-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WsUDufMLetJL5S5hO6/Oc9HvmBMv6qWawFW90njY78iSJheekJvI4nAFaD/IVm4b +XDVQxg3Kazlr2c5QMYDYA== 0000929624-98-001875.txt : 19981118 0000929624-98-001875.hdr.sgml : 19981118 ACCESSION NUMBER: 0000929624-98-001875 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENESYS TELECOMMUNICATIONS LABORATORIES INC CENTRAL INDEX KEY: 0001036436 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943120525 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22605 FILM NUMBER: 98752034 BUSINESS ADDRESS: STREET 1: 1155 MARKET ST 11TH FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94103 BUSINESS PHONE: 4154371100 MAIL ADDRESS: STREET 1: 1155 MARKET STREET,11TH FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94103 10-Q 1 FORM 10-Q 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 SEPTEMBER 30, 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 Employer Identification No.) incorporation or organization) 1155 MARKET STREET, SAN FRANCISCO, CALIFORNIA 94103 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 437-1100 Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
TITLE OF EACH CLASS OUTSTANDING AT SEPTEMBER 30, 1998 ------------------- --------------------------------- Common Stock, no par value 22,864,155 Shares
Genesys Telecommunications Laboratories, Inc. THIRD QUARTER 1998 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
2 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements -------------------- Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1998 and June 30, 1998 4 Condensed Consolidated Statements of Operations for the three months ended September 30, 1998 and 1997 5 Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 1998 and 1997 6 Notes to Condensed Consolidated Financial Statements 7 3 GENESYS TELECOMMUNICATIONS LABORATORIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS
September 30, June 30, 1998 1998 ----------------- --------------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 42,583 $ 30,256 Short-term investments 10,157 Accounts receivable, net 28,007 28,454 Prepaid expenses and other 8,719 8,314 ----------------- --------------- Total current assets 89,913 83,562 PROPERTY AND EQUIPMENT, net 17,625 14,675 OTHER ASSETS 6,463 6,742 ----------------- --------------- $ 114,280 $ 104,700 ================= =============== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Note payable $ 153 $ 243 Current portion of long-term obligations 33 33 Accounts payable 4,520 2,639 Accrued payroll and related benefits 3,702 4,539 Other accrued liabilities 5,674 8,427 Deferred revenues 18,820 16,805 ----------------- --------------- Total current liabilities 34,611 30,977 ----------------- --------------- LONG-TERM OBLIGATIONS 93 102 ----------------- --------------- SHAREHOLDERS' EQUITY: Common stock 74,402 72,356 Shareholder notes receivable (316) (440) Cumulative translation adjustment (222) (188) Retained Earnings 5,712 1,893 ----------------- --------------- Total shareholders' equity 79,576 73,621 ----------------- --------------- $ 114,280 $ 104,700 ================= =============== The accompanying notes are an integral part of these condensed consolidated financial statements.
4 GENESYS TELECOMMUNICATIONS LABORATORIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Three Months Ended September 30, 1998 1997 ------------ ------------- (Unaudited) REVENUES: License $ 23,662 $ 13,267 Service 5,346 2,973 ------------ ------------- Total revenues 29,008 16,240 ------------ ------------- COST OF REVENUES: License 1,052 671 Service 4,055 1,821 ------------ ------------- Total cost of revenues 5,107 2,492 ------------ ------------- GROSS MARGIN 23,901 13,748 ------------ ------------- OPERATING EXPENSES: Research and development 5,403 3,059 Sales and marketing 10,403 6,950 General and administrative 2,703 1,862 ------------ ------------- Total operating expenses 18,509 11,871 ------------ ------------- INCOME FROM OPERATIONS 5,392 1,877 INTEREST AND OTHER INCOME (EXPENSE), NET 484 335 ------------ ------------- INCOME BEFORE PROVISION FOR INCOME TAXES 5,876 2,212 PROVISION FOR INCOME TAXES 2,057 816 ------------ ------------- NET INCOME $ 3,819 $ 1,396 ============ ============= BASIC NET INCOME PER SHARE $ 0.17 $ 0.07 ============ ============= DILUTED NET INCOME PER SHARE 0.15 0.05 ============ ============= BASIC WEIGHTED AVERAGE COMMON SHARES 22,628 20,510 ============ ============= DILUTED WEIGHTED AVERAGE COMMON SHARES 25,779 26,096 ============ ============= The accompanying notes are an integral part of these condensed consolidated financial statements.
5 GENESYS TELECOMMUNICATIONS LABORATORIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the Three Months Ended September 30, 1998 1997 ---------------- -------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,819 $ 1,396 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred stock compensation expense 119 119 Depreciation and amortization 1,918 981 Provision for doubtful accounts 100 5 Changes in operating assets and liabilities: Accounts receivable (547) 1,801 Prepaid expenses and other (405) (406) Accounts payable (1,881) (543) Accrued payroll and related benefits 837 405 Other accrued liabilities 2,753 (162) Deferred revenues 2,015 265 ---------------- -------------- Net cash provided by (used in) operating activities 8,728 3,861 ---------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales of short-term investments 13,408 - Purchases of short-term investments (6,580) (16,682) Purchases of property and equipment (4,488) (2,628) (Increase) decrease in other assets (693) (240) ---------------- -------------- Net cash provided by (used in) investing activities 1,647 (19,550) ---------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from/(Repayments of) note payable (90) 30 Principal payments on capital lease obligations (9) (124) Proceeds from sales of common stock 2,051 69 ---------------- -------------- Net cash used in financing activities 1,952 (25) ---------------- -------------- NET DECREASE IN CASH AND CASH EQUIVALENTS 12,327 (15,714) CASH AND CASH EQUIVALENTS: Beginning of Period 30,256 47,160 ---------------- -------------- End of Period $ 42,583 $ 31,446 =============== ============== 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 months ended September 30, 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, GeoTel litigation, 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 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 basis 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):
Three Months Ended September 30, ------------------------------------- 1998 1997 ------------- --------------- Weighted average common shares outstanding 22,628 19,843 Shares issued in acquisition of Forte - 667 BASIC WEIGHTED AVERAGE COMMON SHARES 22,628 20,510 ================ =============== Weighted average options and warrants for common stock 3,151 5,586 DILUTED WEIGHTED AVERAGE COMMON SHARES 25,779 26,096 ================ ===============
4. LITIGATION On December 17, 1996, GeoTel Communications Corporation ("GeoTel") filed a lawsuit in the United States District Court for the District of Massachusetts naming the Company as defendant, and alleging infringement of a patent issued to GeoTel entitled "Communications System Using a Central Controller to Control at Least One Network and Agent System", U.S. Patent No. 5,546,452 (the "GeoTel Patent"). In the complaint, GeoTel requested injunctive relief, an accounting for damages and an assessment of interest and costs, and other relief as the court deems just and proper. On February 10, 1997, the Company filed an answer in response to the complaint filed by GeoTel, asserting that the GeoTel Patent is invalid, denying the alleged patent infringement and seeking dismissal of the complaint with prejudice. The litigation is currently in early discovery stages, with depositions to commence fall of 1998 and fact discovery scheduled to be completed in January 1999. The Company believes that it has meritorious defenses to the asserted claims and intends to defend the litigation vigorously. GeoTel alleges that the Genesys Call Router, Genesys Call Center Manager and Genesys Call Concentrator products, and the T Server product, as a necessary element of all Genesys products, infringe the GeoTel Patent. After consultation with counsel, the Company does not believe any of the products described under "Business--Products" in the Company's Annual Report on Form 10-K infringe any valid claims of the GeoTel Patent. In connection with the Company's development of the potential new products described under "Business--Research and Development" in the Company's Annual Report on Form 10-K, the Company has sought the advice of such counsel and believes that such potential products can be developed without infringing the GeoTel Patent; however, there can be no assurance that GeoTel will not assert infringement of the GeoTel Patent with respect to such potential new products. Further, the outcome of litigation is inherently unpredictable, and there can be no assurance that the results of these proceedings will be favorable to the Company or that they will not have a material adverse effect on the Company's business, financial condition or results of operations. Regardless of the ultimate outcome, the GeoTel litigation could result in substantial expense to the Company and significant diversion of effort by the Company's technical and managerial personnel. If the Court determines that the Company infringes GeoTel's patent and that the GeoTel patent is valid and enforceable, it could issue an injunction against the use or sale of certain of the Company's products and it could assess significant damages against the Company. Accordingly, an adverse determination in the proceeding could subject the Company to significant liabilities and require the Company to seek a license from GeoTel. Although patent and other intellectual property disputes in the software area have sometimes been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial, and there 8 can be no assurance that a license from GeoTel, if required, would be available to the Company on acceptable terms or at all. Accordingly, an adverse determination in the GeoTel litigation could prevent the Company from licensing certain of its software products, which would have a material adverse effect on the Company's business, financial condition and results of operations. 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, 1998. The Company believes the adoption of SFAS 131 will not have a material impact on its financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") which establishes accounting and reporting standards for derivative instruments and hedging activities. The Company does not expect the adoption of SFAS 133, required beginning the first of quarter of 2000 to have a material effect on its consolidated financial statements. 9 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. 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 September 30, --------------------------------------- 1998 1997 ---------------- --------------- Revenues: License ................................................... 81.6% 81.7% Service ................................................... 18.4 18.3 ---------------- --------------- Total revenues........................................ 100.0 100.0 ---------------- --------------- Cost of revenues: License ................................................... 3.6 4.1 Service ................................................... 14.0 11.2 ---------------- --------------- Total cost of revenues................................ 17.6 15.3 ---------------- --------------- Gross Margin.................................................... 82.4 84.7 ---------------- --------------- Operating expenses: Research and development................................... 18.6 18.8 Sales and marketing........................................ 35.9 42.8 General and administrative................................. 9.3 11.5 ---------------- --------------- Total operating expenses.............................. 63.8 73.1 ---------------- --------------- Income from operations.......................................... 18.6 11.6 Interest and other income (expense), net........................ 1.7 2.1 ---------------- --------------- Income before provision for income taxes........................ 20.3 13.6 Provision for income taxes...................................... 7.1 5.0 ---------------- --------------- Net income ................................................... 13.2% 8.6% ================ ===============
10 Revenues -------- License. License revenues increased by 78.4% from $13.3 million in the three ------- months ended September 30, 1997 to $23.7 million in the three months ended September 30, 1998. 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 79.8% from $3.0 million in the three months ended September 30, 1997 to $5.3 million in the three months ended September 30, 1998. The Company's software license agreements often provide for maintenance, consulting and training. Accordingly, increases in licensing activity have resulted in increases in revenues from services related to maintenance, consulting and training. If the Company is successful in implementing its strategy of encouraging third-party organizations such as systems integrators to undertake a greater percentage of implementation of the Company's products, service revenues may decrease as a percentage of total revenues, while maintenance as a percentage of total revenues is expected to increase. The Company does not believe that the historical growth rates of service revenues will be sustainable or are indicative of future results. Cost of Revenues ---------------- License. Cost of license revenues includes the costs of product media, product ------- duplication and manuals, as well as allocated labor and overhead costs associated with the preparation and shipment of products. Cost of license revenues were $1.1 million and $0.7 million, in the three months ended September 30, 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 $37,500 for the three months ended September 30, 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 $4.1 million and $1.8 million in the three months ended September 30, 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 September 30, 1998 and 1997, the Company's operating expenses were $18.5 million and $11.9 million, or 63.8% and 73.1% of total revenues, respectively. Research and Development. Research and development expenses were $5.4 million and $3.1 million, or 18.6% and 18.8% of total revenues in the three months ended September 30, 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 $0.4 million and $0.3 million of 11 software development costs incurred in the three months ended September 30, 1998 and 1997, respectively, related to the development of its T-server product suite. Sales and Marketing. Sales and marketing expenses were $10.4 million and $6.9 ------------------- million, representing 35.9% and 42.8% of total revenues in the three months ended September 30, 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 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 $2.7 -------------------------- million and $1.9 million, or 9.3% and 11.5% of total revenues in the three months ended September 30, 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 expects to continue to increase its general and administrative staff and to incur other costs necessary to manage a growing organization, 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 11.5% in the first quarter of fiscal 1998 to 9.3% in the first 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. Provision for Income Taxes -------------------------- The Company's effective tax rate for the three months ended September 30, 1998 was 35%, which the Company estimates will be the effective tax rate for the remainder of fiscal 1999. 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 September 30, 1998, the Company's primary sources of liquidity included cash and cash equivalents of $42.6 million and short-term investments of $10.2 million. The Company generated cash from operating activities of $8.7 million in the three months ended September 30, 1998 related primarily to an increase in net income, accrued liabilities and deferred revenues, which was offset in part by a decrease in accounts payable. The Company generated cash from operating activities of $3.9 million in the three months ended September 30, 1997 related primarily to an increase in net income and a decrease in accounts receivable. The Company generated cash from the net maturity of $6.8 million of short- term investments in the three months ended September 30, 1998. The Company used cash of $4.5 million for the purchase of property and equipment in the three months ended September 30, 1998. The Company used cash to purchase $16.7 million of short-term investments and $2.6 million of property and equipment in the three months ended September 30, 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, 12 accordingly, the Company does not expect that the establishment of these subsidiaries will have a material adverse effect on its liquidity and capital resources. The Company believes that its existing sources of liquidity will satisfy the Company's projected working capital and capital requirements for at least the next twelve months. QUARTERLY RESULTS OF OPERATIONS AND FORWARD LOOKING STATEMENTS The Company's quarterly operating results have in the past fluctuated and may in the future fluctuate significantly, depending on a number of factors, many of which are beyond the Company's control, including: market acceptance of the Company products; competition; the size, timing and recognition of revenue from significant orders; the Company's ability to develop and market new products and product enhancements; new product releases by the Company and its competitors and the timing of such releases; the length of sales and implementation cycles; the Company's ability to integrate acquired business; the Company's success in establishing indirect sales channels and expanding its direct sales force; the Company's success in retaining and training third-party support personnel; the delay or deferral of significant revenues until acceptance of software required by an individual license transaction; technological changes in the market for the Company's products; the deferral of customer orders in anticipation of new products and product enhancements; purchasing patterns 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 September 30, 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. 13 Because of these factors, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and that such comparisons should not be relied upon as indications of future performance. Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," and words of similar import, constitute "forward looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934 regarding events, conditions and financial trends that may affect the Company's future plans, business strategy, results of operations and financial position. Readers are referred to the "Risk Factors" section of the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- Not applicable. 14 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ----------------- On December 17, 1996, GeoTel Communications Corporation (''GeoTel'') filed a lawsuit in the United States District Court for the District of Massachusetts naming the Company as defendant, and alleging infringement of a patent issued to GeoTel entitled ''Communications System Using a Central Controller to Control at Least One Network and Agent System'', U.S. Patent No. 5,546,452 (the ''GeoTel Patent''). In the complaint, GeoTel requested injunctive relief, an accounting for damages and an assessment of interest and costs, and other relief as the court deems just and proper. On February 10, 1997, the Company filed an answer in response to the complaint filed by GeoTel, asserting that the GeoTel Patent is invalid, denying the alleged patent infringement and seeking dismissal of the complaint with prejudice. The litigation is currently in early discovery stages, with depositions to commence fall of 1998 and fact discovery scheduled to be completed in January 1999. The Company believes that it has meritorious defenses to the asserted claims and intends to defend the litigation vigorously. GeoTel alleges that the Genesys Call Router, Genesys Call Center Manager and Genesys Call Concentrator products, and the T Server product, as a necessary element of all Genesys products, infringe the GeoTel Patent. After consultation with counsel, the Company does not believe any of the products described under ''Business--Products'' in the Company's Annual Report on Form 10-K infringe any valid claims of the GeoTel Patent. In connection with the Company's development of the potential new products described under ''Business--Research and Development'' in the Company's Annual Report on Form 10-K, the Company has sought the advice of such counsel and believes that such potential products can be developed without infringing the GeoTel Patent; however, there can be no assurance that GeoTel will not assert infringement of the GeoTel Patent with respect to such potential new products. Further, the outcome of litigation is inherently unpredictable, and there can be no assurance that the results of these proceedings will be favorable to the Company or that they will not have a material adverse effect on the Company's business, financial condition or results of operations. Regardless of the ultimate outcome, the GeoTel litigation could result in substantial expense to the Company and significant diversion of effort by the Company's technical and managerial personnel. If the Court determines that the Company infringes GeoTel's patent and that the GeoTel patent is valid and enforceable, it could issue an injunction against the use or sale of certain of the Company's products and it could assess significant damages against the Company. Accordingly, an adverse determination in the proceeding could subject the Company to significant liabilities and require the Company to seek a license from GeoTel. Although patent and other intellectual property disputes in the software area have sometimes been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial, and there can be no assurance that a license from GeoTel, if required, would be available to the Company on acceptable terms or at all. Accordingly, an adverse determination in the GeoTel litigation could prevent the Company from licensing certain of its software products, which would have a material adverse effect on the Company's business, financial condition and results of operations. 15 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 September 30, 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 ----------------- Not applicable. ITEM 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits Exhibit Number Exhibit ------ ------- 27.1 Financial Data Schedule 16 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: November 13, 1998 By: /s/ MICHAEL J. McCLOSKEY ----------------------------------------- Michael J. McCloskey President, Chief Financial Officer and Secretary 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 3-MOS JUN-30-1998 JUN-30-1997 JUL-01-1998 JUL-01-1997 SEP-30-1998 SEP-30-1997 42,583 31,446 10,157 16,682 28,454 16,868 8,719 377 0 0 89,913 68,905 17,625 11,575 6,742 2,343 114,280 81,367 34,611 22,305 0 0 0 0 0 0 74,402 63,241 5,174 (4,930) 114,250 81,367 0 0 29,008 16,240 0 0 5,107 2,492 18,509 11,871 0 0 484 335 5,876 2,212 2,057 816 0 0 0 0 0 0 0 0 3,819 1,396 0.17 0.07 0.15 0.05
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