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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21761
GEOTEL COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3194255
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
900 CHELMSFORD STREET, TOWER II, 12TH FLOOR
LOWELL, MASSACHUSETTS 01851
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (978) 275-5100
NO CHANGE SINCE LAST REPORT
(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:
CLASS OUTSTANDING AT NOVEMBER 1, 1997
----------------------------- -------------------------------
Common Stock, $0.01 par value 13,133,552 shares
============================= ===============================
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GEOTEL COMMUNICATIONS CORPORATION
INDEX TO FORM 10-Q
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
Exhibit Index 17
Exhibit 11.1 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GEOTEL COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
------------- ------------
Current assets:
Cash and cash equivalents $ 40,130 $ 33,263
Accounts receivable and account receivable-related party 3,165 2,121
Prepaid expenses and other current assets 1,488 524
-------- --------
Total current assets 44,783 35,908
-------- --------
Property and equipment, net 2,081 1,016
-------- --------
Total assets $ 46,864 $ 36,924
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 658 $ 656
Accrued expenses 1,250 857
Accrued compensation and related accruals 1,440 685
Deferred revenue and deferred revenue-related party 7,322 2,289
-------- --------
Total current liabilities 10,670 4,487
-------- --------
Stockholders' equity:
Preferred stock -- --
Common stock 134 134
Additional paid-in capital 40,428 39,967
Accumulated deficit (3,262) (6,455)
Notes receivable from stockholders (10) (116)
Unearned compensation (1,051) (1,051)
-------- --------
36,239 32,479
Less treasury stock, at cost (45) (42)
-------- --------
Total stockholders' equity 36,194 32,437
-------- --------
Total liabilities and stockholders' equity $ 46,864 $ 36,924
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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GEOTEL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, Ended SEPTEMBER 30,
1997 1996 1997 1996
-------- -------- -------- --------
Revenues:
Software license $ 3,746 $ 1,526 $ 8,946 $ 4,588
Services and other 980 209 2,437 461
Related party licenses and services (Note 3) 433 661 971 1,235
-------- -------- -------- --------
Total revenues 5,159 2,396 12,354 6,284
-------- -------- -------- --------
Cost of Revenues:
Cost of software licenses 153 52 330 235
Cost of services and other 878 372 2,007 988
-------- -------- -------- --------
Total cost of revenues 1,031 424 2,337 1,223
-------- -------- -------- --------
Gross profit 4,128 1,972 10,017 5,061
-------- -------- -------- --------
Operating Expenses:
Research and development 1,015 820 2,819 2,210
Sales and marketing 1,482 773 3,812 1,969
General and administrative 547 259 1,382 705
-------- -------- -------- --------
Total operating expenses 3,044 1,852 8,013 4,884
-------- -------- -------- --------
Income from operations 1,084 120 2,004 177
Interest income 508 46 1,415 131
-------- -------- -------- --------
Income before income taxes 1,592 166 3,419 308
Provision for income taxes 105 -- 226 --
-------- -------- -------- --------
Net income 1,487 166 3,193 308
Accretion of convertible preferred stock to redemption value -- (28) -- (82)
-------- -------- -------- --------
Net income available to common stockholders $ 1,487 $ 138 $ 3,193 $ 226
======== ======== ======== ========
Net income per common and common equivalent share $ 0.11 $ 0.01 $ 0.23 $ 0.02
======== ======== ======== ========
Weighted average number of common and common
equivalent shares outstanding 13,914 11,463 13,811 11,514
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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GEOTEL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
-------- --------
Cash flows from operating activities:
Net income $ 3,193 $ 308
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 547 370
Equity compensation 362 40
Changes in operating assets and liabilities:
Accounts receivable and accounts
receivable-related party (1,044) (1,148)
Prepaid expenses and other current assets (964) (118)
Accounts payable 2 80
Accrued expenses and other current liabilities 1,148 668
Deferred revenue and deferred revenue - related party 5,033 1,314
-------- --------
Net cash provided by operating activities 8,277 1,514
-------- --------
Cash flows used in investing activities -
Purchases of property and equipment, net (1,612) (556)
-------- --------
Cash flows from financing activities:
Proceeds from sale of common stock and option exercises 162 35
Offering costs of registering common stock (63) --
Proceeds from notes receivable for common stock 106 7
Proceeds from sale of convertible preferred stock -- 161
Acquisition of treasury stock (3) --
Proceeds from long-term debt -- 358
Principal payments under long-term debt -- (244)
-------- --------
Net cash provided by financing activities 202 317
-------- --------
Net increase in cash and cash equivalents 6,867 1,275
Cash and cash equivalents, beginning of period 33,263 4,537
-------- --------
Cash and cash equivalents, end of period $ 40,130 $ 5,812
======== ========
The accompanying footnotes are an integral part of these consolidated financial
statements.
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GEOTEL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements for the three and nine month periods
ended September 30, 1997 and the related footnote information are unaudited and
have been prepared on a basis substantially consistent with the 1996 audited
consolidated financial statements, and in the opinion of management include all
adjustments (consisting of only normal recurring adjustments) necessary for fair
presentation of the results of this interim period. These statements should be
read in conjunction with the consolidated financial statements and related notes
for the year ended December 31, 1996 included in the Company's Form 10-K. The
results of operations for the three and nine month periods ended September 30,
1997 are not necessarily indicative of the results to be expected for the entire
year.
GeoTel Communications Corporation (the "Company") develops and markets
telecommunications software solutions, consisting primarily of one product, that
enable enhanced call center applications. The Company currently derives
substantially all of its revenues from licenses of the Intelligent CallRouter
("ICR") and related services.
The preparation of the 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 the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. COMPUTATION OF NET INCOME PER SHARE
Net income per common share is computed based upon the weighted average
number of common and common equivalent shares outstanding (using the treasury
stock method) after certain adjustments described below. Common equivalent
shares consist of the Company's Series A, B and C Convertible Participating
Preferred Stock (collectively, the "Convertible Preferred Stock", and common
equivalent shares from stock options). The Convertible Preferred Stock converted
to common stock upon the closing of Company's initial public offering ("IPO") of
common stock on November 20, 1996. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 83 (SAB No. 83), all Convertible
Preferred Stock, common and common equivalent shares issued during the twelve
month period prior to the IPO have been included in the calculation as if they
were outstanding for all periods prior to the IPO, using the treasury stock
method at the IPO price of $12.00 per share. Fully diluted net income per common
share is not presented as the dilutive effect is immaterial.
3. RELATED PARTY TRANSACTIONS
An investor, representing approximately 9% of the Company's total common
shares outstanding, is also a customer of the Company. This customer's purchases
from the Company represented 8.4% and 7.9% of total revenue for the three and
nine month periods ended September 30, 1997, respectively, and 27.6% and 19.7%
for the three and nine month periods ended September 30, 1996, respectively.
Gross profit from these transactions approximated those realized in similar
transactions with unrelated parties.
4. INCOME TAXES
The Company's effective tax rate for the three and nine month periods ended
September 30, 1997 was 6.6%. The difference between the statutory income tax
rate and the Company's effective tax rate is due to the use of capitalized
start-up costs, net operating losses and tax credits. No income tax provision
was recorded for federal income tax purposes through the nine months ended
September 30, 1996 as the Company had not reported taxable income in that
period. Currently, the Company has a valuation reserve against its deferred tax
assets in excess of its income tax liabilities. Management reviews the
appropriateness of the valuation on a quarterly basis.
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GEOTEL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. NEWLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS 128"), "Earnings per Share."
SFAS 128 establishes a different method of computing net income per share than
is currently required under the provisions of Accounting Principles Board
Opinion No. 15. Under SFAS 128, the Company will be required to present both
basic net income per share and diluted net income per share. Basic net income
per share for the three months ended September 30, 1997 and 1996 would have been
$0.11 and $0.06 per share, respectively. Basic net income per share for the nine
months ended September 30, 1997 and 1996 would have been $0.24 and $0.10 per
share, respectively. The Company is assessing the effect of SFAS 128 on a
diluted basis but believes the effect will not be material. The Company plans to
adopt SFAS 128 in its quarter ending December 31, 1997 and at that time all
historical net income per share data presented will be restated to conform to
the provisions of SFAS No. 128.
In June 1997, FASB issued Statement of Financial Accounting Standards ("SFAS
130") "Reporting Comprehensive Income". SFAS 130 requires changes in
comprehensive income to be shown in a financial statement that is displayed with
the same prominence as other financial statements. While not mandating a
specific financial statement format, SFAS 130 requires that an amount
representing total comprehensive income be reported. SFAS 130 will become
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods is required for comparative
purposes. The Company does not believe that the adoption of SFAS 130 will have a
material impact on results of operations.
In June 1997, FASB issued Statement of Financial Accounting Standards ("SFAS
131") "Disclosures about Segments of an Enterprise and Related Information".
SFAS 131, which supersedes Statement No. 14, "Financial Reporting for Segments
of a Business Enterprise," changes the way public companies report information
about segments. SFAS 131, which is based on the management approach to segment
reporting, includes requirements to report segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. SFAS
131 is effective for fiscal years beginning after December 15, 1997. Restatement
for earlier years is required for comparative purposes unless impracticable. In
addition, SFAS 131 need not be applied to interim periods in the initial year;
however, in subsequent years, interim period information must be presented on a
comparative basis. The Company does not believe that the adoption of SFAS 131
will have a material impact on financial statement disclosures.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying consolidated
financial statements for the periods specified and the associated notes. Further
reference should be made to Company's 1996 Form 10-K for the year ended December
31, 1996.
OPERATING RESULTS
The following table presents selected unaudited financial information from
the Company's income statement as a percentage of total revenue for the three
month and nine month periods ended September 30, 1997 and 1996. The Company's
operating results for any one period are not necessarily indicative of results
for any future period.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
Revenues:
Software license 78.7% 86.6% 77.7% 89.4%
Services and other 21.3 13.4 22.3 10.6
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of Revenues:
Cost of software licenses 3.0 2.2 2.7 3.8
Cost of services and other 17.0 15.5 16.2 15.7
------ ------ ------ ------
Total cost of revenues 20.0 17.7 18.9 19.5
------ ------ ------ ------
Gross Profit 80.0 82.3 81.1 80.5
------ ------ ------ ------
Operating Expenses:
Research and development 19.7 34.2 22.8 35.2
Sales and marketing 28.7 32.3 30.9 31.3
General and administrative 10.6 10.8 11.2 11.2
------ ------ ------ ------
Total operating costs 59.0 77.3 64.9 77.7
------ ------ ------ ------
Income from operations 21.0 5.0 16.2 2.8
Interest income 9.8 1.9 11.5 2.1
------ ------ ------ ------
Income before income taxes 30.8 6.9 27.7 4.9
Provision for income taxes 2.0 -- 1.8 --
------ ------ ------ ------
Net income 28.8% 6.9% 25.9% 4.9%
====== ====== ====== ======
REVENUES
Total revenues for the third quarter of 1997 increased by 115.3% to
$5,159,000 from $2,396,000 for the third quarter of 1996. Software license
revenue during these quarters increased 95.5% to $4,059,000 from $2,076,000.
Total revenues for the nine months ended September 30, 1997 increased by 96.6%
to $12,354,000 from $6,284,000 for the nine months ended September 30, 1996.
Software license revenue for the nine months ended September 30, 1997 increased
71.0% to $9,605,000 from $5,618,000 for the nine months ended September 30,
1996. The Company believes that the increase in revenue is attributable to
several factors: including revenue recognized under a software licensing
agreement with Digital Equipment Co., Ltd. (the "DEC Agreement"); continued
market acceptance of the Company's product; an increase in the size of the
Company's direct sales force; expansion of the sales channels through the
addition of selected resellers and international partners and the increase in
the Company's customer base. The DEC Agreement provides, among other things, for
the resale of a specified number of software licenses and one year maintenance
support as announced in January of 1997. Under the DEC Agreement, the Company
recognized approximately $1,667,000 and $1,817,000 in revenue for the three and
nine month periods ended September 30, 1997, respectively, compared to $355,000
in revenue for each of the three and nine month periods ended September 30,
1996. The Company has recognized $2,172,000 in revenue under the DEC Agreement
on a cumulative basis through September 30, 1997. Management anticipates
recognizing the remaining revenue of the contract over the next several
quarters.
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Services and other revenue for the third quarter of 1997 increased by 243.8%
to $1,100,000 from $320,000 for the third quarter of 1996. Maintenance revenue,
installation services revenue and consulting and other revenue represented
60.5%, 27.9% and 11.6%, respectively, of total services and other revenue for
the third quarter of 1997 compared to 41.0%, 57.6% and 1.4%, respectively, for
the third quarter of 1996. Services and other revenue increased to 21.3% of
total revenues in the third quarter of 1997 from 13.4% in the third quarter of
1996. Services and other revenue increased in dollars and as a percentage of
total revenues in the third quarter of 1997 primarily as a result of the
increase in the Company's customer base. The Company anticipates that
maintenance revenue will continue to increase as a percentage of total revenues
as the Company's customer base increases. Installation services revenue will
vary based upon software license revenue. Consulting and other revenue are
non-recurring in nature and will fluctuate in dollars and as a percentage of
total revenues from quarter to quarter. The Company performs consulting work
primarily in situations where such work will result in additional software
license revenue.
Services and other revenue for the nine months ended September 30, 1997
increased by 312.8% to $2,749,000 from $666,000 for the nine months ended
September 30, 1996. Maintenance revenue, installation services revenue and
consulting and other revenue represented 57.5%, 30.3% and 12.2%, respectively,
of total services and other revenue for the nine months ended September 30, 1997
compared to 28.4%, 67.7% and 3.9%, respectively, for the nine months ended
September 30, 1996. Services and other revenue increased to 22.3% of total
revenues in the nine months ended September 30, 1997 from 10.6% in the nine
months ended September 30, 1996. Services and other revenue increased in dollars
and as a percentage of total revenues in the nine month period ended September
30, 1997, primarily as a result of the increase in the Company's customer base.
International revenues represented 44.3% and 31.3% of total revenues in the
three and nine month periods ended September 30, 1997, respectively, compared to
35.7% and 21.6% in the three and nine month periods ended September 30, 1996,
respectively. Revenues under the DEC Agreement represented 72.9% and 47.0%,
respectively, of international revenues in the three and nine month periods
ended September 30, 1997 compared to 41.5% and 25.9%, respectively, in the three
and nine month periods ended September 30, 1996. The Company believes that it
will continue to derive a significant portion of its total revenues from
international revenues. To date, the Company's international revenues have been
denominated in U.S. currency.
An investor, representing approximately 9% of the Company's total common
shares outstanding, is also a customer of the Company. This customer's purchases
from the Company represented 8.4% and 7.9% of total revenue for the three month
and nine month periods ended September 30, 1997, respectively, compared to 27.6%
and 19.7% for the three and nine month periods ended September 30, 1996,
respectively. Gross profit from these transactions approximated those realized
in similar transactions with unrelated parties.
A significant portion of the Company's total revenues to date has been
derived from a limited number of customers. Revenues attributable to the five
largest customers in each quarter accounted for 67.3% and 85.8% of the Company's
total revenues for the quarters ended September 30, 1997 and 1996, respectively.
Revenues attributable to the five largest customers for the nine months ended
September 30, 1997 and 1996 were 56.0% and 62.2%, respectively. The Company
expects that it will continue to be dependent upon a limited number of customers
for a significant portion of its revenues in future periods.
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COST OF REVENUES
Cost of software license revenue. Cost of software license revenue consists
principally of product warranty costs, amortization of capitalized development
costs associated with the DEC Agreement and the costs of interface cards. Cost
of software license revenue for the third quarter of 1997 increased by 194.2% to
$153,000 from $52,000 for the third quarter of 1996. Cost of software license
revenue as a percentage of software license revenue were 3.8% and 2.5% for the
third quarters of 1997 and 1996, respectively. Cost of software license revenue
for the nine months ended September 30, 1997 increased by 40.4% to $330,000 from
$235,000 for the nine months ended September 30, 1996. Cost of software license
revenue as a percentage of software license revenue were 3.4% and 4.2% for the
nine month periods ended September 30, 1997 and 1996, respectively. The increase
in dollars in 1997 was primarily due to the amortization of capitalized
development costs under the DEC Agreement. There was no related amortization
expense in the three and nine month periods ended September 30, 1996. The
Company believes that in future periods, the percentage of cost of software
license revenue will continue to range from 3% to 5% of software license
revenue.
Cost of services and other revenue. Cost of services and other revenue
consists principally of the costs incurred to provide installation, consulting,
maintenance and training services. The expenses incurred to provide these
services are comprised primarily of personnel, travel and facility costs. Cost
of services and other revenue for the third quarter of 1997 increased by 136.0%
to $878,000 from $372,000 for the third quarter of 1996. Cost of services and
other revenue as a percentage of services and other revenue were 79.8% and
116.3% for the third quarters of 1997 and 1996, respectively. Cost of services
and other revenue for the nine months ended September 30, 1997 increased by
103.1% to $2,007,000 from $988,000 for the nine months ended September 30, 1996.
Cost of services and other revenue as a percentage of services and other revenue
were 73.0% and 148.3% for the nine months ended September 30, 1997 and 1996,
respectively. The increase in dollars from the quarter and nine month periods
ended September 30, 1997 compared to the corresponding periods in 1996 were
primarily comprised of an increase in personnel and travel costs. These costs
increased as a result of the increase in the number of customers under
maintenance contracts. Cost of services and other revenue on a quarterly basis
has been increasing in absolute dollars, while generally decreasing as a
percentage of services and other revenue. The Company believes that in future
periods, cost of services and other revenue as a percentage of services and
other revenue will fluctuate significantly based upon the mix of the services
provided, but in general the Company anticipates the percentage will decrease as
the Company experiences efficiencies from a growing customer maintenance revenue
base.
OPERATING EXPENSES
Research and Development. Research and development expenses consist
principally of personnel and facility costs. Research and development expenses
for the third quarter of 1997 increased by 23.8% to $1,015,000 from $820,000 for
the third quarter of 1996. Research and development expenses as a percentage of
total revenues were 19.7% and 34.2% for the third quarters of 1997 and 1996,
respectively. Research and development expenses for the nine months ended
September 30, 1997 increased by 27.6% to $2,819,000 from $2,210,000 for the nine
months ended September 30, 1996. Research and development expenses as a
percentage of total revenues were 22.8% and 35.2% for the nine month periods
ended September 30, 1997 and 1996, respectively. The decreases in research and
development expenses as a percentage of total revenues during the three and nine
month periods ended September 30, 1997 compared to the corresponding periods
ended September 30, 1996 were primarily the result of the Company's significant
revenue growth. The increase in absolute dollars for the three and nine month
periods ended September 30, 1997 compared to the corresponding periods ended
September 30, 1996 was the result of increases in personnel and related facility
costs. The major product development efforts in the third quarter of 1997
related to the development of new functionality such as web-based monitoring and
the continued development of enhancements to the ICR. The Company anticipates
that research and development expenses will continue to increase in absolute
dollars but level off as a percentage of revenues ranging from 18% to 20% in the
foreseeable future.
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Sales and Marketing. Sales and marketing expenses consist principally of
personnel costs (salaries, commissions and fringe benefits), travel, trade
shows, promotional expenses and facility costs. Sales and marketing expenses for
the third quarter of 1997 increased by 91.7% to $1,482,000 from $773,000 for the
third quarter of 1996. Sales and marketing expenses as a percentage of total
revenues were 28.7% and 32.3% for the third quarters of 1997 and 1996,
respectively. Sales and marketing expenses for the nine months ended September
30, 1997 increased by 93.6% to $3,812,000 from $1,969,000 for the nine months
ended September 30, 1996. Sales and marketing expenses as a percentage of total
revenues were 30.9% and 31.3% for the nine months ended September 30, 1997 and
1996, respectively. The increase in dollars for the three and nine month periods
ended September 30, 1997 compared to the corresponding periods in 1996 were
primarily comprised of an increase in personnel and travel costs. These costs
increased due to the expansion of the domestic sales staff, commissions
attributable to higher revenues and an increase in promotional costs. The
decreases in sales and marketing expenses as a percentage of total revenues
during the three and nine month periods ended September 30, 1997 compared to the
corresponding periods ended September 30, 1996 were primarily the result of the
Company's significant revenue growth. The Company anticipates that sales and
marketing expenses will continue to increase in absolute dollars but level off
as a percentage of total revenues ranging from 30% to 35% in the foreseeable
future.
General and Administrative. General and administrative expenses consist
principally of personnel costs for administrative, finance, information systems,
human resources and general management personnel. General and administrative
expenses for the third quarter of 1997 increased by 111.2% to $547,000 from
$259,000 for the third quarter of 1996. General and administrative expenses as a
percentage of total revenues were 10.6% and 10.8% for the third quarters of 1997
and 1996, respectively. General and administrative expenses for the nine months
ended September 30, 1997 increased by 96.0% to $1,382,000 from $705,000 for the
nine months ended September 30, 1996. General and administrative expenses as a
percentage of total revenues was 11.2% for the nine months ended September 30,
1997 and 1996. The increase in absolute dollars from the three and nine month
periods ended September 30, 1997 compared to the corresponding periods in 1996
was due to an increase in personnel and legal costs. These costs have increased
due to the growth of the business and the incremental costs of operating as a
public company. The Company anticipates that general and administrative expenses
will increase in absolute dollars but level off as a percentage of total
revenues ranging from 10% to 12% in the foreseeable future.
INTEREST INCOME, NET
Interest income, net, of $508,000 and $46,000 for the third quarters of 1997
and 1996, respectively, resulted from investments of the Company's cash
balances, net of interest expense incurred on bank term notes in 1996. Interest
income, net, was $1,415,000 and $131,000 for the nine month periods ended
September 30, 1997 and 1996, respectively. In the fourth quarter of 1996, the
Company raised approximately $26,704,000 in cash from its initial public
offering. The Company used a portion of the proceeds from the offering to repay
in full the Company's outstanding debt and invested the remainder of the
proceeds. Interest income increased significantly in the three and nine month
periods ended September 30, 1997 in comparison to the corresponding periods in
1996 due to the increase in cash available for investment in 1997.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for the third quarter of 1997 was 6.6% for
the three and nine month periods ended September 30, 1997. The difference
between the statutory income tax rate and the Company's effective tax rate is
due to the use of capitalized start-up costs, net operating losses and tax
credits. No income tax provision was recorded for federal income tax purposes
through the nine months ended September 30, 1996 as the Company had not reported
taxable income in that period. Currently, the Company has a valuation reserve
against its deferred tax assets in excess of its income tax liabilities.
Management reviews the appropriateness of the valuation on a quarterly basis.
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LIQUIDITY AND CAPITAL RESOURCES
On November 20, 1996, the Company completed its initial public offering of
common stock, which generated net proceeds of approximately $26,704,000. The
Company used approximately $756,000 of the proceeds to repay borrowings under
its outstanding equipment lines of credit. At September 30, 1997, the Company
had cash and cash equivalents of $40,130,000 and accounts receivable of
$3,165,000. The Company's working capital increased to $34,113,000 at September
30, 1997 from $31,421,000 at December 31, 1996. As of September 30, 1997, the
Company has received approximately $4,909,000 in advance payments under the DEC
Agreement. The Agreement provides, among other things, for the development of
customized software, the resale of a specified number of software licenses and
one year of maintenance support as announced in January of 1997. The Company
recognized approximately $1,667,000 in revenue in the third quarter of 1997 and
$2,172,000 on a cumulative basis through September 30, 1997. Management
anticipates recognizing the remaining revenue under this contract over the next
several quarters.
The Company generated $8,277,000 in cash from operations in the nine months
ended September 30, 1997 compared to $1,514,000 in the corresponding period of
1996. The improvement in cash flow from operations is primarily the result of
the increase in advance customer payments (See discussion above regarding the
DEC Agreement) and an increase in profitability.
The Company used cash in investing activities of $1,612,000 and $556,000 in
the nine months ended September 30, 1997 and 1996, respectively. Capital
expenditures in 1997 were made due to the increase in personnel, the Company's
move to a new corporate office and for product development related needs. The
Company generated cash in financing activities of $202,000 and $317,000 in the
nine month periods ended September 30, 1997 and 1996, respectively. Financing
activities consisted primarily of sales of equity securities.
The Company believes that existing cash balances and funds generated from
operations will be sufficient to meet its anticipated liquidity and working
capital requirements for at least the next twelve months.
NEWLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS
No. 128 establishes a different method of computing net income per share than is
currently required under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS No. 128, the Company will be required to present both basic
net income per share and diluted net income per share. Basic net income per
share for the three months ended September 30, 1997 and 1996 would have been
$0.11 and $0.06 per share, respectively. Basic net income per share for the nine
months ended September 30, 1997 and 1996 would have been $0.24 and $0.10 per
share, respectively. The Company is assessing the effect of SFAS No. 128 on a
diluted basis but believes the effect will not be material. The Company plans to
adopt SFAS 128 in its quarter ending December 31, 1997 and at that time all
historical net income per share data presented will be restated to conform to
the provisions of SFAS No. 128.
In June 1997, FASB issued Statement of Financial Accounting Standards ("SFAS
130") "Reporting Comprehensive Income". SFAS 130 requires changes in
comprehensive income to be shown in a financial statement that is displayed with
the same prominence as other financial statements. While not mandating a
specific financial statement format, SFAS 130 requires that an amount
representing total comprehensive income be reported. SFAS 130 will become
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods is required for comparative
purposes. The Company does not believe that the adoption of SFAS 130 will have a
material impact on results of operations.
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In June 1997, FASB issued Statement of Financial Accounting Standards ("SFAS
131") "Disclosures about Segments of an Enterprise and Related Information".
SFAS 131, which supersedes Statement No. 14, "Financial Reporting for Segments
of a Business Enterprise," changes the way public companies report information
about segments. SFAS 131, which is based on the management approach to segment
reporting, includes requirements to report segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. SFAS
131 is effective for fiscal years beginning after December 15, 1997. Restatement
for earlier years is required for comparative purposes unless impracticable. In
addition, SFAS 131 need not be applied to interim periods in the initial year;
however, in subsequent years, interim period information must be presented on a
comparative basis. The Company does not believe that the adoption of SFAS 131
will have a material impact on financial statement disclosures.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of future financial performance of
the Company. However, from time to time, information provided by the Company or
statements made by its employees may contain "forward-looking" information that
involve risks and uncertainties. In particular, statements contained in this
Form 10-Q that are not historical facts (including, but not limited to,
statements concerning services and other revenue, anticipated revenue under the
DEC Agreement, international revenues, anticipated cost of revenues levels,
anticipated operating expense levels and such expense levels relative to the
Company's total revenues) constitute forward-looking statements and are made
under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. The Company's actual results of operations and financial condition have
varied and may in the future vary significantly from those stated in any
forward-looking statements. Factors that may cause such differences include,
without limitation, the risks, uncertainties and other information discussed
below, as well as the accuracy of the Company's internal estimates of revenue
and operating expense levels. Each of these factors, and others, are discussed
from time to time in the filings made by the Company with the Securities and
Exchange Commission.
The Company's future results are subject to substantial risks and uncertainties.
The Company has experienced substantial revenue growth since the ICR product
introduction and first achieved profitability in the first quarter of 1996.
However, due to the Company's limited operating history there can be no
assurance that such revenue growth and profitability will continue in the future
on a quarterly or annual basis. Future operating results will depend on many
factors, including the demand for the Company's products, the level of product
and price competition, the Company's success in expanding its direct sales
force, indirect distribution channels and international sales and the ability of
the Company to develop and market new products and control costs. In order to
support the growth of its business, the Company plans to significantly expand
its level of operations. Due to the anticipated increase in the Company's
operating expenses caused by this expansion, the Company's operating results
will be adversely affected if revenues do not increase. The Company currently
expects to derive substantially all of its revenues from licenses of the ICR
product and related services and that it will continue to be dependent upon a
limited number of customers for a significant portion of its revenues in future
periods. Although demand for the ICR has grown in recent quarters, the call
center market is still an emerging market. The Company's future financial
performance will depend in large part on continued growth in the number of
organizations adopting software applications to enhance their responsiveness to
customers and the number of applications developed for use in these
environments.
The Company is dependent upon its ability to protect its proprietary
technology and relies upon a combination of patents, copyrights, trademarks,
trade secret laws and confidentiality procedures. There can be no assurance that
the protections put in place by the Company will be adequate. The Company
believes that international expansion is important to the Company's ability to
continue its growth. There can be no assurance that the Company will be
successful in integrating its product in international markets and such revenues
are subject to a number of risks including compliance with regulatory
requirements, export restrictions and controls, trade barriers, protection of
intellectual property rights, management of international operations, collection
of receivables, political instability, currency exchange rate fluctuation and
potentially adverse tax consequences. The Company depends on a single vendor for
the software and network adapter necessary for the ICR to interface with the
AT&T network. Although the Company has a perpetual, fully-paid license, with
access to the underlying source code for this software and the rights to
manufacture the network adapter, if for any reason the vendor does not make the
software or network adapter available to the Company, there can be no assurance
that the Company will be able to develop these products on a timely basis.
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The Company's quarterly operating results may vary significantly in the
future depending on factors such as increased competition from the interexchange
carriers, Automatic Call Distribution switching system vendors and other
companies, the timing of new product announcements and changes in pricing
policies by the Company and its competitors, market acceptance of new and
enhanced versions of the Company's products, the size and timing of significant
orders, order cancellations by customers, changes in operating expenses, changes
in Company strategy, personnel changes, the Company's ability to manage growth,
if any, including the continued improvement in its financial and management
controls and growth of its employee work force and general economic factors. The
Company's expense levels are based, in part, on its expectations of future
revenues and to a large extent are fixed in the short-term. If revenue levels
are below expectations, the Company's business, operating results and financial
condition are likely to be materially adversely affected. Net income may be
disproportionately affected by a reduction in revenues because a proportionately
smaller amount of the Company's expenses varies with its revenues. As a result,
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Additional information on the factors that
could affect the Company's financial results is included in the Company's 1996
Form 10-K, as amended, which has been filed with the Securities and Exchange
Commission.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On November 20, 1997, the Company's Registration Statement of Form S-1 (File No.
333-13263) became effective. The net proceeds from the offering were
approximately $26,704,000. To date, the Company has utilized approximately
$756,000 of the proceeds to repay borrowings under its outstanding equipment
lines of credit. The Company has not used any of the remaining proceeds from the
effective date (November 20, 1996) through September 30, 1997. No payments were
made to directors, officers (except in their capacity as employees of the
Company) or to persons owning ten percent or more of any class of equity
securities of the Company, or to the affiliates of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
11.1 Weighted Shares Used in Computation of Earnings per Share
(b) Report on Form 8-K.
The Company did not file a Form 8-K during the quarter ended September 30,
1997.
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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.
GEOTEL COMMUNICATIONS CORPORATION
(Registrant)
November 13, 1997 /s/Timothy J. Allen
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Timothy J. Allen
Vice President of Finance, Chief Financial Officer
Treasurer and Assistant Secretary
(principal financial and chief accounting officer)
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EXHIBIT INDEX
PAGE NO.
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11.1 Weighted Shares Used in Computation of
Earnings Per Share 18
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