525
(State or other jurisdiction of (IRS EmployerIdentification No.)
incorporation or organization)
1155 MARKET STREET, SAN FRANCISCO, CALIFORNIA 94103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 437-1100
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
TITLE OF EACH CLASS OUTSTANDING AT DECEMBER 31, 1998
Common Stock, no par value 23,399,551 Shares
Genesys Telecommunications Laboratories, Inc.
FISCAL SECOND QUARTER 1999 FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements 3
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 15
ITEM 2. Changes in Securities and Use of Proceeds 16
ITEM 3. Defaults Upon Senior Securities 16
ITEM 4. Submission of Matters to a Vote of
Security Holders 16
ITEM 5. Other Information 16
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 1998
and June 30, 1998 4
Condensed Consolidated Statements of Operations for the
three and six months ended December 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for the six
months ended December 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, June 30,
1998 1998
------------- ----------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 42,469 $ 30,256
Short-term investments 14,816 16,985
Accounts receivable, net 33,744 28,007
Prepaid expenses and other 9,649 8,314
-------- --------
Total current assets 100,678 83,562
PROPERTY AND EQUIPMENT, net 17,697 14,675
OTHER ASSETS 6,829 6,463
-------- --------
$125,204 $104,700
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 62 $ 243
Current portion of long-term obligations 33 33
Accounts payable 4,147 4,520
Accrued payroll and related benefits 11,069 3,702
Other accrued liabilities 8,971 5,674
Deferred revenues 18,864 16,805
-------- --------
Total current liabilities 43,146 30,977
-------- --------
LONG-TERM OBLIGATIONS 85 102
-------- --------
SHAREHOLDERS' EQUITY:
Common stock 87,022 72,356
Shareholder notes receivable (316) (440)
Cumulative translation adjustment 17 (188)
Retained earnings (Accumulated deficit) (4,750) 1,893
-------- --------
Total shareholders' equity 81,973 73,621
-------- --------
$125,204 $104,700
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Quarter Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited)
REVENUES:
License $ 26,030 $ 15,677 $ 49,692 $ 28,944
Service 6,188 3,472 11,534 6,445
--------- -------- -------- --------
Total revenues 32,218 19,149 61,226 35,389
--------- -------- -------- --------
COST OF REVENUES:
License 1,163 831 2,215 1,502
Service 4,506 2,229 8,561 4,050
--------- -------- -------- --------
Total cost of revenues 5,669 3,060 10,776 5,552
--------- -------- -------- --------
GROSS MARGIN 26,549 16,089 50,450 29,837
--------- -------- -------- --------
OPERATING EXPENSES:
Research and development 6,144 3,667 11,548 6,726
Sales and marketing 11,103 8,445 21,505 15,395
General and administrative 2,510 2,019 5,212 3,881
Merger costs - 905 - 905
Non-recurring charges 15,488 - 15,488 -
--------- -------- -------- --------
Total operating expenses 35,245 15,036 53,753 26,907
--------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS (8,696) 1,053 (3,303) 2,930
INTEREST AND OTHER INCOME (EXPENSE), NET 400 394 884 729
--------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (8,296) 1,447 (2,419) 3,659
PROVISION FOR INCOME TAXES 2,167 294 4,224 1,110
--------- -------- -------- --------
NET INCOME (LOSS) $ (10,463) $ 1,153 $ (6,643) $ 2,549
========= ======== ======== ========
BASIC NET INCOME (LOSS) PER SHARE $ (0.45) $ 0.06 $ (0.29) $ 0.12
========= ======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE $ (0.45) $ 0.04 $ (0.29) $ 0.09
========= ======== ======== ========
BASIC WEIGHTED AVERAGE COMMON SHARES 23,200 20,800 22,900 20,800
========= ======== ======== ========
DILUTED WEIGHTED AVERAGE COMMON SHARES 23,200 26,800 22,900 26,900
========= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
GENESYS TELECOMMUNICATIONS
LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Six Months
Ended December 31,
1998 1997
-------- --------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,643) $ 2,549
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred stock compensation expense 238 238
Depreciation and amortization 4,337 1,759
Provision for doubtful accounts 200 579
Non-cash portion of Non-recurring charges 9,426 --
Changes in operating assets and liabilities:
Accounts receivable (5,937) (1,811)
Prepaid expenses and other (1,335) (755)
Accounts payable (373) (266)
Accrued payroll and related benefits 7,367 164
Other accrued liabilities 3,297 1,383
Deferred revenues 2,059 2,795
-------- --------
Net cash provided by operating activities 12,636 6,635
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (14,436) (23,840)
Sales of short-term investments 16,605 --
Purchases of property and equipment (6,199) (4,878)
(Increase) decrease in other assets (939) (303)
-------- --------
Net cash used in investing activities (4,969) (29,021)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of note payable -- (241)
Principal payments on capital lease obligations (181) (35)
Repayments of long-term obligations (17) (209)
Proceeds from sales of common stock 4,744 244
-------- --------
Net cash provided by used in financing activities 4,546 (241)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,213 (22,627)
CASH AND CASH EQUIVALENTS:
Beginning of Period 30,256 47,160
-------- --------
End of Period $ 42,469 $ 24,533
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
GENESYS TELECOMMUNICATIONS LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been prepared
by Genesys Telecommunications Laboratories, Inc. (the Company) without audit and
reflect all adjustments which are, in the opinion of management, necessary for a
fair presentation of the financial position and the results of operations of the
Company for the interim periods. The statements have been prepared in accordance
with the regulations of the Securities and Exchange Commission (SEC).
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles. The results of operations for the
three and six months ended December 31, 1998 are not necessarily indicative of
the operating results to be expected for the full fiscal year or future
operating periods. The information included in this report should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the fiscal year ended June 30, 1998 and the risk factors as set forth in the
Company's Annual Report on Form 10-K, including, without limitation, risks
relating to limited operating history, potential fluctuations in quarterly
operating results, lengthy sales cycle, lengthy implementation cycle, dependence
on third party consultants, dependence on new products, rapid technological
change, competition, product concentration, management of growth, dependence on
third-party resellers, customer concentration, dependence on emerging CTI
market, risks associated with international sales and operations, dependence on
key personnel, government regulation of immigration, dependence on ability to
integrate with third-party technology, product liability, protection of
intellectual property, concentration of stock ownership, possible volatility of
stock price, shares eligible for future sale, registration rights, effect of
certain charter provisions, anti-takeover effects of provisions of the by-laws
and uncertainty as to use of proceeds. Any party interested in reviewing these
publicly available documents should write to the SEC or the Chief Financial
Officer of the Company.
2. CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated.
7
3. NET INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which
was adopted by the Company in the quarter ended December 31, 1997, and in
accordance with this standard all prior periods presented have been restated to
conform to its provisions. Under the new requirements for calculating earnings
per share, the dilutive effect of potential common shares is excluded from basic
net income (loss) per share. Diluted net income (loss) per share is computed
using the weighted average number of common and potential common shares
outstanding during the period. Potential common shares consist of preferred
stock (using the "if converted" method) and stock options and warrants (using
the treasury stock method). Potential common shares are excluded from the
dilutive computation only if their effect is anti-dilutive. In February 1998,
the Securities and Exchange Commission issued Staff Accounting Bulletin 98,
which included SEC requirements related to the adoption of SFAS 128. The Company
applied these provisions to the calculation of basic and diluted weighted
average shares outstanding for all periods presented in the accompanying
statements of operations.
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):
Quarter
Ended
December 31,
---------------
1998 1997
------ ------
Weighted average common shares outstanding 23,200 19,948
Shares issued in acquisition of Forte - 667
------ ------
BASIC WEIGHTED AVERAGE COMMON SHARES 23,200 20,615
====== ======
Weighted average options and warrants for common stock - 6,180
------ ------
DILUTED WEIGHTED AVERAGE COMMON SHARES 23,200 26,795
====== ======
Potential weighted average common shares totaling 3.6 million and 3.3 million
have been excluded from diluted weighted average common shares for the three
and six months ended December 31, 1998, respectively, as their inclusion would
be anti-dilutive.
4. NON-RECURRING CHARGES
Executive Management Additions and Acquisition of Plato Software
----------------------------------------------------------------
Corporation
-----------
In December 1998, the Company hired Ori Sasson as its Chief Executive Officer
and elected him as a member of the Board of Directors of Genesys. In connection
with the hiring of Mr. Sasson, the Company also completed the acquisition of
Plato Software Corporation, a Delaware corporation ("Plato"), a company in which
Mr. Sasson was a principal shareholder. The merger was completed pursuant to an
Agreement and Plan of Reorganization ("Merger Agreement") dated as of December
9, 1998. As Plato did not have significant operations or revenue prior to the
acquisition, the Company has treated the purchase as the acquisition of an
asset.
Pursuant to the Merger Agreement, the Company issued 202,500 shares of its
Common Stock in exchange for all outstanding shares of Plato Common Stock, and
issued options to purchase 47,500 shares of Genesys Common Stock in exchange
for all outstanding Plato Stock options. A total of 50,000 shares have been
placed into an escrow subject to the satisfaction of all representations and
warranties under the terms and conditions of the Merger Agreement. The Company
recorded the fair value of net
8
assets purchased from Plato, which consisted of certain technology to be
incorporated into the Genesys products, totaling $382,000 as of December 31,
1998.
As the acquisition of Plato was consummated in connection with the election of
Ori Sasson as Chief Executive Officer and a member of the Board of Directors of
the Company, the Company recorded as expense the portion of the shares and
options issued that represented compensation to Mr. Sasson and other Plato
employees. Deferred compensation totaling $800,000 related to unvested options
will be amortized over the remaining vesting period of the options of
approximately 4 years. In addition, the Company recorded as expense its
reimbursement to Mr. Sasson of the tax liabilities associated with this
compensation. The total amount of compensation expense and related tax
reimbursements associated with this transaction was approximately $12.4 million,
and was reflected as part of a non-recurring charge in the Company's financial
statements.
Compensation to Former President and Chief Financial Officer
------------------------------------------------------------
The Company recorded $3.1 million of non-recurring charges related to an
employment and severance agreement dated December 11, 1998 with its former
President and Chief Financial Officer.
4. LITIGATION
In November 1998, GeoTel Communications Corporation ("GeoTel") and the Company
settled the litigation between them concerning GeoTel's United States Patent No.
5,546,452 on terms which both companies believe not to be material to their
financial results. Pursuant to the settlement, GeoTel will receive license fees
from Genesys for ongoing revenues generated from certain products in exchange
for a nonexclusive, irrevocable license to use the technology covered by
GeoTel's 452 Patent or any related patent in all present and future Genesys
products which incorporate such technology.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), which
was adopted by the Company in its first fiscal quarter of 1999. SOP 97-2
clarifies and amends certain provisions of Statement of Position 91-1, "Software
Revenue Recognition". The adoption of the provisions of SOP 97-2 did not have a
material impact on the Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which was adopted by the Company in its first quarter of fiscal 1999.
Accordingly, the Company is required to disclose, in financial statement format,
all non-owner changes in equity. Such changes include, for example, cumulative
foreign currency translation adjustments, certain minimum pension liabilities
and unrealized gains and losses on available-for-sale securities. The Company's
only reconciling item to comprehensive income from net income is cumulative
translation adjustments resulting from foreign currency exchange rates, the net
effect of which is immaterial to the Company's financial statements for the
periods presented.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which establishes standards
for reporting information about operating segments in annual financial
statements and interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. As defined in SFAS 131, operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. The Company will adopt SFAS 131 for the year ended June 30, 1999. The
Company believes the adoption of SFAS 131 will not have a material impact on its
financial statements.
9
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Company does
not expect the adoption of SFAS 133, required beginning the first fiscal quarter
of 2000, to have a material effect on its consolidated financial statements.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Genesys Telecommunications Laboratories, Inc (''Genesys'' or the ''Company'') is
a leading provider of enterprise-wide customer interaction, computer telephony
and e-mail software solutions. The Company's products allow an organization
to optimally manage its customer interactions and employee communications to
increase productivity, lower costs and achieve greater customer satisfaction and
loyalty. To accomplish this, Genesys' software-based solutions integrate and
extend the capabilities of an organization's computer, telecommunications and
database systems, bringing together what were once disparate technologies. The
Company believes that as customer interactions are increasingly viewed as
strategic to an organization's mission, call center capabilities will be
extended beyond traditional agent, site and switch boundaries, transforming the
entire enterprise into a customer interaction network.
EXECUTIVE MANAGEMENT ADDITIONS AND ACQUISITION OF PLATO SOFTWARE CORPORATION
In December 1998, the Company appointed Ori Sasson as its Chief Executive
Officer and elected him as a member of the Board of Directors of Genesys. In
connection with the hiring of Mr. Sasson, the Company also completed the
acquisition of Plato Software Corporation, a Delaware corporation ("Plato"), a
company in which Mr. Sasson was a principal shareholder. The merger was
completed pursuant to an Agreement and Plan of Reorganization ("Merger
Agreement") dated as of December 9, 1998. As Plato did not have significant
operations or revenue prior to the acquisition, the Company has treated the
purchase as the acquisition of an asset.
Pursuant to the Merger Agreement, the Company issued 202,500 shares of its
Common Stock in exchange for all outstanding shares of Plato Common Stock, and
issued options to purchase 47,500 shares of Genesys Common Stock in exchange
for all outstanding Plato stock options. A total of 50,000 shares have been
placed into an escrow subject to the satisfaction of all representations and
warranties under the terms and conditions of the Merger Agreement. The Company
recorded the fair value of net assets purchased from Plato, which consisted of
certain technology to be incorporated into the Genesys products, totaling
$382,000 as of December 31, 1998.
As the acquisition of Plato was consummated in connection with the election of
Ori Sasson as Chief Executive Officer and a member of the Board of Directors of
the Company, the Company recorded as expense the portion of the shares and
options issued that represented compensation to Mr. Sasson and other Plato
employees. Deferred compensation totaling $800,000 related to unvested options
will be amortized over the remaining vesting period of the options of
approximately 4 years. In addition, the Company recorded as expense its
reimbursement to Mr. Sasson of the tax liabilities associated with this
compensation. The total amount of compensation expense and related tax
reimbursements associated with this transaction was approximately $12.4 million,
and was reflected as part of a non-recurring charge in the Company's financial
statements.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data of the Company
expressed as a percentage of total revenues for the years and periods indicated.
Three Months Ended Three Months Ended
December 31, December 31,
1998 1997 1998 1997
------ ------ ------ ------
REVENUES:
License 80.8% 81.9% 81.2% 81.8%
Service 19.2 18.1 18.8 18.2
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
COST OF REVENUES:
License 3.6 4.4 3.6 4.2
Service 14.0 11.6 14.0 11.5
----- ----- ----- -----
Total cost of revenues 17.6 16.0 17.6 15.7
----- ----- ----- -----
GROSS MARGIN 82.4 84.0 82.4 84.3
----- ----- ----- -----
OPERATING EXPENSES:
Research and development 19.1 19.2 18.9 19.0
Sales and marketing 34.5 44.1 35.1 43.5
General and administrative 7.8 10.5 8.5 11.0
Merger-related costs 0.0 4.7 0.0 2.5
Non-recurring charges 48.1 0.0 25.3 0.0
----- ----- ----- -----
Total operating expenses 109.5 78.5 87.8 76.0
----- ----- ----- -----
INCOME (LOSS) FROM OPEARATIONS -27.1 5.5 -5.4 8.3
OTHER INCOME (EXPENSE), NET 1.2 2.1 1.4 2.1
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES -25.9 7.6 -4.0 10.3
PROVISION FOR INCOME TAXES 6.7 1.5 6.9 3.1
----- ----- ----- -----
NET INCOME (LOSS) -32.6% 6.0% -10.9% 7.2%
===== ===== ===== =====
11
Revenues
License. License revenues increased by 66% from $15.7 million in the three
months ended December 31, 1997 to $26.0 million in the three months ended
December 31, 1998. License revenues increased by 71.7% from $28.9 million in
the first six months of fiscal 1998 to $49.7 million in the first six months of
fiscal 1999. This increase resulted from the market's growing acceptance of
the Company's products and underlying technology, an expansion of the Company's
product offerings, and a significant increase in the Company's sales, marketing
and customer service organizations. The Company does not believe that the
historical growth rates of license revenues will be sustainable or are
indicative of future results.
Service. Service revenues primarily comprise fees from consulting, post-contract
support and, to a lesser extent, training services. Service revenues increased
by 78.2% from $3.5 million in the three months ended December 31, 1997 to $6.2
million in the three months ended December 31, 1998. Service revenues increased
by 79.0% from $6.4 million in the first six months of fiscal 1998 to $11.5
million in the first six months of fiscal 1999. The Company's software license
agreements often provide for maintenance, consulting and training. Accordingly,
increases in licensing activity have resulted in increases in revenues from
services related to maintenance, consulting and training.
Service revenues are largely dependent upon the extent to which product
implementations are performed by internal professional services personnel versus
third party organizations such as systems integrators. To the extent that the
Company utilizes more internal resources to perform product implementations,
service revenues could increase as a percentage of total revenues. Conversely,
if the Company utilizes to a greater extent third-party organizations such as
systems integrators to implement the Company's products, service revenues may
decrease as a percentage of total revenues. Maintenance revenues as a
percentage of total revenues are expected to increase due to continued expansion
of the Company's installed base. The Company does not believe that the
historical growth rates of service revenues will be sustainable or are
indicative of future results.
Cost of Revenues
License. Cost of license revenues includes the costs of product media, product
duplication and manuals, as well as allocated labor and overhead costs
associated with the preparation and shipment of products. Cost of license
revenues were $1.2 million and $0.8 million in the three months ended December
31, 1998 and 1997, respectively, and $2.2 million and $1.5 million in the six
months ended December 31, 1998 and 1997, respectively. The increase in absolute
dollar amounts relates primarily to an increase in the volume of products
shipped by the Company, and the resulting increase in documentation material
costs and personnel necessary to assemble and ship the products. Also included
in cost of license revenues is amortization of capitalized software costs
amounting to approximately $132,000 and $37,000 for the three months ended
December 31, 1998 and 1997, respectively, and $411,000 and $100,000 for the six
months ended December 31, 1998 and 1997, respectively.
Service. Cost of service revenues are primarily comprised of employee-related
costs incurred in providing consulting, post-contract support and training
services. Cost of service revenues were $4.5 million and $2.3 million in the
three months ended December 31, 1998 and 1997, respectively, and $8.6 million
and $4.1 million in the six months ended December 31, 1998 and 1997,
respectively. The increase in absolute dollars was due primarily to increases in
consulting, support and training personnel, and increases in overhead costs
associated with travel, computer equipment and facilities. The cost of service
revenues as a percentage of service revenues may vary between periods due to the
mix of services provided by the Company and the resources used to provide these
services.
Operating Expenses
For the three months ended December 31, 1998 and 1997, the Company's operating
expenses were $35.2 million and $15.0 million, or 109.5% and 78.5% of total
revenues, respectively. For the six months ended December 31, 1998 and 1997,
operating expenses were $53.7 million and $26.9 million, or 87.8% and 76.0% of
total revenues, respectively.
12
Research and Development. Research and development expenses were $6.1 million
and $3.7 million, or 19.1% and 19.2% of total revenues in the three months ended
December 31, 1998 and 1997, respectively, and $11.5 million and $6.7 million, or
18.9% and 19.0% of total revenues in the six months ended December 31, 1998 and
1997, respectively. These expenses increased in absolute dollars primarily as a
result of an increase in personnel to support the Company's product development
activities. The Company expects that research and development expenditures will
continue to increase in absolute dollars.
Research and development expenses are generally charged to operations as
incurred. In accordance with Statement of Financial Accounting Standards No.
86, the Company capitalized approximately $100,000 and $150,000 of software
development costs incurred in the three months ended December 31, 1998 and
1997, respectively, and $500,000 and $450,000 in the six months ended December
31, 1998 and 1997, respectively, related to the development of its product
suite.
Sales and Marketing. Sales and marketing expenses were $11.1 million and $8.4
million, representing 34.5% and 44.1% of total revenues in the three months
ended December 31, 1998 and 1997, respectively, and $21.5 million and $15.4
million, or 35.1% and 43.5% of total revenues in the six months ended December
31, 1998 and 1997, respectively. These expenses increased in absolute dollars
primarily due to the Company's continuing investment in building a direct sales
force to support the increasing demand for its products, and the Company's
investment in expanding its channel sales force in North America, Europe and the
Asia Pacific. In addition, the Company incurred increased marketing expenses
associated with the Company's expanding product line, including trade shows and
promotional expenses. The Company has recently hired several senior sales and
marketing executives, including a Vice President of Worldwide Field Operations,
a Vice President of North American Direct Sales, and a Vice President of North
American Channel Sales. The Company expects to hire additional personnel in the
near future, including a Vice President of Marketing. The Company expects an
increase in expenses related to the hiring of these and other new personnel.
The Company expects to continue to expand its direct sales and marketing
efforts, and therefore, anticipates sales and marketing expenditures will
continue to increase significantly in absolute dollars.
General and Administrative. General and administrative expenses were $2.5
million and $2.0 million, or 7.8% and 10.5% of total revenues in the three
months ended December 31, 1998 and 1997, respectively, and $5.2 million and $3.9
million, or 8.5% and 11.0% of total revenues in the six months ended December
31, 1998 and 1997, respectively. These expenses increased in absolute dollars
during these periods principally due to the addition of staff and information
system investments to support the growth of the Company's business during
these periods. In addition, the Company has incurred higher legal costs
associated primarily with general corporate matters, trademark matters and
patent filings. The Company plans to hire a new Chief Financial Officer in the
near future. The Company expects to continue to increase its general and
administrative staff and to incur other costs necessary to manage a growing
organization, and accordingly, it expects general and administrative expenses
to continue to increase in absolute dollars. General and administrative
expenses as a percentage of total revenues have decreased from 10.5% in the
second quarter of fiscal 1998 to 7.8% in the second quarter of fiscal 1999,
due principally to the significant investments made by the Company in 1998
relative to total revenues in anticipation of significant growth during fiscal
1998 and 1999. The Company expects to continue to increase general and
administrative expenses in absolute dollars, but expects that these expenses
as a percentage of total revenues will stabilize.
Merger Costs. The Company incurred $905,000 of merger costs in connection with
the merger of Forte Advanced Management Software, Inc. during the three and six
months ended December 31, 1997. The costs consisted primarily of legal and
accounting fees.
Non-recurring Charges. In connection with the hiring of Ori Sasson as the
Company's Chief Executive Officer, the Company recorded non-recurring charges
totaling $11.6 million related to compensation and tax reimbursements paid or
accrued to Mr. Sasson, and an additional $802,000 of compensation paid or
accrued to certain employees of Plato. In addition, the Company recorded $3.1
million of non-recurring charges related to an employment and severance
agreement dated December 11, 1998 with its former President and Chief Financial
Officer.
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Provision for Income Taxes
Excluding the effect of the non-recurring charges recorded during the quarter,
the Company's effective tax rate for the three months ended December 31, 1998
was 35%, which the Company estimates will be the effective tax rate for the
remainder of fiscal 1999. Due to permanent limitations on the deductibility for
tax purposes of executive compensation, the Company did not record any tax
benefit related to the non-recurring charges recorded during the quarter, which
resulted in a tax provision of $2.2 million even though the Company incurred a
pre-tax loss of $8.3 million. The Company's effective tax rate for the year
ended June 30, 1998 was 34%.
Year 2000
Many computer systems experience problems handling dates beyond the year 1999.
Therefore, some computer hardware and software will need to be modified prior to
the year 2000 in order to remain functional. The Company is assessing both the
internal readiness of its computer systems and the compliance of its computer
products and software sold to customers for handling the year 2000. The Company
has designed and tested current versions of its products to be year 2000 ready.
Some of the Company's customers might be running older product versions that
might not be year 2000 ready. It is possible that the Company may experience
increased expenses in addressing migration issues for these customers. In
addition, there can be no assurances that the Company's current products do not
contain undetected errors or defects associated with year 2000 date functions
that may result in material costs to the Company. Some commentators have stated
that a significant amount of litigation will arise out of year 2000 compliance
issues. Because of the unprecedented nature of such litigation, it is uncertain
whether or to what extent the Company may be affected by it. Although the
Company does not believe that it will incur any material costs or experience
material disruptions in its business associated with preparing its internal
systems for the year 2000, there can be no assurance that the Company will not
experience serious unanticipated negative consequences and/or material costs
caused by undetected errors or defects in the technology used in its internal
systems, which are composed predominantly of third party software and hardware
technology with embedded software, and the Company's own software products.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company's primary sources of liquidity included
cash and cash equivalents of $42.5 million and short-term investments of $14.8
million.
The Company generated cash from operating activities of $12.6 million in the six
months ended December 31, 1998 related primarily to an increase in net income,
accrued liabilities and deferred revenues, which was offset in part by an
increase in accounts receivable. The Company generated cash from operating
activities of $6.6 million in the six months ended December 31, 1997 related
primarily to an increase in net income and deferred revenues, offset in part
by an increase in accounts receivable.
The Company generated cash from the net maturity of $2.2 million of short-term
investments in the six months ended December 31, 1998. The Company used cash of
$6.2 million for the purchase of property and equipment in the six months ended
December 31, 1998. The Company used cash to purchase $23.8 million of short-
term investments and $4.9 million of property and equipment in the six months
ended December 31, 1997.
The Company has established subsidiaries in foreign countries, including the
United Kingdom, France, Germany, Sweden, Canada, Russia, Japan, Singapore and
Australia, which function primarily as sales offices in those locations. The
Company expects to establish offices in other foreign countries as it continues
to expand its international operations. The capital expenditures necessary to
establish a foreign office are not significant, and, 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.
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QUARTERLY RESULTS OF OPERATIONS AND FORWARD LOOKING STATEMENTS
The Company's quarterly operating results have in the past fluctuated and may in
the future fluctuate significantly, depending on a number of factors, many of
which are beyond the Company's control, including: market acceptance of the
Company products; competition; the size, timing and recognition of revenue from
significant orders; the Company's ability to develop and market new products and
product enhancements; new product releases by the Company and its competitors
and the timing of such releases; the length of sales and implementation cycles;
the Company's ability to integrate acquired business; the Company's success in
establishing indirect sales channels and expanding its direct sales force; the
Company's success in retaining and training third-party support personnel; the
delay or deferral of significant revenues until acceptance of software required
by an individual license transaction; technological changes in the market for
the Company's products; the deferral of customer orders in anticipation of new
products and product enhancements; purchasing patterns of indirect channel
partners and customers; changes in pricing policies by the Company and its
competitors; the mix of revenues derived from the Company's direct sales force
and various indirect distribution and marketing channels; the mix of revenues
derived from domestic and international customers; seasonality; changes in
operating expenses; changes in relationships with strategic partners; changes in
Company strategy; personnel changes; foreign currency exchange rate
fluctuations; the ability of the Company to control its costs; and general
economic factors.
While the Company generally operates with limited backlog, from time to time it
receives orders from customers that are for project development over an extended
period of time. The Company derives substantially all of its revenues from
licenses of the Company's platform and related applications software and
services. The Company believes that the purchase of its products is relatively
discretionary and generally involves a significant commitment of capital and
other resources by a customer. The Company's typical order size ranges from
$200,000 to $400,000; however, several orders during the three months ended
December 31, 1998 exceeded $500,000 each. The timing of the receipt and
shipment of a single order can have a significant impact on the Company's
revenues and results of operations for a particular quarter. In situations
requiring customer acceptance of implementation, the Company does not recognize
license revenues until installations are complete and does not recognize the
consulting component of service revenues until the services are rendered. As a
result, revenue recognition may be delayed in many instances. Historically, the
Company has often recognized a substantial portion of its revenues in the last
month of a quarter, with these revenues frequently concentrated in the last two
weeks of a quarter. As a result, product revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter, and
revenues for any future quarter are not predictable with any meaningful degree
of certainty. Product revenues are also difficult to forecast because the
market for the Company's software products is rapidly evolving, and the
Company's sales cycle, which may last from three to nine months or more, varies
substantially from customer to customer. The Company's quarterly revenues are
also subject to seasonal fluctuations, particularly in the quarter ending in
September when reduced activity outside North America during the summer months
can adversely affect the Company's revenues. The Company's expenses are
relatively fixed and are based, in part, on expectations as to future revenues.
Consequently, if future revenue levels were below expectations, net income would
be disproportionately affected because a proportionately smaller amount of the
Company's expenses varies with its revenues. In addition, the Company expects
that sales derived through indirect channels, which are more difficult to
forecast and generally have lower gross margins than direct sales, will increase
as a percentage of total revenues. Due to all of the foregoing factors, the
Company believes that period-to-period comparisons of its results of operations
are not meaningful and should not be relied upon as indications of future
performance. It is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock would likely be
materially adversely affected.
Because of these factors, the Company believes that period-to-period comparisons
of its results of operations are not necessarily meaningful and that such
comparisons should not be relied upon as indications of future performance.
Certain statements contained in this Quarterly Report on Form 10-Q, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, constitute "forward looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934 regarding events, conditions and financial trends that may affect the
Company's future plans, business strategy, results of operations and
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financial position. Readers are referred to the "Risk Factors" section of the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission, which identify important risk factors that could cause actual
results to differ from those contained in the forward-looking statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In November 1998, GeoTel Communications Corporation ("GeoTel") and the Company
settled the litigation between them concerning GeoTel's United States Patent No.
5,546,452 on terms which both companies believe not to be material to their
financial results. Pursuant to the settlement, GeoTel will receive license fees
from Genesys for ongoing revenues generated from certain products in exchange
for a nonexclusive, irrevocable license to use the technology covered by
GeoTel's 452 Patent or any related patent in all present and future Genesys
products which incorporate such technology.
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ITEM 2. Changes in Securities and Use of Proceeds
During the period covered by this report, there were no changes in the rights of
holders of any class of securities of the Company and no unregistered sales of
equity securities.
On June 16, 1997, the Company's registration statement on Form S-1 (SEC File No.
333-24479) was declared effective. The registration statement registered for
offer and sale 2,500,000 (2,875,000 shares including over-allotments) of the
Company's Common Stock, no par value, for an aggregate price of $45 million
($51.75 million including over-allotments) (the "Offering"). Pursuant to the
Offering, which was completed in June 1997, the Company sold 2,375,000 shares,
including over-allotments, of Common Stock and certain shareholders of the
Company sold 500,000 shares of Common Stock. The shares in the Offering were
sold in a firm commitment underwriting that was co-managed by Goldman Sachs &
Company, Lehman Brothers and Robertson, Stephens & Company (now known as
BancBoston Robertson Stephens). The amount of underwriting expenses incurred by
the Company in connection with the Offering were approximately $1,990,500,
resulting in net proceeds to the Company in the amount of $37,137,000.
As of December 31, 1998, none of the net proceeds from the Offering have been
used by the Company, and the net proceeds are held in cash or high-grade short-
term investments. The Company's planned use of proceeds is as described in the
registration statement.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Information
In December 1998, Ori Sasson was elected as Chief Executive Officer and
appointed to the Board of Directors of the Company, filling the seat vacated
by the resignation of James Jordan. Greg Shenkman, a Director and the former
Chief Executive Officer of the Company, was appointed Chairman of the Board.
Also in December 1998, the Company entered into a employment and separation
agreement with Michael McCloskey, under which Mr. McCloskey would continue to
provide services to the Company for up to a six-month period. In January 1999,
the Company hired several new officers, including a Vice President of
Worldwide Field Operations, a Vice President of Worldwide Professional
Services, a Vice President of North American Direct Sales and a Vice President
of North American Channel Sales. The Company expects to make other key
management hires in the next several months, including a Vice President of
Marketing and a Chief Financial Officer.
It will be critical to the Company's success that the new management team, as
well future management hires, are successfully integrated into the Company's
operations. The Company's ability to effectively implement its business
strategy is highly dependent on the distributions of the members of its
management team. There can be no assurance that the Company will be able to
retain its existing management personnel, or be successful in filling
additional positions in the next several months. The loss of any of member of
the new management team or the failure to attract or retain other key
management personnel, could have a material adverse effect of the Company's
business, results of operations and financial condition.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibit
------- -------
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3.1 Amended and Restated Bylaws
10.1 Mutual Executive Separation and Independent Consulting Agreement by
and between the Company and Gregory Shenkman, dated October 27, 1998
10.2 Mutual Separation and Independent Consulting Agreement by and
between the Company and John Metcalfe, dated September 11, 1998
10.3 Employment Offer Letter by and between the Company and Ori Sasson,
dated December 9, 1998
10.4 Employment and Severance and Independent Consulting Agreement by and
between the Company and Michael McCloskey, dated December 11, 1998
27.1 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENESYS TELECOMMUNICATIONS
LABORATORIES, INC.
Date: February 16, 1999 By: /s/ Michael J. Sheridan
----------------------------------
Michael J. Sheridan
Vice President, Finance
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