-----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, TD43OhknUTpXkLs+zpNquAd6Gy4HP2HjNJewiEX89e0/xsX0jNiPJ734/FYlzkov ubKXtuUcSDIonqEZoAMY2A== 0000950135-97-001377.txt : 19970328 0000950135-97-001377.hdr.sgml : 19970328 ACCESSION NUMBER: 0000950135-97-001377 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEOTEL COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001023905 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 04319455 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12299 FILM NUMBER: 97565138 BUSINESS ADDRESS: STREET 1: 25 PORTER RD CITY: LITTLETON STATE: MA ZIP: 01460 BUSINESS PHONE: 5084861100 MAIL ADDRESS: STREET 1: 25 PORTER RD CITY: LITTLETON STATE: MA ZIP: 01460 10-K 1 GEOTEL COMMUNICATIONS 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR TRANSITION PERIOD FROM TO 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 (I.R.S. Employer Incorporation or Organization) Identification No.)
25 PORTER ROAD LITTLETON, MASSACHUSETTS 01460 (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 508-486-1100 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK $.01 PAR VALUE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 17, 1997 there were 13,089,578 shares outstanding of the registrant's common stock, $0.01 par value. As of that date, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $51,713,000. DOCUMENTS INCORPORATED BY REFERENCE PART III -- Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 29, 1997 are incorporated by reference into Part III (Items 10, 11, 12 and 13). ================================================================================ 2 PART I CAUTIONARY STATEMENTS The Private Securities Litigation Reform Act of 1995 contains certain safe harbors regarding forward-looking statements. From time to time, information provided by the Company or statements made by its directors, officers or employees may contain "forward-looking" information which involve risks and uncertainties. Actual future results may differ materially. Statements indicating that the Company "expects," "estimates," "believes," "is planning" or "plans to" are forward-looking, as are other statements concerning future financial results, product offerings or other events that have not yet occurred. There are several important factors which could cause actual results or events to differ materially from those anticipated by the forward-looking statements. Such factors, some of which are described in greater detail in Item 7 under the heading "Risk Factors That May Affect Future Results," include, but are not limited to, the receipt and shipment of new orders, the timely release of enhancements to the Company's products, which could be subject to software release delays, the growth rates of certain market segments, the positioning of the Company's products in those market segments, variations in the demand for customer service and technical support, pricing pressures and the competitive environment in the software industry, and the Company's ability to penetrate international markets and manage its international operations. Although the Company has sought to identify the most significant risks to its business, the Company cannot predict whether, or to what extent, any of such risks may be realized nor can there be any assurance that the Company has identified all possible issues which the Company might face. ITEM 1: BUSINESS GeoTel Communications Corporation ("GeoTel" or the "Company") is a provider of telecommunications software solutions focused on enhanced call routing technology that enables customer-oriented companies to deliver responsive and cost-effective customer service. The Company's software solutions are aimed at decentralized or service-oriented corporations that use call centers, voice response units and other answering resources to interact with their customers. GeoTel's software solution, the Intelligent CallRouter, is designed for companies that utilize multiple call centers to handle high volumes of inbound customer calls and regard their effective handling of customer interaction through call center technology as a key competitive advantage. The Company is focused on open, standards-based software solutions for enterprise-wide call distribution in a multi-vendor, multi-carrier, fault-tolerant, distributed environment. GeoTel's call routing solutions have been deployed by a variety of companies, including America Online, American Express, Compaq, Continental Airlines, Delta Airlines, Fidelity, Gateway 2000, GTE, Household Credit Services, MCI, Matrixx Marketing, Optus Systems, Private Health Care Systems, Spiegel, Sprint and USAir. INDUSTRY BACKGROUND Call Center Market Companies are increasingly recognizing that excellent customer service can be used as a strategic weapon to differentiate their firms from competitors. In order to remain competitive, corporations must continually evaluate their product and service offerings to expand market share, lower costs and meet customer expectations. To improve service quality, companies have invested in technologies that enable them to concentrate customer service representatives, or agents, into groups known as call centers. Many corporations utilize call centers as the primary method of interacting with their customers. These call centers are typically deployed in multiple locations and can be utilized to provide a prioritized level of services for their most valued customers. Call centers allow businesses to reduce costs and deliver premium customer service. While call centers have grown both in size and importance, current technologies have been focused on stand-alone, call center applications, rather than the customer interaction requirements of the entire corporation. This has led to a fragmented environment in businesses that have multiple call centers, branch offices and divisions, with call centers evolving as technology "islands" within the corporation. As a result, corporations are unable to provide solutions that utilize all the customer response resources within the organization whether they are personnel or systems-based. Increasingly, successful organizations are seeking 1 3 solutions to address these strategic business requirements through the implementation of "virtual call centers." Virtual call centers utilize all the relevant resources maintained by the corporation in order to achieve a unified, controllable and adaptable customer service solution. Enterprise-wide utilization of resources and technology enables the corporation to maximize levels of customer service while fully utilizing existing investments in telephony, technology and personnel. Call Center Technology In response to customer demand, the telecommunications environment has changed rapidly with the emergence of new carrier-based, Advanced Intelligent Network (AIN) services and 800/888 number portability. Most interexchange carriers (IXCs), including AT&T, MCI and Sprint, have opened network control to their customers, enabling the development of third party software to control the routing of customer calls within their networks. Corporations can now shop for the most competitive carrier rates and implement new network-based services which are not based on proprietary closed solutions, while retaining their existing telephone numbers. As the era of "open public networking" evolves, corporations are seeking business solutions that encompass more than the limited, non-integrated, proprietary telecommunication products that have been dominant in the past. The technology utilized by call centers has evolved dramatically over the past three years. Historically, due to the closed nature of public networks, corporations installed premises-based switching systems at the end of long distance or local exchange telephone lines. Reliance on these switching systems requires corporations to use proprietary closed solutions offered by service providers where multi-vendor switching system interoperability was not possible. Consequently, the call center solutions employed by most corporations have been designed around the technological limits of premises-based switching systems and the limitations of carrier networks, which prevent corporations from realizing the potential benefits of virtual call centers. Virtual call centers draw upon all of the organization's call response resources and utilize open-systems based applications to enhance the capabilities of the existing call center infrastructure by integrating it with existing business applications and data. The primary providers of call center solutions are IXCs and Automatic Call Distribution (ACD) switching system vendors. Currently, the major IXCs offer services that can route inbound toll-free calls to more than one call center, but they have limited visibility as to why the call is being delivered to that location. These services attempt to distribute calls among multiple call center locations by relying on percentage allocations based on historical data or call counting. Since there is no real-time data, these routing schemes are limited because the system is not aware of what is actually taking place in the individual call centers. For example, carriers might route 40% of a business' incoming calls to Boston, 30% to Dallas and 30% to Denver using a set table based on time of day and origin of call. While this solution is viable as long as each site is staffed accordingly to handle the inflow of calls, it cannot dynamically adjust to variances in agent availability, call handling times, and calls from non-network sources. Furthermore, the customer is unable to benefit from a multi-carrier environment. Many ACD switching system vendors provide private networking options that allow calls to flow from one system to another, but these systems consume network bandwidth and still do not optimize network resources. They are also ineffective in a multi-vendor ACD environment. Due to the migration towards open systems by the IXCs, customers are now able to control connections across interexchange carrier networks based on resources, customer profiles and other factors as determined by high-end enterprise-level software applications. ACDs and other customer premises-based switching systems have also opened control to computer applications. The evolution of Computer Telephony Integration (CTI) technology allows computer applications to interface with and control functions of the ACD or Private Branch Exchange (PBX). These applications are capable of utilizing business data, legacy systems and client/server systems and integrating them with existing telecommunications systems. To date, few organizations have fully realized the potential benefits offered by virtual call centers due to the lack of enterprise-wide call distribution. In particular, the need for enterprise-wide call distribution must be addressed as a prerequisite for a well-managed customer-focused call center. Traditional carrier services and ACD products have limited flexibility and are generally not scaleable to large enterprises. These solutions 2 4 do not facilitate enterprise-wide call distribution since they offer only local routing within a stand-alone ACD, and do not enable a multi-vendor, multi-carrier solution. As a result, the Company believes that the need exists for flexible, scaleable, customer premises-based call processing software that will manage the control of customer-based switching systems, network routing, call queuing and voice services. GEOTEL SOLUTION GeoTel's solution allows companies that utilize call center technology to deliver cost-effective, premium customer service. The Company's Intelligent CallRouter (ICR) enables enterprise-wide call routing and consolidated real-time management information at the network level. These capabilities are independent of the manufacturer of the ACD, PBX or key system to which they are attached. The ICR also provides interfaces to multiple carrier networks enabling call routing independent of the toll-free network provider. The ICR extends a corporation's existing public and private network solutions with enterprise-wide, intelligent call processing directed at organizations that utilize call center technologies to interact with their customers. The ICR allows corporations to blend the logic of both the carrier network and ACDs as well as business applications required to provide high-level customer service and customer contact support. By integrating all call center applications, a corporation can achieve large group efficiencies, such as utilizing available agents regardless of location, instead of physically adding staff to a specific call center. To achieve enterprise-wide call control, the ICR has visibility of all call answering resources, enabling the system to route calls and associated data transactions to the agent or skill group that best satisfies the rules established by the corporation. The ICR connects all call centers into a hierarchical, networked system, so that an enterprise routing application can receive the real-time status information required to control call transactions throughout the enterprise. The Company's solutions offer the following advantages: Virtual Call Center. The ICR transforms geographically dispersed agent groups connected to different ACDs and Voice Response Units (VRUs) into a single virtual team, reducing the number of agents required for a given service level, while offering a more uniform level of service to all callers. Since labor is a significant cost for service-oriented corporations, the ability to utilize agent resources more effectively provides a significant cost savings for the Company's customers. In addition, the ICR allows local ACD capabilities to be extended to the entire network. Sophisticated enterprise-wide call routing routines, such as those using customer account numbers or Automatic Number Identification (ANI), can be developed once and deployed at either the network level or in conjunction with an ACD or VRU at the customer's premises, or both. Multiple Carrier and Switch Interoperability. The Company's open solution does not require the customer to replace its existing premises-based equipment, switches or carriers, therefore extending their value in a "plug-and-play" environment. The Company's customers are also able to select among AT&T, MCI or Sprint, offering them the ability to leverage new features and cost saving opportunities from the major 800 providers. In addition, the ICR allows customers to remain vendor independent by supporting the major ACD switches -- Lucent DEFINITY(R), Aspect CallCenter(R), Northern Telecom Meridian(TM), Rockwell Galaxy(TM) and Rockwell Spectrum(TM). Real-Time Routing. The routing of customer calls is a real-time, mission-critical application. The ICR's Pre-Routing feature is the application of ACD-like call routing at the network level, before the caller hears ringing and before the call is sent to a given destination. Unlike any currently available call routing service offered by carriers, the Pre-Routing feature can route calls based on real-time knowledge of agent availability and queue status, not on a fixed percentage or allocation basis. The ICR recognizes where the call originates, gathers real-time information about the status of all call centers and agents, and then routes calls based on best available enterprise-wide capabilities and resources at the moment the call is received. Post-Routing is the control of calls already connected to an ACD or PBX, such as the intelligent transfer of calls from VRUs, agent-to-agent transfers and the overflow of calls between call centers. These capabilities enable the ICR to route calls on an individual call basis, across different ACDs and multiple carriers. 3 5 Fault Tolerant Open Architecture. The ICR is designed to be fault tolerant to hardware component failures, communications network failures, asynchronous software errors and the catastrophic loss of a site supporting the ICR. The Company's technology utilizes an open architecture and is based on industry standard software, such as Windows NT, SQL Server and PowerBuilder. The ICR has been designed to integrate with existing call center applications and facilitate support of future applications. The Company has defined and published application programming interfaces for major call center applications such as workforce management, interactive VRUs and customer databases. Consolidated Management Reporting. The Company's call routing solution enables customers to manage their distributed call centers with consolidated, real-time and historical reporting. The ICR provides the ability to access and combine data from multiple databases, allowing the user to source best-of-class applications for call volume forecasting, agent scheduling, workflow management and screen-synchronization while maintaining an enterprise-wide view of the performance of their call centers. STRATEGY The Company's primary business objective is to become the leading supplier of enterprise-wide call distribution software solutions. To achieve this objective, the Company is pursuing the following strategies: Extend Technology Leadership. Capitalizing on the Company's experience in call centers, communications and software technologies, the Company was the first to deliver a client/server-based application solely focused on enterprise-wide call distribution. The Company intends to continue to utilize and integrate industry available technologies whenever appropriate and focus its development resources on expanding the value-added call processing features required by its customers. The Company believes it distinguishes itself through its portfolio of supported ACDs, multi-carrier connectivity, product adaptability to business environments, implementation of industry standards, open systems platforms, scalability and product integration with most call center applications. Expand Enterprise Call Distribution. GeoTel intends to ensure that its call distribution technology continues to expand to include all of the answering resources available within a customer's business environment. This will include high-end production call centers, VRUs and distributed call answering resources including branch offices, remote agents and professionals, network resources and desktop applications. In June 1996, GeoTel delivered and installed ICR release Version 1.4 which includes support for the integration of VRUs. By integrating VRU systems, the Intelligent CallRouter extends routing control to network and premise VRUs, allows the corporation to use VRUs as an intelligent call answering resource in the virtual call center, and provides consolidated management information of VRU data. Intelligent CallRouter applications have been implemented in systems supporting as few as 200 and as many as 5,000 call center agents. Leverage Open Architecture. The Company continues to develop interfaces to both existing and emerging call center technologies provided by the vendors of market-leading technologies. The Company intends to provide its customers with the ability to protect their investment in current call center solutions, while providing value-added services and functionally beyond their existing infrastructure. This will be accomplished by adhering to open industry standard interfaces of other vendor products and publishing interfaces to the Company's call routing software platform for products and services such as ACDs, carrier networks, interactive VRUs and customer databases. Utilize Multiple Distribution Channels. The Company has established a multi-channel distribution system to cost-effectively address the potential market for its products. To date, the Company has generated the majority of its revenues through its direct sales force which maintains frequent customer contact and knowledge of customer applications. The Company's direct sales force is complemented by strategic sales channels, including its relationship with MCI, selected resellers and an international partner. The Company intends to expand both direct and indirect distribution channels and to penetrate international markets by expanding its relationships with the market leaders of toll-free services on a country-by-country basis. 4 6 Ensure Customer Success. GeoTel believes that superior customer service, support and training are essential for customer satisfaction and are key to differentiating its overall product offering. The Company offers consulting and installation services to assist customers in designing and deploying call routing applications and also provides training for end-users and distribution partners. GeoTel intends to expand its own customer service, support and training activities, as well as to encourage third-party organizations, such as international partners, to become proficient in deploying the Company's products. PRODUCTS The GeoTel Intelligent CallRouter is an advanced call-by-call routing server that supports multiple call routing clients independent of their location, ACD, IXC or VRU. The multi-carrier, multi-vendor capabilities of the ICR allow the user to focus on delivering premium customer service without the limitations of proprietary or custom-developed solutions. The ICR combines real-time call routing capabilities with an extensive management reporting system. Its open architecture enables interoperability with other call processing and call volume management systems within an enterprise and provides a means for integrating those various stand-alone solutions. The ICR can be interfaced to agent scheduling, workflow management and other call center management tools. The distributed software fault tolerance implemented in the Intelligent CallRouter provides the mission-critical reliability required for enterprise-wide call distribution. The principal function of the ICR is to route telephone calls among geographically distributed call centers in a way that optimizes the use of resources across all call centers or other answering locations. In order to perform these functions, the ICR utilizes network-based information on the origin of the call and information provided by the caller to match the caller with the skills of the available answering resources. The primary components of the ICR are a central routing controller, a database, and interfaces to the telephone network and call answering devices such as PBXs, ACDs and VRUs. The ICR is an open systems product that has been deployed on industry-standard platforms. The Company designed the system to support a broad range of intelligent telecommunications interfaces, industry standard MIS tools, computer platforms and a growing number of vertical market applications. The ICR uses Windows NT as the core multitasking operating environment. Windows NT allows customers to select from a variety of hardware platforms certified by the Company on which to deploy the ICR application. The database utilized by the ICR is Microsoft SQL Server for Windows NT, which provides an advanced, client/server database management system. The Company provides a monitoring and reporting system based on PowerBuilder, which is a Windows-based, client-server application development tool. PowerBuilder allows users to quickly and easily build sophisticated, graphical applications that can access information stored in multiple databases. Since the Company utilizes a database technology that is open database connectivity (ODBC) compliant, the customer may choose a reporting tool of its preference as an alternative to PowerBuilder. The following diagram illustrates the principal components of the ICR. The major components of the ICR are as follows: CallRouter. The core of the Intelligent CallRouter is a suite of software processes called the CallRouter that provides the central intelligence by which customers translate business goals into call routing decisions. The CallRouter receives and responds to routing requests from the routing clients (Network Interface Controllers and Peripheral Gateways), collects call center event activity from the Peripheral Gateways and communicates with users through desktop Admin Workstations. The CallRouter provides all the routing choices available in today's ACDs and applies them at the network level. The implementation of routing services on an enterprise basis creates a call center management model where geographically distributed call centers appear as if they were at one location. The ICR utilizes real-time, event-driven data such as agent status, queue status, and incoming call volume in making its call-by-call routing decisions. It allows customers to establish routing decisions for a wide range of agent and service performance metrics, including agent availability, the ratio of calls in progress to logged-in/ready agents, and the ratio of calls in queue to staffed/scheduled agents. The CallRouter makes routing decisions through user-defined call routing scripts. 5 7 The logic required to segment callers, identify their reason for calling, and then forward those requests for service to the appropriate agent(s) is defined in call routing objects. Having determined these routing guidelines, business rules are defined to arbitrate between routing options where the demand for a given skill or service resource exceeds availability. Threshold parameters can be input to allow for the use of backup agents under certain circumstances or to prioritize call handling of a given class of caller. Network Interface Controller (NIC). The NIC is the software interface between the Intelligent CallRouter and the interexchange carrier network. It communicates with the IXC network through the intelligent network control interfaces that have recently been made available by the carriers. The NIC receives call routing requests from the network, forwards them to the CallRouter, and returns responses to the carrier network. In effect, the NIC transforms the network into a routing client. This approach allows customers to control routing decisions at the network level and gain greater flexibility as they seek to further deploy advanced intelligent network services. Peripheral Gateway (PG). The PG software provides the interface between the CallRouter and the call center system (ACD, PBX, or VRU) that is being monitored and/or controlled by the ICR. The PG connects to the CTI link and/or ACD's management reporting system and obtains information regarding agent availability, agent performance, the number of calls in progress, and how they are being handled. To facilitate Post-Routing, the PG can also exert control over the ACD, PBX or VRU and instruct it where to route calls. Database Server. GeoTel's database technology reduces the performance constraints normally associated with ACD and network data aggregation. Operating in conjunction with the CallRouter, the ICR's Database Server stores and manages historical information, including Pre-Routing and Post-Routing records, routing scripts, and ICR configuration data. The ICR Database Server is a relational database that can collect and process large amounts of call and transaction data, including call handling, planning and performance data. Admin Workstation. The Intelligent CallRouter records call activity on an enterprise-wide basis and reports on this activity on a real-time basis utilizing the Admin Workstation. In addition to providing real-time call handling statistics, the ICR provides consolidated, historical reporting for all calls across all attached networks, ACDs, PBXs, and VRUs. Using any desktop workstation within the network, customers can mix and match data in virtually any combination, allowing analysis of real-time data with historical data. For example, customers may want to compare current performance to past performance over the last few minutes, days, or weeks. Software license fees for the Intelligent CallRouter vary significantly based on a number of factors, including the functionality of the system, the number of sites, the number of agents at each site and the level of redundancy required. The customer list price for software license fees for the Intelligent CallRouter software typically range from approximately $420,000 for a three site configuration with some redundancy to approximately $1,000,000 for an eight site configuration with extensive redundancy. The Company typically provides discounts based on volume purchases. The Company and its customers generally enter into maintenance agreements providing for ongoing service and product upgrades for a fixed annual fee. Maintenance services and installation services, which are not included in the license fee, amount to an additional 15% and 10%, respectively, of the list price license fee. Maintenance contracts are renewable on an annual basis. TECHNOLOGY The Company has developed a number of innovative technologies to support its open strategy: Real-Time Routing. The ICR's real-time delivery of enterprise-wide call center data makes use of innovative Local and Wide Area Network (LAN/WAN) solutions to efficiently distribute information and facilitate connectivity. A mixed LAN/WAN environment is supplemented by dial capabilities for both casual access of data from remote premises as well as alarm notification and paging. All clients are configured with redundant data paths to central services for both configuring and monitoring the enterprise. The system is designed to run on single or multiple Windows NT server-class machines. Interprocess communication is 6 8 efficient based on native capabilities within Windows NT integrated with the Company's processes. The architecture can scale to support very large numbers of agents, small offices, and home agents. Fault Tolerance. To meet rigorous requirements for system reliability in the call processing market, the Company has developed innovative industry standard fault tolerant software solutions to provide not only tolerance of hardware, software and communications failures, but also for the loss of an entire site. The Company's software technology relating to virtual time synchronization provides fault tolerance at the process level and includes protection against single-point hardware failures. Detection of failures is immediate and the Company has augmented standard TCP/IP protocols with features designed to minimize outages due to communications failures. Remote Support and Diagnostics Technology. The ICR incorporates extensive system management capabilities, including alarming with automatic "phone home" and paging capabilities; symmetric database replication; intelligent PC Server node management; and tools to provide graphical representations of system status. Consistent with an open architecture, the system will export Simple Network Management Protocol (SNMP) "traps" to management systems. Fully redundant communications paths are enhanced with real-time detection of communications failures with near instantaneous switch-over to redundant links. Carrier Connectivity. The ICR meets the certification standards of all three of the major U.S. interexchange carrier networks, AT&T, MCI and Sprint, by interfacing with the SS7, UDP/IP, and X.25 networks, respectively, using the proprietary protocols of each carrier. The ICR architecture is designed to support the introduction of other network interfaces as the Telecommunications Act of 1996 enables the entry of other providers into the toll-free marketplace. In addition, the Company is developing interfaces for several international carriers. Premises-based Switching/Call Processing lnterfaces. The Company has developed event-based interfaces to all of the major ACDs. The ICR currently supports five switches: Lucent DEFINITY, Aspect CallCenter, NTI Meridian, Rockwell Galaxy and Rockwell Spectrum. By developing event-based tracking of the ACDs (detecting when any event of interest happens at the ACD), the ICR has the capability to report accurate enterprise-wide statistics and know accurately which agents are available and skilled to handle incoming calls. The ICR can also control, via Post-Routing, how calls directed to or from the switch are subsequently routed and has the ability to deliver CTI information. By designing the ICR to have the capability to interface to all ACDs, PBXs, VRUs, and other premises-based equipment, the ICR enables customers to utilize equipment from multiple vendors allowing effective use of a multi-vendor switching environment. In contrast, proprietary solutions require all switches to be purchased from the same vendor. Visual Script Editor. The ICR uses visual/object-based call routing scripts controlled and defined by the customer. The Visual Script Editor is used to describe how calls are to be routed on a call-by-call basis. Each dialed number can have a unique treatment or can be handled with a collection of other dialed numbers. Many scripting objects are defined to assist the script designer in choosing an appropriate algorithm. The Database Lookup and Application Gateway objects enable the Script editor to import, in real-time, external database information or arbitrary data that can be used in subsequent script objects. SALES AND MARKETING The Company's distribution strategy is to sell its software products and services to major corporations who are significant users of inbound toll-free services, and have multiple locations with resources that respond to incoming calls. The Company uses a direct sales force in the United States as its primary distribution channel to market to these companies. There are currently nine direct sales representatives located in eight offices throughout the U.S. Each sales representative carries a quota for a defined geographic territory and is compensated for all sales within the territory. The Company's sales strategy is based on a consultative sales process, working closely with customers to understand and define their needs and determine how they can be addressed by the Company's products. This strategy continues after the initial sale. The Company, through ongoing sales, support, training, and maintenance, maintains close contact with its existing customers in order to determine the customers' evolving requirements for updates and enhancements. 7 9 In addition to the direct sales organization, the Company has signed agreements with MCI and Optus to complement direct sales and provide international distribution. MCI has signed a three-year renewable agreement with the Company to offer its products as a service to customers on a worldwide basis. Optus is a distributor of the Company's products in the Australian and New Zealand markets. To complement its domestic sales strategy, the Company intends to develop its sales channels for its products in the international markets. The Company plans to continue to address international markets by using its direct sales force and expects to add several other distribution partners. The Company supports its distribution strategy with a variety of focused marketing activities designed to identify qualified prospects and expand the Company's reputation. The Company attends several industry trade shows, conducts numerous informational seminars in different cities, regularly speaks at industry events, publishes articles and white papers, and uses direct mail. In addition, the telecommunications marketplace is heavily influenced by reference accounts and, as such, the Company is dependent upon its existing customers for favorable references. As part of its marketing and product strategy, the Company cultivates relationships with the major ACD/PBX vendors and VRU vendors, as well as the interexchange carriers. Equipment from each of the ACD/PBX vendors is maintained at the Company's facilities and technical discussions are ongoing to ensure tight integration with the various switches. The Company intends to continue to expand the range and number of products it supports based on customer requests and market opportunities. The Company currently derives substantially all of its revenues from licenses of the Intelligent CallRouter and related services. A significant portion of the Company's revenues to date has been derived from a limited number of customers. International sales represented 15.3% of revenues in 1996. More information regarding the Company's revenues is included under the heading "Risk Factors That May Affect Future Results," and Footnote J in Item 8 under "Notes to Consolidated Financial Statements." CUSTOMER SERVICE AND SUPPORT The Company believes that high quality customer service and support are integral components of the solutions it offers. The Company's customer service and support organization provides customers with technical support, training, consulting and implementation/installation services. The Company believes that in order to meet its customers' support expectations it must invest in and leverage technology to build its service infrastructure. As of December 31, 1996, the Company had 16 employees in its customer service and support organization. All of the Company's customers currently have software maintenance agreements with the Company that provide for one or more of the following services: Software Maintenance and Support. The Company's support organization offers a variety of support services to its customers including telephone, electronic mail and facsimile customer support through its support services staff. In addition, the product provides a "call home" application which allows customers to request service on-line. Initial product license fees do not cover software maintenance. Through its standard customer support package, the Company provides its customers with 12-hour weekday telephone support and 24-hour monitoring and quick response through use of the Company's remote support technology. Periodic product updates and maintenance releases are included with the annual support fees for the Company's standard support package, which is 15% of the then-current list price of the licensed products. Documentation and Training. The Company provides each customer with product design, documentation and training. The product includes an easy-to-use graphical user applications interface with on-line help. A complete library of end-user documentation is also provided with each system. The Company offers comprehensive training courses in all aspects of the product at its facility in Littleton, Massachusetts, and at the customer's option, provides on-site customer training upon request. Fees for education and training services, beyond those services provided as a part of installation services, are in addition to and separate from the license fees charged for the Company's software products and are charged per student, per class or on a time and materials basis. 8 10 Consulting. The Company's application consultants are available to work closely with customers to provide assistance concerning application design and report customization. Fees for consulting services are charged separately from the Company's software products on a time and materials basis. In addition, the Company intends to continue to develop relationships with third-party consulting organizations in order to support its customer base. Installation Services. The Company provides customers with comprehensive installation services, including initial application design, implementation planning, system design support, project management, initial education and training, and coordination of third-party software and hardware acquisition. The Company's fee for installation services is charged separately from the Company's licensing fees and is based on a percentage of the current list price of the products being installed. Fees for the Company's standard installation services are typically 10% of the then-current list price of the licensed products. PRODUCT DEVELOPMENT Since its inception, the Company has made substantial investments in product development. The Company's development organization was built upon a base of software professionals with extensive experience in operating systems, communications, fault tolerance, and software quality processes. Customer experience and direct input to the product planning process is reflected in all products designed and delivered by the Company. The Company announced the Intelligent CallRouter in August 1994 and began customer shipments in May 1995. The Company plans to introduce enhancements to the Intelligent CallRouter and new products that can be sold to existing and new customers. The Company is currently working on several strategic projects that will enhance the ICR product in the areas of desktop integration, computer telephony integration, and the use of the Internet and Intranets. There is also a significant emphasis on enhancing the product to work in international markets. The Company intends to expand its existing product offerings and introduce new products for the call processing software market. Although the Company expects that most of its new products will be developed internally, the Company may, based on timing and cost considerations, acquire technology and products from third parties and evaluate third-party applications for inclusion within its products on an ongoing basis. The Company believes that its future performance will depend, in large part, on its ability to maintain and enhance its current product line, develop new products that achieve market acceptance, maintain technological competitiveness, meet an expanding range of customer requirements and continue to recruit highly-skilled and qualified software professionals. As of December 31, 1996, the Company's product development, quality assurance and technical writing staff consisted of 28 employees. The Company's total expenses for research and development for 1996, 1995 and 1994 were $3,086,000, $2,322,000 and $1,879,000, respectively. The Company anticipates that it will continue to commit substantial resources to research and development in the future and that product development expenses may increase in absolute dollars in future periods. COMPETITION The market for telecommunications software products is intensely competitive and is subject to rapid technological change. Although to date the Company has experienced limited competition, the Company expects competition to increase significantly in the future. Currently, the Company's principal competitors are the interexchange carriers, particularly AT&T, and to a lesser extent MCI and Sprint, which provide proprietary call routing solutions as part of their service offerings. In addition, a number of other companies have introduced or announced their intention to introduce products that could be competitive with the Company's products, including Genesys Telecommunications Laboratories and IEX Corporation. Additional competitors, including traditional ACD providers, such as Lucent Technologies, Aspect Telecommunications Corporation, Northern Telecommunications, Inc. and Rockwell International Corporation, may enter the market by enhancing their proprietary private network solutions or by entering into arrangements with the interexchange carriers. The Company believes that, to date, approximately one-half of the Company's 9 11 customers have purchased the Company's products to replace or enhance existing call routing solutions offered by the interexchange carriers. The Company's other customers have purchased the Company's products in order to implement a virtual call center solution for the first time. This additional competition could adversely affect the Company's sales and profitability through price reductions, reduced gross margins and loss of market share. In particular, should one or more interexchange carriers, including MCI, Optus and Sprint which are customers of the Company, choose to provide or distribute competitive products and services, the Company's business could be materially adversely affected. Many of the Company's current and potential competitors have substantially greater financial, marketing and technical resources than the Company. The Company believes that the principal competitive factors affecting its market include product performance and functionality, customer service and support, product reputation, company reputation, carrier support, ACD support, fault tolerance, adaptability to individual customer call routing requirements, scalability, ability to integrate with third party products, ease-of-use, price, and effectiveness of sales and marketing efforts. Although the Company believes that it currently competes favorably with respect to such factors, there can be no assurance that the Company can maintain its competitive position against current and potential competitors, especially those with greater financial, marketing, service, support, technical, and other resources than the Company. INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS The Company relies primarily on a combination of patent, copyright, trademark and trade secrets laws, as well as confidentiality agreements to protect its proprietary rights. The Company has been issued one patent relating to the architecture, operating methodologies and interfaces of the Company's Intelligent CallRouter. The Company also has one patent application pending in the United States and internationally. While the Company believes that its pending patent application relates to a patentable invention, there can be no assurance that such patent application or any future patent application will be granted or that any patent relied upon by the Company will not be challenged, invalidated or circumvented, or that rights granted thereunder will provide competitive advantages to the Company. Moreover, despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain the use of information that the Company regards as proprietary. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to as great an extent as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology. The Company is not aware that any of its products infringes the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company with respect to current or future products. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, resulting in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, if at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. The software and network adapter necessary to enable the Company's Intelligent CallRouter to interface with the AT&T network is licensed by the Company from a single vendor under a perpetual, fully-paid license. Although the Company has access to the source code underlying this software and 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. Intelligent CallRouter, Pre-Routing and Post-Routing are registered trademarks of the Company and GeoTel is a trademark of the Company. All other trademarks and tradenames referred to in this Annual Report are the property of their respective owners. 10 12 EMPLOYEES As of December 31, 1996, the Company had a total of 74 employees, all of whom are based in the United States. Of the total, 31 were in research and development, 16 were in support and support services, 19 were in sales and marketing and 8 were in administration and finance. The Company's future performance depends in significant part upon the continued service of its key technical, sales and marketing, and senior management personnel and its continuing ability to attract and retain highly qualified technical, sales and marketing, and managerial personnel. Competition for such personnel is intense and there can be no assurance that the Company will be successful in attracting or retaining such personnel in the future. None of the Company's employees are represented by a labor union or are subject to a collective bargaining agreement. The Company has not experienced any work stoppages and considers its relations with its employees to be good. ITEM 2: PROPERTIES The Company's executive office is located in Littleton, Massachusetts in a facility consisting of 14,356 square feet, under a lease which expires in December 1998. In addition, the Company leases office space in the metropolitan areas of Atlanta, Chicago, Dallas, Philadelphia, Phoenix and Washington, D.C. The Company entered into a sublease agreement in February 1997 for office space for its new executive office in Lowell, Massachusetts. Initially, the Company will have the use of 31,770 square feet which will increase by an additional 15,885 square feet on January 1, 1998 and by a further addition of 15,885 square feet on January 1, 1999. Annual operating sublease payments during the sublease term will range from $302,000 in the first year to $731,000 beginning in 1999 and through the remainder of the lease term. The Company has the right, with proper notice, to terminate this sublease at the end of the sixth year of the sublease. Management believes that its new facilities will meet its needs for the next twelve months and that it will be able to negotiate a termination of its current lease or sublease the space. ITEM 3: LEGAL PROCEEDINGS On January 31, 1997 the Company filed suit for patent infringement against Genesys Telecommunications Laboratories, Inc. ("Genesys"), of San Francisco, Calif., in the U.S. District Court for the District of Massachusetts. In the action, the Company, owner of U.S. Patent No. 5,546,452, alleges that certain of Genesys' products infringe the Company's patent. The Company is seeking damages and injunctive relief. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company became subject to the reporting requirements of the Securities Exchange Act of 1934 on November 20, 1996. There were no matters submitted to a vote of the Company's shareholders during the fourth quarter of the fiscal year ended December 31, 1996. ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT Information required by Item 10 of Form 10-K with respect to executive officers of the Company is set forth below. Executive officers of the Company are elected by the Board of Directors on an annual basis and service until their successors have been duly elected and qualified. There are no family relationships among any of the executive officers or directors of the Company. The executive officers of the Company, and their ages as of December 31, 1996, are as follows:
NAME AGE POSITION - --------------------------------- --- -------------------------------------------- John C. Thibault................. 43 President, Chief Executive Officer and Director Louis J. Volpe................... 47 Senior Vice President of Sales and Marketing Timothy J. Allen................. 47 Vice President of Finance, Chief Financial Officer, Treasurer and Assistant Secretary G. Wayne Andrews................. 45 Vice President, Chief Technology Officer and Director Steven H. Webber................. 52 Vice President of Engineering
- --------------- 11 13 John C. Thibault has served as President, Chief Executive Officer and Director of the Company since January 1994. From April 1991 to October 1993, Mr. Thibault served as President, Chief Executive Officer and Director of Coral Network Corporation. From April 1988 to April 1991, Mr. Thibault served as an officer of Motorola, Inc. and Senior Vice President and General Manager of Motorola's Codex product division. From May 1986 to April 1988, Mr. Thibault was President and Chief Executive Officer of PBX manufacturer Intecom, Inc., a subsidiary of Wang Laboratories. Prior to his position at Intecom, he held several senior management positions over an 11-year period with Wang. Louis J. Volpe has served as Senior Vice President of Sales and Marketing of the Company since May 1996. From February 1995 to April 1996, Mr. Volpe served as Vice President of Marketing of the Company. Mr. Volpe served as Senior Vice President of Marketing and Operations of Parametric Technology Corporation from May 1993 to January 1995 and as Vice President of Marketing and Operations from September 1989 to May 1993. Prior to Parametric, Mr. Volpe was an executive at Prime Computer. Mr. Volpe is a director of Pure Atria, Inc. and Softdesk Inc., each of which is a publicly-traded company. Timothy J. Allen has served as Vice President of Finance, Chief Financial Officer, Treasurer and Assistant Secretary of the Company since February 1995. From March 1990 to September 1994, Mr. Allen served as Vice President and Chief Financial Officer of Object Design, Inc. From July 1988 to October 1989, Mr. Allen served as Vice President of Finance and Chief Accounting Officer for Xyvision Inc. From January 1983 to June 1988, Mr. Allen served as Xyvision's corporate controller. Prior to joining Xyvision, Mr. Allen was Corporate Controller at Nixdorf Computer Corporation. G. Wayne Andrews a co-founder of the Company, has served as a Director of the Company since June 1993 and as Vice President and Chief Technical Officer of the Company since January 1994 and served as President of the Company from June 1993 to December 1993. From October 1989 to December 1992, Mr. Andrews was co-founder and Vice President of Teloquent Communications Corporation. At Teloquent, Mr. Andrews held positions as Vice President Product Management, Vice President Engineering and Vice President Customer Support. Prior to co-founding Teloquent, Mr. Andrews was Director, International Development Center, and Director, Advanced Switching Systems at Teknekron Infoswitch Corp. Steven H. Webber a co-founder of the Company, has served as Vice President of Engineering of the Company since October 1993. Prior to joining the Company, Mr. Webber held a number of key technical and management positions with Stratus Computer Inc., including Chief Technical Advisor and Director of Strategic Planning. Prior to Stratus, Mr. Webber held a number of key technical positions at Honeywell Information Systems, Inc. and Massachusetts Institute of Technology. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's common stock trades on the Nasdaq National Market tier of the Nasdaq Stock Market under the Symbol: "GEOC". The following table sets forth, for the periods indicated, the range of high and low bid prices for the Company's common stock as reported by the Nasdaq Stock Market.
YEAR ENDED DECEMBER 31, 1996 ------------------ HIGH LOW ------- ------ Fourth Quarter (Commencing on November 20, 1996) ..... $18.125 $12.00
The Company has not declared or paid cash dividends on its common stock and does not plan to pay cash dividends to its shareholders in the near future. The Company presently intends to retain its earnings to finance further growth of its business. As of March 14, 1997, the Company's common stock was held by approximately 104 shareholders of record. This does not reflect persons or entities who hold their stock in nominee or street name accounts through various brokerage firms. The Company estimates that there are over 1,000 shareholders who hold their stock in nominee or street name accounts. 12 14 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the Notes thereto appearing elsewhere in this report.
INCEPTION (JUNE 4, 1993) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, ---------------------------------------- 1993 1994 1995 1996 -------------- ---------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Software license.................... $ 1,360 $ 7,880 Services and other.................. 174 1,167 ---------- ---------- ----------- ----------- Total revenues...................... 1,534 9,047 Cost of Revenues: Cost of software license............ 264 297 Cost of services and other.......... 611 1,414 ---------- ---------- ----------- ----------- Total cost of revenues.............. 875 1,711 ---------- ---------- ----------- ----------- Gross profit............................. 659 7,336 ---------- ---------- ----------- ----------- Operating Expenses: Research and development............ $ 140 $ 1,879 2,322 3,086 Sales and marketing................. -- 570 1,476 2,760 General and administrative.......... 261 641 887 1,052 ---------- ---------- ----------- ----------- Total operating costs............... 401 3,090 4,685 6,898 ---------- ---------- ----------- ----------- Income (loss) from operations............ (401) (3,090) (4,026) 438 Interest income, net..................... 24 124 164 316 ---------- ---------- ----------- ----------- Net income (loss)........................ (377) (2,966) (3,862) 754 Accretion of convertible preferred stock to redemption value.................... (4) (35) (77) (97) ---------- ---------- ----------- ----------- Net income (loss) available (attributable) to common stockholders........................... $ (381) $ (3,001) $ (3,939) $ 657 ========== ========== =========== =========== Net income (loss) available (attributable) to common stockholders........................... $ (0.20) $ (1.10) $ (1.25) $ 0.06 ========== ========== =========== =========== Weighted average number of common and common equivalent shares............... 1,950,088 2,724,895 3,154,729 11,730,906 ========== ========== =========== =========== Supplemental Basis (See Note B): Net income (loss) per common and common equivalent share....................... $ (0.11) $ (0.40) $ (0.37) $ 0.06 ========== ========== =========== =========== Weighted average number of common and common equivalent shares............... 3,509,584 7,476,726 10,365,465 11,730,906 ========== ========== =========== ===========
AT DECEMBER 31, ------------------------------------------------ 1993 1994 1995 1996 ------ ------- ------- ------- BALANCE SHEET DATA: Cash and cash equivalents.................... $ 451 $ 3,793 $ 4,537 $33,263 Working capital.............................. 2,841 4,249 4,292 31,421 Total assets................................. 3,020 5,483 6,449 36,924 Long-term debt, less current portion......... -- 338 408 -- Convertible preferred stock.................. 3,267 7,937 11,986 -- Total stockholders' equity (deficit)......... $ (370) $(3,357) $(7,312) $32,437
13 15 ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company was incorporated in June 1993 to develop telecommunications software solutions that enable enhanced call center applications. From inception through the first half of 1995, the Company was engaged principally in research and product development of its Intelligent CallRouter product. The Company's first customer installation of the Intelligent CallRouter occurred in May 1995 and the Company recognized its first revenue from customer shipments in the fourth quarter of 1995. The Company initially achieved profitability in the first quarter of 1996. Unit shipments have grown due to increasing market acceptance of the Company's product and increases in the size of the Company's direct sales force. The Company expects that the Intelligent CallRouter product will account for substantially all of its revenue for the foreseeable future. The Company believes that its future performance will depend in large part on its ability to maintain and enhance its current Intelligent CallRouter product line, develop new products that achieve market acceptance, maintain technological competitiveness, meet an expanding range of customer requirements and continue to recruit highly skilled and qualified software professionals. The Company primarily markets its products in the United States through a direct sales force which is complemented by strategic sales channels, selected resellers and international partners. The Company's revenue is derived from two sources: software licenses and services. Software license revenue, which has historically represented the majority of the Company's total revenue, is generally payable within thirty days of product acceptance. The Company recognizes software license fee revenues upon shipment unless there are significant post-delivery obligations. When significant post-delivery obligations exist, revenues are deferred until such obligations have been satisfied. Service revenues consist primarily of maintenance, installation and training revenues. Maintenance revenues are recognized ratably over the term of the support period, which is typically twelve months. Installation and training revenues are recognized when the services are performed. A significant portion of the Company's revenues to date has been derived from a limited number of customers. Revenues attributable to the Company's five largest customers accounted for approximately 94.4% and 49.1% of the Company's total revenues in 1995 and 1996, 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. The Company has experienced substantial revenue growth since 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 and indirect distribution channels 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. Although demand for the Intelligent CallRouter 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's quarterly operating results may in the future vary significantly depending on factors such as increased competition, 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, and general economic factors. The Company's expense 14 16 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. 15 17 OPERATING RESULTS The following table presents selected unaudited financial information for the Company's last five quarters (since the Company began recognizing revenue), as well as the percentage of the Company's total revenues represented by each item. The Company has not included quarterly financial information for any quarter prior to the quarter ended December 31, 1995 as the Company was a development stage enterprise and expenses in those quarters related primarily to the research and development of the Company's products and initial marketing efforts. In the opinion of the Company's management, this unaudited information reflects all adjustments, consisting only of normal recurring adjustments, necessary to present fairly this information when read in conjunction with the Consolidated Financial Statements and Notes thereto. The Company's operating results for any one quarter are not necessarily indicative of results for any future period.
QUARTER ENDED ------------------------------------------------------------------ DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1995 1996 1996 1996 1996 ------------ --------- -------- ------------- ------------ (IN THOUSANDS) Revenues: Software license................... $1,360 $ 1,705 $1,837 $ 2,076 $2,262 Services and other................. 174 134 212 320 501 ------ ------- ------ ------- ------ Total revenues..................... 1,534 1,839 2,049 2,396 2,763 ------ ------- ------ ------- ------ Cost of Revenues: Cost of software license........... 264 75 108 52 62 Cost of services and other......... 240 278 338 372 426 ------ ------- ------ ------- ------ Total cost of revenues............. 504 353 446 424 488 ------ ------- ------ ------- ------ Gross Profit............................ 1,030 1,486 1,603 1,972 2,275 ------ ------- ------ ------- ------ Operating Expenses: Research and development........... 601 656 734 820 876 Sales and marketing................ 479 621 575 773 791 General and administrative......... 386 204 242 259 347 ------ ------- ------ ------- ------ Total operating costs.............. 1,466 1,481 1,551 1,852 2,014 ------ ------- ------ ------- ------ Income (loss) from operations........... (436) 5 52 120 261 Interest income, net.................... 52 40 45 46 185 ------ ------- ------ ------- ------ Net income (loss)....................... $ (384) $ 45 $ 97 $ 166 $ 446 ====== ======= ====== ======= ======
QUARTER ENDED ------------------------------------------------------------------ DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1995 1996 1996 1996 1996 ------------ --------- -------- ------------- ------------ (PERCENTAGE OF REVENUES) Revenues: Software license................... 88.6% 92.7% 89.7% 86.7% 81.9% Services and other................. 11.4 7.3 10.3 13.3 18.1 ------ ----- ----- ----- ----- Total revenues..................... 100.0 100.0 100.0 100.0 100.0 ------ ----- ----- ----- ----- Cost of Revenues: Cost of software license........... 17.2 4.1 5.3 2.2 2.2 Cost of services and other......... 15.6 15.6 16.5 15.5 15.4 ------ ----- ----- ----- ----- Total cost of revenues............. 32.8 19.2 21.8 17.7 17.6 ------ ----- ----- ----- ----- Gross Profit............................ 67.2 80.8 78.2 82.3 82.4 ------ ----- ----- ----- ----- Operating Expenses: Research and development........... 39.2 35.7 35.8 34.2 31.7 Sales and marketing................ 31.2 33.8 28.1 32.3 28.6 General and administrative......... 25.2 11.1 11.8 10.8 12.6 ------ ----- ----- ----- ----- Total operating costs.............. 95.6 80.6 75.7 77.3 72.9 ------ ----- ----- ----- ----- Income (loss) from operations........... (28.4) 0.2 2.5 5.0 9.5 Interest income, net.................... 3.4 2.2 2.2 1.9 6.6 ------ ----- ----- ----- ----- Net income (loss)....................... (25.0)% 2.4% 4.7% 6.9% 16.1% ====== ===== ===== ===== =====
16 18 REVENUES Revenues consist of software license fees and services. The Company recorded no revenues until the fourth quarter of 1995. Since the fourth quarter of 1995, the Company's quarterly revenues have increased sequentially by 19.9%, 11.4%, 16.9% and 15.3% for the first, second, third and fourth quarters of 1996, respectively. The increases were due to increases in unit sales. The Company did not record any revenues from international sales until the first quarter of 1996. International sales represented 15.3% of revenues for the year ended December 31, 1996. The Company believes that it will continue to derive a significant portion of its revenues from international sales and that international revenue will comprise a larger percentage of total revenue in future years. To date, the Company's international sales have been denominated in U.S. currency. Most of the Company's revenues have been from software license and installation revenues. The Company anticipates that maintenance revenues will increase as a percentage of revenues as the Company's customer base increases. Service and other revenues for the fourth quarter of 1995 were derived solely from installation services. Installation, maintenance services and other revenue represented 58.9%, 31.4% and 9.7%, respectively, of total service and other revenues for the year ended December 31, 1996. Service and other revenues increased as a percentage of total revenue during 1996 due to the increase in maintenance revenue. Maintenance revenue has increased as a result of the increase in Company's customer base. Installation services are one time sales. Maintenance contracts are generally twelve months in duration and are subject to customer renewal. COST OF REVENUES To date, cost of software licenses consists principally of product warranty costs and costs attributable to a discontinued marketing program offered to the Company's first five customers. Cost of software licenses as a percentage of software license revenue were 19.4%, 4.4%, 5.9%, 2.5% and 2.7% for the fourth quarter of 1995 and the first, second, third and fourth quarter of 1996, respectively. The decreases in percentage from the fourth quarter of 1995 resulted from a decrease in hardware costs. As part of the initial introduction of the Company's software products, the Company purchased and resold certain hardware required by customers in order to implement the Company's products. This program was discontinued as the Company's general practice in September 1995. The Company does not anticipate that hardware costs will represent a significant portion of cost of revenues in the future. The increase in dollars and as a percentage of software license revenue in the second quarter of 1996 as compared to any other quarter in 1996, was the result of an increase in the provision for warranty expense. The Company believes that in future periods, the percentage of cost of software licenses will approximate the percentages realized in the third and fourth quarters of 1996. Cost of services 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 costs, travel and facility costs. Cost of services as a percentage of services and other revenues were 137.9%, 207.5%, 159.4%, 116.3% and 85.0% for the fourth quarter of 1995 and the first, second, third and fourth quarter of 1996, respectively. The dollar increases were a result of start-up costs associated with building a customer support infrastructure to handle the anticipated future growth in customers. The Company anticipates that the cost of services will increase in absolute dollars, while decreasing as a percentage of services and other revenues in the foreseeable future. In the fourth quarter of 1996, revenues from services and other revenue exceeded the related costs of services and other expenses. The Company believes this trend will continue in the future as the Company continues to experience the anticipated efficiencies from a growing customer base and as maintenance customer renewals increase. OPERATING EXPENSES Research and Development. Research and development expenses consist principally of personnel and facility costs. Research and development expenses as a percentage of total revenues were 39.2%, 35.7%, 35.8%, 34.2% and 31.7% for the fourth quarter of 1995 and the first, second, third and fourth quarter of 1996, respectively. The decrease in percentage from the fourth quarter of 1995 to the first quarter in 1996 was the result of expenses remaining relatively constant during the period while the Company experienced significant revenue growth. The increase in absolute dollars from the fourth quarter of 1995 through the fourth quarter of 17 19 1996 was the result of an increase in employees and the associated hiring costs. The major product development efforts in 1996 related to the development of significant enhancements to the Company's ICR product such as expanding the products interface compatibility through the addition of new ACD interfaces, interfaces to Voice Response Units ("VRU's"), engineering the product to operate in a service bureau environment (i.e. one system supporting several customers) and improvements in the existing graphical user interface and security features of the product. The Company anticipates that research and development expenses will continue to increase in absolute dollars, while decreasing as a percentage of total revenues in the foreseeable future. Sales and Marketing. Sales and marketing expenses consist principally of personnel costs, travel, promotional expenses and facility costs. Sales and marketing expenses as a percentage of total revenues were 31.2%, 33.8%, 28.1%, 32.3% and 28.6% for the fourth quarter of 1995 and the first, second, third and fourth quarter of 1996, respectively. The Company recorded a charge associated with the termination of an employee in the first quarter of 1996. Excluding this charge, the Company would have experienced an increase in sales and marketing expenses in absolute dollars but a decrease as a percentage of total revenues from the preceding quarter because of the increase in revenue during the periods. The decrease in the percentage of sales and marketing expenses in the fourth quarter from the third quarter of 1996 was the result of the increase in revenue in the fourth quarter while the Company maintained spending at the same level as the third quarter of 1996. The increase in sales and marketing expenses was the result of adding sales personnel to the direct sales force and an increase in commission expense attributable to higher sales. The Company anticipates that sales and marketing expenses will increase in absolute dollars and as a percentage of total revenues 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, as well as legal expenses and facility costs. General and administrative expenses as a percentage of total revenues were 25.2%, 11.1%, 11.8%, 10.8% and 12.6% for the fourth quarter of 1995 and the first, second, third and fourth quarter of 1996, respectively. General and administrative expenses in the fourth quarter of 1995 were higher than in any of the quarters in 1996 principally due to the settlement of litigation for approximately $127,000. General and administrative expenses have been increasing in absolute dollars since the first quarter of 1996 due to an increase in employees and travel. The significant increase in absolute dollars in the fourth quarter of 1996 compared to the prior quarters of 1996, was the result of the Company recognizing an expense of approximately $69,000 relating to the forgiveness of a note receivable and compensation to offset the associated officer's income taxes. Excluding this charge, the Company would have experienced an increase in general and administrative expenses in absolute dollars but a decrease as a percentage of total revenues from the prior quarters in 1996. The Company anticipates that general and administrative expenses will increase in absolute dollars, while decreasing as a percentage of total revenues for the foreseeable future. INTEREST INCOME, NET Interest income, net, of $52,000, $40,000, $45,000, $46,000 and $185,000 for the fourth quarter of 1995 and the first, second, third and fourth quarter of 1996, respectively, resulted from investments of the Company's cash balances, net of interest expense incurred on bank term notes. In the fourth quarter 1996, the Company raised approximately $26,669,000 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 fourth quarter due to the increase in cash invested. PROVISION FOR INCOME TAXES No income tax provision was recorded for federal income tax purposes for the years ended December 31, 1996, 1995 and 1994 as the Company has not reported taxable income in those periods. As of December 31, 1996, the Company had capitalized start-up costs of approximately $4,800,000 that are amortized to offset taxable income over the five year period beginning in 1994 and net operating loss carryforwards of approximately $1,111,000 for federal and state income tax purposes that may be used to offset future federal 18 20 income tax, if any. The Company also has $223,000 of federal research and development tax credits which expire beginning in the year 2009 if not utilized. An ownership change, as defined in the Tax Reform Act of 1986, may restrict the utilization of certain tax attributes. A valuation allowance has been recorded for the entire deferred tax asset as a result of uncertainties regarding the realization of the asset due to the limited history of operating profits. See the Consolidated Financial Statements and Notes thereto. LIQUIDITY AND CAPITAL RESOURCES The Company, prior to its initial public offering on November 20, 1996, had financed its operations since inception primarily by the private sales of equity securities pursuant to which the Company received approximately $12,123,000 and by bank term notes to finance purchases of equipment. The principal uses of cash have been to fund research and development of the Company's products and initial marketing of the products and to purchase capital equipment. On November 20, 1996, the Company completed its initial public offering of common stock, which generated net proceeds of $26,669,000. The Company used approximately $756,000 of the proceeds to repay borrowings under its outstanding equipment lines of credit. At December 31, 1996, the Company had cash and cash equivalents of $33,263,000. As of December 31, 1996, the Company had $2,121,000 in accounts receivable. The Company's working capital increased to $31,421,000 at December 31, 1996 from $4,292,000 at December 31, 1995. The Company's operating activities provided cash of $3,306,000 in 1996 and used cash of $3,940.000 and 2,511,000 in 1995 and 1994, respectively. The Company was in the development stage up until the fourth quarter of 1995 which resulted in a negative cash flow from operations. In 1996, the Company experienced significant positive cash flow as a result of achieving profitability of $754,000 in its first full year of revenues and due to the increase in deferred revenue of $2,017,000 partially offset by an increase in receivables of $1,106,000. Cash used in investing activities in 1996 was $743,000 for capital expenditures. Cash provided from investing activities was $472,000 and $752,000 in 1995 and 1994, respectively. The positive cash flow in those years was the result of the sale and maturity of marketable securities partially offset by capital expenditures. Cash provided by financing activities was $26,163,000, $4,212,000 and $5,101,000 in 1996, 1995 and 1994, respectively. In 1996, the positive cash flow was primarily the result of the Company's initial public offering of common stock. In 1995 and 1994, the financing activities consisted primarily of the sale of Convertible Preferred Stock. As of December 31, 1996, the Company had no material commitments for capital expenditures. The Company believes that existing cash balances, funds available under the equipment line and funds generated by operations, will be sufficient to meet its anticipated liquidity and working capital requirements for at least the next twelve months. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS The Company operates in a highly competitive and changing environment that involve a number of risks, some of which are beyond the Company's control. The following discussion highlights a number of these risks. These discussions involve forward looking statements that involve a number of risks and uncertainties that could cause future results to differ materially. Among these risk factors are continuing acceptance of GeoTel's products in the marketplace, the Company's ability to grow from the sales of these products, general competitive pressures in the marketplace, and the continued overall growth in the market for telecommunications software products. Limited Operating History; Future Operating Results Uncertain. The Company was incorporated in June 1993 and did not begin shipping products until May 1995. As of December 31, 1996, the Company had an accumulated deficit of $6,455,000. The Company has experienced substantial revenue growth since 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 on 19 21 a quarterly or annual basis in the future. 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 and indirect distribution channels 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. Potential Fluctuations in Quarterly Operating Results. The Company's quarterly operating results may in the future vary significantly depending on factors such as increased competition, 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, the lengthy sales cycles of the Company's products, changes in operating expenses, changes in Company strategy, personnel changes and general economic factors. 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 varies substantially from customer to customer. A significant portion of the Company's revenues and operating income has been, and is expected to continue to be, derived from software licensing fees from a limited number of customers. Variability in the timing of such license fees may cause material fluctuations in the Company's business, operating results and financial condition. The Company's products and services generally require capital expenditures by customers as well as the commitment of resources to implement the Company's products. Accordingly, the Company is substantially dependent on its customers' decisions as to the timing and level of such expenditures and resource commitments. In addition, the Company typically realizes a significant portion of license revenues in the last month of a quarter. As a result, the magnitude of quarterly fluctuations may not become evident until late in, or after the close of, a particular quarter. The Company's expenses are based in part on the Company's expectations as to future revenue levels and to a large extent are fixed in the short-term. If revenues do not meet expectations, the Company's business, operating results and financial condition are likely to be materially adversely affected. In particular, because only a small portion of the Company's expenses varies with revenues, net income may be disproportionately affected by a reduction in revenues. As a result, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful and should not be relied upon as indications of future performance. Due to the foregoing factors, it is likely that in some future quarter the Company's revenue or operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock could be materially adversely affected. Potential Volatility of Stock Price. The market price of the Company's Common Stock may be volatile and may be significantly affected by factors such as actual or anticipated fluctuations in the Company's quarterly operating results, announcements of new products by the Company or its competitors, developments with respect to conditions and trends in the telecommunications industry, government regulation, changes in estimates by securities analysts of the Company's future performance, general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have adversely affected the market prices of securities of companies for reasons unrelated to their operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company. Such litigation could result in substantial costs and a diversion of management's attention and resources, which would have a material adverse effect on the Company's business, financial condition and results of operations. These broad market fluctuations may adversely affect the market price of the Common Stock. Risks Associated with Customer Concentration and One-Time License Fees. A significant portion of the Company's revenues to date has been derived from a limited number of customers. Revenues attributable to the Company's five largest customers accounted for approximately 94.4% and 49.1% of the Company's total revenues in 1995 and 1996, respectively. Fidelity, Sprint and America Online accounted for approximately 38.3%, 25.9% and 20.0%, respectively, of the Company's total revenues in 1995, and Fidelity, Optus, Delta, American Express, and GTE accounted for approximately 14.1%, 11.4%, 8.9%, 7.6% and 7.3%, respectively, of the Company's total revenues for 1996. The Company expects that it will continue to be dependent upon a 20 22 limited number of customers for a significant portion of its revenues in future periods. None of the Company's customers, other than MCI and Optus, is contractually obligated to license or purchase additional products or services from the Company and these customers generally have acquired fully-paid licenses to the installed product. As a result of this customer concentration, the Company's business, operating results and financial condition could be materially adversely affected by the failure of anticipated orders to materialize or by deferrals or cancellations of orders. In addition, a significant portion of the Company's revenues to date has been derived from initial license fees from customers who have acquired fully-paid licenses to the installed product. There can be no assurance that any of the Company's customers will continue to purchase the Company's products and services in amounts similar to previous periods or that revenues from customers that have accounted for significant revenues in past periods, individually or as a group, will continue or, if continued, will reach or exceed historical levels in any future period. The Company's operating results may in the future be subject to substantial period-to-period fluctuations as a consequence of such customer concentration. Lengthy Sales and Implementation Cycles. The Company's products are typically intended for use in applications that may be critical to a customer's business. The license and implementation of the Company's software products generally involves a significant commitment of resources by prospective customers. As a result, the Company's sales process is often subject to delays associated with lengthy approval processes that typically accompany significant capital expenditures. For these and other reasons, the sales cycle associated with the license of the Company's products is often lengthy (recently averaging approximately six months) and subject to a number of significant delays over which the Company has little or no control. In addition, the Company does not recognize license revenues until all significant post-delivery obligations have been satisfied, including the development of specific product features which, in certain cases, can take several quarters. The time required to implement the Company's products can vary significantly with the needs of its customers and is generally a process that extends for several months. There can be no assurance that the Company will not experience delays in the future, particularly if the Company receives orders for large, complex installations. Product Concentration; Dependence on Growth in Call Center Market. The Company currently derives substantially all of its revenues from licenses of the Intelligent CallRouter and related services. Broad market acceptance of the Company's product is critical to the Company's future success. As a result, a decline in demand for or failure to achieve broad market acceptance of the Intelligent CallRouter as a result of competition, technological change or otherwise, would have a material adverse effect on the business, operating results and financial condition of the Company. A decline in sales of the Intelligent CallRouter could also have a material adverse effect on sales of other Company products that may be sold to Intelligent CallRouter customers. The Company's future financial performance will depend in part on the successful development, introduction and customer acceptance of new and enhanced versions of the Intelligent CallRouter and other products. There can be no assurance that the Company will continue to be successful in marketing the Intelligent CallRouter or any new or enhanced products. The Intelligent CallRouter is utilized in call centers maintained by companies in a variety of industries. This product is currently expected to account for substantially all of the Company's future revenues. Although demand for the Intelligent CallRouter 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 those environments. There can be no assurance that the market for the Company's products will continue to grow. In addition, changes in the business or pricing strategies of the interexchange carriers or ACD vendors could adversely affect demand for the Company's products. If the call center market fails to grow or grows more slowly than the Company currently anticipates, the Company's business, operating results and financial condition would be materially adversely affected. During recent years, segments of the telecommunications industry have experienced significant economic downturns characterized by decreased product demand, price erosion, work slowdowns and layoffs. The Company's operations may in the future experience substantial fluctuations from period to period as a consequence of such industry patterns, general economic conditions affecting the timing of orders from major customers, and other factors affecting 21 23 capital spending. There can be no assurance that such factors will not have a material adverse effect on the Company's business, operating results and financial condition. Competition. The market for telecommunications software products is intensely competitive and is subject to rapid technological change. Although to date the Company has experienced limited competition, the Company expects competition to increase significantly in the future. Currently, the Company's principal competitors are the interexchange carriers, particularly AT&T, and to a lesser extent MCI and Sprint, which provide proprietary call routing solutions as part of their service offerings. In addition, a number of other companies have introduced or announced their intention to introduce products that could be competitive with the Company's products, including Genesys Telecommunications Laboratories and IEX Corporation. Additional competitors, including traditional ACD providers, such as Lucent Technologies, Aspect Telecommunications Corporation, Northern Telecommunications, Inc. and Rockwell International Corporation, may enter the market by enhancing their proprietary private network solutions or by entering into arrangements with the interexchange carriers. The Company believes that, to date, approximately one-half of the Company's customers have purchased the Company's products to replace or enhance existing call routing solutions offered by the interexchange carriers. The Company's other customers have purchased the Company's products in order to implement a virtual call center solution for the first time. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect the Company's business, operating results and financial condition. Some of the Company's current, and many of the Company's potential, competitors have significantly greater financial, technical, marketing and other resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than the Company. In addition, one or more interexchange carriers, including MCI, Optus and Sprint which are customers of the Company, could choose to provide or distribute competitive products and services. Accordingly, there can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, operating results and financial condition. Moreover, the Company may be subject to potential conflicts of interest from time to time if a customer, such as MCI, Optus or Sprint, provides or distributes competitive products or services. In this regard, a customer which elects to provide or distribute competitive products or services could make strategic decisions with respect to pricing and other matters relating to products provided or distributed by it which could adversely affect the Company's business, operating results and financial condition. Dependence on New Products and Rapid Technological Change. The market for the Company's products is characterized by rapid technological change, frequent new product introductions and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. The life cycles of the Company's products are difficult to estimate. The Company's future success will depend upon its ability to enhance its current products and to develop and introduce new products on a timely basis that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of its customers. There can be no assurance that the Company will be successful in developing and marketing product enhancements or new products that respond to technological change or evolving industry standards, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products, or that its new products and product enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. If the Company is unable, for technological or other reasons, to develop and introduce new products or enhancements of existing products in a timely manner in response to changing market conditions or customer requirements, the Company's business, operating results and financial condition will be materially adversely affected. In June 1996, the Company released a new version of its Intelligent CallRouter and the Company plans to introduce additional enhancements in the near term. These enhancements are subject to significant technical risks. If these enhancements are delayed or if they do not achieve market acceptance, the Company's business, operating results and financial condition will be materially adversely affected. 22 24 Risk of Product Defects or Development Delays. Software products as complex as those offered by the Company frequently contain errors or failures, especially when first introduced or when new versions are released. Although the Company conducts extensive product testing, new products and enhancements could contain software errors and, as a result, the Company could experience delays in recognizing revenues during the period required to correct these errors. The Company could in the future lose revenues as a result of software errors or defects. The Company's products are typically intended for use in applications that may be critical to a customer's business. As a result, the Company believes that its current customers and potential customers have a greater sensitivity to product defects than the market for software products generally. Although the Company has not experienced material adverse effects resulting from any such errors to date, there can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found in new products or releases after commencement of commercial shipments, resulting in the loss of revenue or delay in market acceptance, diversion of development resources, damage to the Company's reputation, or increased service and warranty costs, any of which could have a material adverse effect upon the Company's business, operating results and financial condition. Management of Growth; Dependence Upon Key Personnel. The Company has recently experienced a period of rapid growth in revenues that has placed a significant strain upon its management systems and resources. The Company's ability to compete effectively and to manage future growth, if any, will require the Company to continue to improve its financial and management controls, reporting systems and procedures on a timely basis and expand, train and manage its employee work force. There can be no assurance that the Company will be able to do so successfully. The Company's failure to do so could have a material adverse effect upon the Company's business, operating results and financial condition. The Company's future performance depends in significant part upon the continued service of its key technical, sales and senior management personnel, none of whom is bound by an employment agreement. The loss of the services of one or more of the Company's executive officers could have a material adverse effect on the Company's business, operating results and financial condition. The Company's future success also depends on its continuing ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company can retain its key technical, sales and managerial employees or that it can attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future. Risks Associated with International Expansion. International sales accounted for approximately 15.3% of the Company's revenues for 1996. As part of its business strategy, the Company is seeking opportunities to expand its products into international markets. The Company believes that such expansion is important to the Company's ability to continue to grow and to market its products and services. In marketing its products and services internationally, however, the Company will face new competitors, some of whom may have established strong relationships with carriers. In addition, the ability of the Company to enter the international markets will be dependent upon the Company's ability to integrate its products with local proprietary networks in foreign countries. There can be no assurance that the Company will be successful in integrating its products with these proprietary networks or marketing or distributing its products abroad or that, if the Company is successful, its international revenues will be adequate to offset the expense of establishing and maintaining international operations. To date, the Company has limited experience in marketing and distributing its products internationally. In addition to the uncertainty as to the Company's ability to establish an international presence, there are certain difficulties and risks inherent in doing business on an international level, such as compliance with regulatory requirements and changes in these requirements, export restrictions, export controls relating to technology, tariffs and other trade barriers, protection of intellectual property rights, difficulties in staffing and managing international operations, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in currency exchange rates and potentially adverse tax consequences. There can be no assurance that one or more of such factors will not have a material adverse effect on any international operations established by the Company and, consequently, on the Company's business, operating results and financial condition. Dependence on Proprietary Technology; Risks of Infringement. The Company is dependent upon its ability to protect its proprietary technology. To protect its proprietary rights, the Company relies on a 23 25 combination of patents, copyrights, trademarks, trade secret laws and confidentiality procedures. The Company has been issued one United States patent and also has one patent application pending in the United States and internationally. There can be no assurance that patents will be issued with respect to the pending or future patent applications or that the Company's existing or future patents will be upheld as valid or will prevent the development of competitive products. In addition, existing patent, copyright, trademark and trade secret laws afford only limited protection, and many countries' laws do not protect the Company's proprietary rights to the same extent as do the laws of the United States. Accordingly, there can be no assurance that the Company will be able to protect its proprietary rights against unauthorized third-party copying, use or exploitation, any of which could have a material adverse effect on the Company's business, operating results and financial condition. Attempts may be made to copy or reverse engineer aspects of the Company's products, or to obtain, use or exploit information or methods which the Company deems proprietary. Additionally, there can be no assurance that the Company's customers and others will not develop products which infringe upon the Company's rights, or that compete with the Company's products. Policing the use of the Company's products is difficult and expensive, and there is no assurance that such efforts would prove effective. Litigation or other action may be necessary in the future to enforce the Company's proprietary rights, to seek and confirm patent protection for the Company's technologies, or to determine the validity and scope of the proprietary rights of others. Any litigation could be time-consuming and result in significant costs. The Company expects that its software products may increasingly be subject to claims as the number of products and competitors in the Company's markets grows and the functionality of such products overlaps. Any such claims, with or without merit, could result in substantial costs and diversions of resources and management's attention, and could cause product shipment delays or require the Company to enter into royalty or licensing agreements, any of which could have a material adverse impact on the Company's business, operating results and financial condition. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, if at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. Dependence on a Single Supplier for a Certain Product. The software and network adapter necessary to enable the Company's Intelligent CallRouter to interface with the AT&T network is licensed by the Company from a single vendor under a perpetual, fully-paid license. Although the Company has access to the source code underlying this software and 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. Product Liability. The Company's license agreements with its customers generally contain provisions designed to limit the Company's exposure to potential product liability claims. However, it is possible that the limitation of liability provisions contained in the Company's license agreements may not be effective under the laws of certain jurisdictions. Although the Company has not experienced any product liability claims to date, the sale and support of products by the Company may entail the risk of such claims, and there can be no assurance that the Company will not be subject to such claims in the future. A successful product liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results and financial condition. 24 26 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Consolidated Balance Sheets as of December 31, 1996 and 1995............ 26 Consolidated Statements of Operations for the years ended December 31, 1996, 1995, and 1994.................................................. 27 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1996, 1995 and 1994................................ 28 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994.................................................. 29 Notes to Consolidated Financial Statements.............................. 30 Reports of Independent Accountants...................................... 40
25 27 GEOTEL COMMUNICATIONS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------- 1996 1995 ------- ------- ASSETS Current assets: Cash and cash equivalents........................................... $33,263 $ 4,537 Accounts receivable................................................. 2,121 749 Accounts receivable -- related party................................ -- 266 Prepaid expenses and other current assets........................... 524 107 ------- ------- Total current assets........................................... 35,908 5,659 ------- ------- Property and equipment, net.............................................. 1,016 790 ------- ------- Total assets................................................... $36,924 $ 6,449 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.................................................... $ 656 $ 160 Accrued expenses.................................................... 857 310 Accrued compensation and related accruals........................... 685 324 Current portion of long-term debt................................... -- 301 Deferred revenue.................................................... 2,080 242 Deferred revenue -- related party................................... 209 30 ------- ------- Total current liabilities...................................... 4,487 1,367 ------- ------- Long-term debt........................................................... -- 408 ------- ------- Commitments (Notes E and I) Convertible preferred stock, $.01 par value, authorized, issued and outstanding none and 7,718,615 shares in 1996 and 1995, respectively... -- 11,986 ------- ------- Stockholders' equity (deficit): Preferred stock, $.01 par value, authorized 5,000,000 shares, none issued............................................................. -- -- Common stock, $.01 par value, authorized 40,000,000 shares, issued 13,358,296 and 2,572,580 shares; outstanding 13,083,553 and 2,329,094 shares in 1996 and 1995, respectively.................... 134 26 Additional paid-in capital.......................................... 39,967 74 Accumulated deficit................................................. (6,455) (7,209) Notes receivable from stockholders.................................. (116) (180) Unearned compensation............................................... (1,051) -- ------- ------- 32,479 (7,289) Less treasury stock, at cost, 274,743 and 243,486 shares in 1996 and 1995, respectively................................................. (42) (23) ------- ------- Total stockholders' equity (deficit)........................... 32,437 (7,312) ------- ------- Total liabilities and stockholders' equity (deficit)........... $36,924 $ 6,449 ======= =======
The accompanying notes are an integral part of the consolidated financial statements. 26 28 GEOTEL COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ------ ------- ------- Revenues: Software license................................... $6,850 $ 821 Services and other................................. 921 126 Related party licenses and services (Note J)....... 1,276 587 ------ ------- Total revenues..................................... 9,047 1,534 ------ ------- Cost of Revenues: Cost of software license........................... 297 264 Cost of services and other......................... 1,414 611 ------ ------- Total cost of revenues............................. 1,711 875 ------ ------- Gross profit............................................ 7,336 659 ------ ------- Operating Expenses: Research and development........................... 3,086 2,322 $ 1,879 Sales and marketing................................ 2,760 1,476 570 General and administrative......................... 1,052 887 641 ------ ------- ------- Total operating costs.............................. 6,898 4,685 3,090 ------ ------- ------- Income (loss) from operations........................... 438 (4,026) (3,090) Interest income......................................... 386 225 141 Interest expense........................................ (70) (61) (17) ------ ------- ------- Net income (loss)....................................... 754 (3,862) (2,966) Accretion of convertible preferred stock to redemption value................................................. (97) (77) (35) ------ ------- ------- Net income (loss) available (attributable) to common stockholders.......................................... $ 657 $(3,939) $(3,001) ====== ======= ======= Net income (loss) per common and common equivalent share -- Supplemental Basis (Note B) Net income (loss) available (attributable) to common stockholders.......................................... $ 0.06 $ (1.25) $ (1.10) ====== ======= ======= Weighted average number of common and common equivalent shares................................................ 11,730,906 3,154,729 2,724,895
The accompanying notes are an integral part of the consolidated financial statements. 27 29 GEOTEL COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK TREASURY STOCK ------------------ NOTES ---------------- NUMBER ADDITIONAL RECEIVABLE NUMBER OF PAID-IN ACCUMULATED FROM UNEARNED OF SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS COMPENSATION SHARES AMOUNT ---------- ------ ---------- ----------- ------------ ------------ -------- ------ Balance Dec. 31, 1993................... 1,034,028 $ 10 $ 1 $ (381) Sale of common stock for cash and notes receivable............................ 1,038,560 11 100 $ (94) Acquisition of treasury stock........... 163,211 $ (3) Net loss................................ (2,966) Accretion of Convertible preferred stock to redemption value................... (35) ----- --- ---------- ---- -------- ------- ------ --- Balance Dec. 31, 1994................... 2,072,588 21 66 (3,347) (94) 163,211 (3) Sale of common stock for cash, services and notes receivable.................. 499,992 5 85 (86) Acquisition of treasury stock........... 80,275 (20) Net loss................................ (3,862) Accretion of Convertible preferred stock to redemption value................... (77) ----- --- ---------- ---- -------- ------- ------ --- Balance Dec. 31, 1995................... 2,572,580 26 74 (7,209) (180) 243,486 (23) Sale of common stock and exercise of stock options......................... 27,000 34 (101,222) 1 Accretion of Convertible preferred stock to redemption value................... (97) Issuance of common stock from initial public offering, net.................. 2,465,000 25 26,644 Conversion of preferred stock into common stock.......................... 8,293,716 83 12,161 Acquisition of treasury stock and forgiveness of note receivable........ 64 132,479 (20) Stock options granted below fair value................................. 1,151 $ (1,151) Amortization of unearned compensation... 100 Net income.............................. 754 ----- --- ---------- ---- -------- ------- ------ -------- --- Balance December 31, 1996............... 13,358,296 $134 $ 39,967 $(6,455) $ (116) $ (1,051) 274,743 $(42) ========== ==== ======== ======= ====== ======== === ======== TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ------------ Balance Dec. 31, 1993................... $ (370) Sale of common stock for cash and notes receivable............................ 17 Acquisition of treasury stock........... (3) Net loss................................ (2,966) Accretion of Convertible preferred stock to redemption value................... (35) ---- Balance Dec. 31, 1994................... (3,357) Sale of common stock for cash, services and notes receivable.................. 4 Acquisition of treasury stock........... (20) Net loss................................ (3,862) Accretion of Convertible preferred stock to redemption value................... (77) ---- Balance Dec. 31, 1995................... (7,312) Sale of common stock and exercise of stock options......................... 35 Accretion of Convertible preferred stock to redemption value................... (97) Issuance of common stock from initial public offering, net.................. 26,669 Conversion of preferred stock into common stock.......................... 12,244 Acquisition of treasury stock and forgiveness of note receivable........ 44 Stock options granted below fair value................................. -- Amortization of unearned compensation... 100 Net income.............................. 754 ---- Balance December 31, 1996............... $ 32,437 ====
The accompanying notes are an integral part of the consolidated financial statements. 28 30 GEOTEL COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 ------- ------- ------- Cash flows from operating activities: Net income (loss)........................................... $ 754 $(3,862) $(2,966) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities Depreciation and amortization.......................... 517 359 159 Equity compensation.................................... 137 1 -- Changes in operating assets and liabilities Accounts receivable and accounts receivable -- related party................................... (1,106) (1,015) -- Prepaid expenses and other current assets......... (417) (38) (17) Accounts payable.................................. 496 51 59 Accrued expenses and accrued compensation......... 908 292 254 Deferred revenue and deferred revenue -- related party........................................... 2,017 272 -- ------- ------- ------- Net cash provided by (used for) operating activities........ 3,306 (3,940) (2,511) ------- ------- ------- Cash flows from investing activities: Proceeds from sales and maturities of marketable securities................................................ -- 952 3,384 Purchases of marketable securities.......................... -- -- (1,875) Purchases of property and equipment......................... (743) (480) (757) ------- ------- ------- Net cash provided by (used for) investing activities........ (743) 472 752 ------- ------- ------- Cash flows from financing activities: Proceeds from sale of common stock -- net................... 26,704 3 17 Proceeds from notes receivable for common stock............. 7 -- -- Proceeds from sale of convertible preferred stock -- net.... 161 3,972 4,635 Proceeds from long-term debt................................ 358 418 467 Principal payments under long-term debt..................... (1,067) (161) (15) Acquisition of treasury stock............................... -- (20) (3) ------- ------- ------- Net cash provided by financing activities:.................. 26,163 4,212 5,101 ------- ------- ------- Net change in cash and cash equivalents..................... 28,726 744 3,342 Cash and cash equivalents, beginning of year................ 4,537 3,793 451 ------- ------- ------- Cash and cash equivalents, end of year...................... $33,263 $ 4,537 $ 3,793 ======= ======= ======= Supplemental disclosures of noncash financing activities: Notes received in exchange for common stock................. $ -- $ 86 $ 94 ======= ======= ======= Supplemental cash flow information: Interest paid............................................... $ 66 $ 60 $ 13 ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. 29 31 GEOTEL COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. NATURE OF BUSINESS: GeoTel Communications Corporation (the "Company") develops and markets telecommunications software solutions, consisting primarily of one product, that enable enhanced call center applications. Principal operations of the Company commenced during 1995. The Company currently derives substantially all of its revenues from licenses of the Intelligent CallRouter and related services. B. SIGNIFICANT ACCOUNTING POLICIES: Basis of Consolidation The consolidated financial statements include the accounts of GeoTel Communications Corporation and its wholly owned subsidiary. All intercompany balances and transactions have been eliminated. Use of Accounting Estimates 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. Cash, Cash Equivalents and Investments The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. The Company classifies its investments as available-for-sale and states them at amortized cost plus accrued interest which approximates fair market value. Cash equivalents consist of the following (in thousands):
DECEMBER 31, ------------------ 1996 1995 ------- ------ Commercial paper...................................... $31,216 $3,986 Money market instruments.............................. 1,415 340 ------- ------ Total cash equivalents................................ $32,631 $4,326 ======= ======
Income Taxes The Company provides for income taxes under the liability method, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Under this method, a valuation allowance is required against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Management evaluates on a quarterly basis the recoverability of the deferred tax assets and the level of the valuation allowance. At such time as it is determined that it is more likely than not that deferred tax assets are realizable, the valuation allowance will be appropriately reduced. 30 32 GEOTEL COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Property and Equipment Property and equipment are stated at cost. The Company provides for depreciation and amortization using the straight-line method over their estimated useful lives as follows:
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE ------------------------------------------------- ------------------------- Computer and lab equipment....................... 3 years Furniture and fixtures........................... 3 years Leasehold improvements........................... Shorter of lease term or estimated useful life
Repairs and maintenance are charged to expense as incurred. Significant improvements are capitalized and depreciated. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations. Revenue Recognition The Company recognizes license fee revenues upon shipment unless there are significant post-delivery obligations. When significant post-delivery obligations exist, typically, customer acceptance criteria, revenues are deferred until no such significant obligations remain. Service and other revenues have consisted primarily of maintenance, installation and training revenues. Maintenance revenues are recognized ratably over the term of the support period, which is typically twelve months. Installation and training revenues generally are recognized when the services are performed. Amounts received prior to revenue recognition and for prepaid maintenance revenue are classified as deferred revenue. Product Warranty Costs The Company provides a ninety day warranty and provides for estimated direct labor and associated indirect costs. Provision for estimated warranty costs is recorded at the time of sale and periodically adjusted to reflect actual experience. Financial Instruments and Concentrations of Credit Risk Carrying amounts of certain of the Company's financial instruments including cash and cash equivalents, trade accounts receivable, accounts payable, accrued expenses and other liabilities approximate fair value due to their short maturities. The Company invests its excess cash primarily in highly rated commercial paper and financial institutions. Accounts receivable at December 31, 1996 and 1995 consist principally of ten and three customer balances, respectively (See Note J). To reduce risk, the Company routinely assesses the financial strength of its customers and, as a consequence believes that its trade accounts receivable credit risk exposure is limited. The Company generally does not require collateral and historically has not experienced significant losses on trade receivables. Research and Development Research and development costs are charged to operations as incurred. The Company capitalizes eligible software costs incurred after technological feasibility of the product has been established. The Company achieves technological feasibility when a working model has been established. To date, costs eligible for capitalization have been immaterial and no costs have been capitalized. 31 33 GEOTEL COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Computation of Net Income (Loss) Per Common and Common Equivalent Share Net income (loss) per common share and common equivalent 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 stock options outstanding. Common equivalent shares from Convertible Preferred Stock and options are excluded from the computation when their effect is antidilutive, except that, 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 initial public offering ("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 (loss) per share is not presented as it is the same as the amounts disclosed in primary net income (loss) per share for the years ended December 31, 1996, 1995 and 1994. Supplementary net income (loss) per common share has been computed in the same manner, except that all outstanding shares of Convertible Preferred Stock converted into common stock upon the closing of the IPO are treated as having been converted into common stock at the date of original issuance. Net income (loss) per share on a supplementary basis is as follows:
YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 ---------- ---------- --------- Net income (loss) per common and common equivalent share........................... $0.06 $(0.37) $(0.40) ========== ========== ========= Weighted average number of common and common equivalent shares outstanding.............. 11,730,906 10,365,465 7,476,726 ========== ========== =========
C. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following (in thousands):
DECEMBER 31, ---------------- 1996 1995 ------ ------ Computer and lab equipment.................................. $1,934 $1,218 Furniture and fixtures...................................... 86 67 Leasehold improvements...................................... 32 24 ------ ------ 2,052 1,309 Less accumulated depreciation and amortization.............. (1,036) (519) ------ ------ $1,016 $ 790 ====== ======
D. INCOME TAXES: The difference between the statutory federal income tax rate and the Company's effective tax rate for the year ended December 31, 1996 is principally due to the utilization of net operating losses, capitalized start-up costs including capitalized research and development cost carryforwards. No income tax provision was recorded for federal income tax purposes for the years ended December 31, 1996, 1995 and 1994 as the Company had not reported taxable income in those periods. The Company elected to capitalize start-up costs and research and development costs for income tax purposes and amortize them over five and ten years, respectively, for the period prior to recording product revenue in 1995. 32 34 GEOTEL COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of deferred taxes were as follows (in thousands):
DECEMBER 31, --------------- 1996 1995 ------ ------ Deferred tax assets: Depreciation................................................ $ 171 $ 110 Capitalized start-up costs.................................. 1,762 2,151 Accrued expenses............................................ 179 37 Tax credits................................................. 223 245 Net operating losses........................................ 443 574 ------- ------- Net deferred tax assets....................................... 2,778 3,117 Valuation allowance........................................... (2,778) (3,117) ------- ------- Total net deferred tax asset.................................. $ -- $ -- ======= =======
Valuation allowances have been recorded to offset the entire net deferred tax assets as a result of the uncertainties regarding the realization of the asset due to the limited history of operating profits. At December 31, 1996, the Company had net operating loss carryforwards of $1,111,000 for federal and state income tax purposes that may be used to offset future federal income tax, if any. The net operating loss carryforwards expire at various dates beginning in 2009. Similarly, research and development and state investment tax credit carryforwards aggregating $223,000 and $245,000 were available at December 31, 1996 and 1995, respectively, which expire at various dates beginning in 2009. An ownership change, as defined in the Tax Reform Act of 1986, may restrict the utilization of certain tax attributes. The difference between the federal net operating loss carryforwards and the amount of the accumulated deficit results primarily from certain start-up costs and research and development expenses, which have been capitalized for tax purposes. E. LONG-TERM DEBT: As of December 31, 1995, the Company had outstanding loans which aggregated to $709,000 under several equipment lines of credit with a bank. All of the outstanding debt was repaid in November 1996 from a portion of the proceeds from the Company received from its IPO. At December 31, 1996, the Company's existing equipment line of credit allowed the Company to borrow the lesser of $800,000 or a 90% advance rate against the invoice price of approved equipment purchased after May 31, 1996, as defined. The borrowing period ends on June 30, 1997. Borrowings under this agreement bear interest at the bank's prime rate (8.25% at December 31, 1996). Any borrowings will be collateralized by substantially all of the Company's assets. This agreement contains restrictive covenants that require certain levels of equity and liquidity and prohibit the payment of cash dividends without the bank's consent. At December 31, 1996, the Company was in compliance with all related covenants. 33 35 GEOTEL COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) F. CONVERTIBLE PREFERRED STOCK: The following table reflects Convertible Preferred Stock activity, from December 31, 1993 through December 31, 1996:
AMOUNT SHARES -------------- ---------- (IN THOUSANDS) Balance at December 31, 1993........................ 3,302,000 3,267 Shares of Series A issued, July 1994................ 100,000 100 Shares of Series B issued, July 1994................ 2,604,286 4,535 Accretion to redemption value....................... -- 35 ---------- -------- Balance at December 31, 1994........................ 6,006,286 7,937 Shares of Series C issued, August 1995.............. 1,712,329 3,972 Accretion to redemption value....................... -- 77 ---------- -------- Balance at December 31, 1995........................ 7,718,615 11,986 Shares of Series C issued, February 1996............ 70,000 161 Accretion to redemption value....................... -- 97 Conversion to common stock.......................... (7,788,615) (12,244) ---------- -------- Balance at December 31, 1996........................ -- $ -- ========== ========
All outstanding shares of Convertible Preferred Stock were converted into common stock upon the closing of the Company's IPO on November 20, 1996. Shares of Convertible Preferred Stock, while outstanding, were subject to the following rights and privileges: Dividends Preferred stockholders were entitled to receive dividends at the same rate as dividends paid with respect to the common stock. Such preferred dividends would have been determined by the number of shares of common stock into which each share of preferred stock could have been converted, as defined. The Company is prohibited from paying cash dividends under the outstanding equipment lines unless the Company receives the bank's consent. The Company has not paid any dividends to the preferred or common stockholders. Liquidation In certain events, including liquidation, dissolution or the winding up of the Company, the holders of the Series A, B and C Convertible Preferred Stock were entitled to receive an amount equal to $1.00, $1.75 and $2.336 per share, respectively, plus declared but unpaid dividends, before any payment would be made to the common stockholders. The holders of the Convertible Preferred Stock would then share ratably with the common stockholders in the distribution of the remaining assets distributable to the stockholders as if each share of Convertible Preferred Stock had been converted, as defined. Voting Preferred stockholders were entitled to the number of votes equal to the number of shares of common stock into which each share of Convertible Preferred Stock was convertible. Conversion and Redemption The holders of a majority of the outstanding shares of Convertible Preferred Stock were entitled, at any time after July 31, 2000, to cause all such shares to be converted into common stock on a share-for-share basis, as defined and to receive from the Company their liquidation amount in three equal, annual 34 36 GEOTEL COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) installments. In September 1996, the Company's Board of Directors adopted and the stockholders approved an amendment to the terms of the Company's Convertible Preferred Stock to provide that, in lieu of any cash payment in connection with the automatic conversion of the Convertible Preferred Stock upon the IPO, the Convertible Preferred Stock will be converted into an additional number of shares of common stock determined by dividing fifty percent of the original purchase price of the Convertible Preferred Stock by the IPO price. At the IPO price of $12.00 per share, the Convertible Preferred Stock was converted into an additional 505,101 shares of Common Stock. Since the holders of the Convertible Preferred Stock have voting control, such conversion resulted in an increase in common stock and additional paid-in capital with no impact on net income or earnings per share. The Convertible Preferred Stock was being accreted to approximately $12,756,000 which is equal to the sum of (i) the price per share paid for each share of Convertible Preferred Stock and (ii) the fair value of the common stock, at the date of the original issuance of the Convertible Preferred Stock, for which such Convertible Preferred Stock will be converted. The Company has provided for periodic accretion of the fair value of the common stock using the effective interest method. G. STOCKHOLDERS' EQUITY (DEFICIT): Initial Public Offering The Company completed its IPO on November 20, 1996 and sold 2,465,000 shares of common stock at $12.00 per share, resulting in net proceeds, after deducting underwriting discounts and expenses, of $26,669,000. In addition, the Company's Board of Directors adopted and the stockholders approved an increase in the number of authorized shares of capital stock from 21,788,615 shares to 45,000,000 shares, of which 40,000,000 shares have been designated as common stock and 5,000,000 shares have been designated as preferred stock. Common Stock Each share of common stock has full voting rights. The terms of the Company's existing borrowing arrangements with a bank prohibit the payment of cash dividends without the prior consent of the bank. Preferred Stock The Company authorized to issue an aggregate 5,000,000 shares of preferred stock. The Company's Board of Directors has the authority, without further stockholder approval, to issue in one or more series and to fix the relative rights, preferences, privileges, qualifications, limitations and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series. Stock Restriction Agreements The Company entered into Stock Restriction Agreements (the "Stock Restriction Agreements") with certain employees pursuant to which such employees purchased an aggregate of 1,444,278 shares of common stock, of which 1,034,028 were purchased for $0.01 per share in 1993 and 410,250 were purchased for $0.10 per share in 1994. In connection with the 1994 sale of common stock described above, the Company received a full recourse note receivable totaling approximately $37,000 from an officer of the Company. This note bears interest at 5.25% and is required to be paid in full upon the earlier to occur of the tenth anniversary date of issuance or the first anniversary of an IPO or other liquidity event, as defined. This note and related interest were forgiven in December 1996. All shares purchased under the Stock Restriction Agreements were subject to repurchase by the Company at the original purchase price for up to a period of five years from the date of purchase, unless the shares become vested. An employee vests in twenty percent of the shares on the first anniversary of the date of purchase and, thereafter, the remaining shares become vested on a monthly basis 35 37 GEOTEL COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) through the fifth anniversary of the date of purchase or upon a qualified IPO. In accordance with the terms of a Stock Restriction Agreement, the Company repurchased 148,211 unvested shares in 1994 at a price of $0.01 per share from an employee whose employment with the Company terminated. In addition, the Company repurchased 58,595 shares from this employee in 1995 at a price of $0.30 per share. Upon the IPO, the Stock Restriction Agreements terminated and all the shares of common stock purchased under the Stock Restriction Agreements became fully vested. Restricted Stock Purchase Plan The Company has adopted, and subsequently amended, a 1993 Restricted Stock Purchase Plan (the "1993 Plan"), which provides for the issuance of common stock to directors, officers, consultants and other key personnel at prices determined by a Committee selected by the Board of Directors. Participants' shares are subject to repurchase by the Company at the original purchase price for up to five years after the beginning of the vesting period. A participant vests in twenty percent of the shares on the first anniversary of the date of purchase and, thereafter, the remaining shares become vested on a monthly basis through the fifth anniversary date of purchase. At December 31, 1996, the Company may repurchase up to 486,672 unvested shares. Such shares are to be repurchased at the original purchase price ranging from $0.10 to $0.18 per share. There are no shares available for further grant under the 1993 Plan. The shares outstanding at December 31, 1996 under the 1993 Plan have a weighted average repurchase price of $0.14 per share. Information related to the 1993 Plan is as follows:
DECEMBER 31, --------------------------------------------------------------------------- 1996 1995 1994 ----------------------- ----------------------- ----------------------- WEIGHTED WEIGHTED WEIGHTED NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE SHARES SHARE PRICE SHARES SHARE PRICE SHARES SHARE PRICE --------- ----------- --------- ----------- --------- ----------- Outstanding at beginning of year.......................... 1,091,622 $0.14 613,310 $0.14 -- -- Issued.......................... 27,000 0.18 499,992 0.18 628,310 $0.14 Repurchased..................... (132,479) 0.14 (21,680) 0.10 (15,000) 0.10 --------- --------- ------- Outstanding at end of year...... 986,143 $0.14 1,091,622 $0.14 613,310 $0.14 ========= ========= =======
In connection with the sale of common stock under the 1993 Plan described above, the Company received full recourse notes receivable totaling approximately $86,000 and $57,000 from certain employees during the years ended December 31, 1995 and 1994, respectively. These notes bear interest at 5.25% and are required to be paid in full upon the one year anniversary of the Company's initial public offering. The interest is payable at the date of maturity. Such notes are collateralized by the common stock purchased and accordingly are included in stockholders' equity (deficit). Stock Option Plan In 1995, the Board of Directors adopted and the stockholders subsequently approved the Company's 1995 stock option plan (the "1995 Plan"), which provides for the issuance of incentive stock options and nonqualified stock options to eligible employees, officers and consultants to the Company. The options can be granted for periods of up to ten years and generally vest ratably over a five-year period with initial vesting occurring on the first anniversary from the grant date and then monthly thereafter. In 1996 and 1995, certain options were granted in conjunction with a management incentive program approved by the board of directors. Under this program, options were granted at the beginning of the year at fair market value with vesting occurring at the end of five years subject to immediate full vesting if certain annual performance criteria were attained. The performance criteria was met in both years and vesting was accelerated. In 1996, the Board of Directors adopted and stockholders approved an increase in the 1995 Plan of 1,000,000 shares of common stock. In addition, the Board of Directors adopted and stockholders approved the number of shares of common 36 38 GEOTEL COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) stock available for grants under the 1995 Plan to be increased by the number of shares repurchased by the Company from time to time under the 1993 Plan. The maximum number of shares will increase effective January 1, 1997 and each January 1 thereafter during the term of the 1995 Plan, by an amount equal to four percent of the total number of shares of common stock issued and outstanding as of the close of business on December 31, of the preceding year, not exceeding 6,000,000 shares. At December 31, 1996, 1,474,726 shares were authorized for issuance under the 1995 Plan. Effective January 1, 1997, the number of authorized shares was increased to 2,009,057 shares. The option price for stock options granted under the 1995 Plan is determined by a Committee consisting of two or more members of the Company's Board of Directors. The option price for incentive stock options shall be the fair value at the time the option is granted. In the case of options granted to a shareholder who at the time of grant owns, directly or indirectly, stock possessing more than 10% of total combined voting power of any class of stock of the Company, the exercise price of the options shall not be less than 110% of the fair value of the common stock as of the date of grant. Information related to the 1995 Plan is as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995 -------------------------- ------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE -------- -------------- ------ -------------- Outstanding at beginning of year................ 64,500 $ 0.24 -- -- Granted......................................... 982,018 2.62 64,500 $ 0.24 Cancelled....................................... (37,500) 2.47 -- -- Exercised....................................... (101,222) 0.30 -- -- -------- ------ Outstanding at end of year...................... 907,796 $ 2.72 64,500 $ 0.24 ======== ======
The following information summarizes information concerning currently outstanding and exercisable options:
WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER REMAINING WEIGHTED AVERAGE NUMBER EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE - ---------------------------- ----------- ---------------- ---------------- ----------- ---------------- $0.18 to $0.30.............. 628,716 9.32 $ 0.29 20,208 $ 0.25 $3.00 to $8.00.............. 222,580 9.73 6.94 -- -- $12.00 to $14.75............ 56,500 9.89 13.03 -- -- ------- ------ Total....................... 907,796 9.45 $ 2.72 20,208 $ 0.25 ======= ======
No options were exercisable as of December 31, 1995. The 101,222 options exercised during the year ended December 31, 1996, related to merit grants which included immediate vesting provisions. As of December 31, 1996 and 1995, the Company had 465,708 and 361,551, respectively, shares available for future option grants under the 1995 Plan. Employee Stock Purchase Plan In September 1996, the Company's Board of Directors adopted and the stockholders approved the 1996 Employee Stock Purchase Plan (the "1996 Purchase Plan"). The Company has reserved 250,000 shares of common stock for issuance under the 1996 Purchase Plan. The 1996 Purchase Plan will enable employees, subject to a defined maximum percentage of base compensation and number of shares, to purchase common stock at 85% of the lower of the fair market value of the Company's common stock on the first or last day of each six-month purchase period. The first offering period began in January 1997 and will end in July 1997. 37 39 GEOTEL COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock-Based Compensation Plans The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for the 1995 Plan. Accordingly, compensation expense has been recognized for its stock-based compensation plan for any options granted below fair value of the common stock. In the year ended December 31, 1996, the Company recorded approximately $1,151,000 in unearned compensation for options to purchase 674,580 shares granted at exercise prices below the fair value of the common stock. The weighted average fair value of options granted at fair value during 1996 and 1995 were $0.30 and $0.24, respectively. The weighted average fair value of options granted below fair value at date of grant during 1996 was $4.21. There were no options granted below fair value at date of grant for 1995. Had compensation cost for the 1995 Plan been determined based upon the fair value at the grant date as calculated in accordance with Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation," the Company's net income would have decreased by approximately $97,000 in 1996 and the net loss for 1995 would have increased by approximately $9,000. The pro forma effect of adopting SFAS 123 would have reduced net income per share by $0.01 in 1996 and no effect on the Company's net loss per share in 1995. In computing these pro forma amounts the Company has assumed a risk-free interest rate equal to 8.25% and 8.75%, for 1996 and 1995, respectively, expected volatility of 60% for post-IPO grants and no volatility (minimum value method) for pre-IPO grants, expected life of five years and no dividends. The effects of applying SFAS 123 in this disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. H. RETIREMENT SAVINGS PLAN: In 1994, the Company adopted a Retirement Savings Plan (the "Savings Plan") for its employees, which has been qualified under Section 401(k) of the Internal Revenue Code. Eligible employees are permitted to contribute to the Savings Plan through payroll deductions within statutory limitations and subject to any limitations included in the Savings Plan. To date, the Company has made no contributions to the Plan. I. OPERATING LEASES: The Company leases certain equipment and office space under operating leases that expire through 1998. Future minimum annual lease commitments, including operating costs, under the operating leases for the years 1997 and 1998 are $158,000 and $145,000, respectively. The Company entered into a sublease agreement in February 1997 for office space for its new executive office in Lowell, Massachusetts. Initially, the Company will have the use of 31,770 square feet which will increase by an additional 15,885 square feet on January 1, 1998 and by a further addition of 15,885 square feet on January 1, 1999. Annual operating sublease payments during the sublease term will range from $302,000 in the first year to $731,000 beginning in 1999 and through the remainder of the lease term. The Company has the right, with proper notice, to terminate this sublease at the end of the sixth year of the sublease. Rent expense was approximately $170,000, $124,000, $41,000 for the years ended December 31, 1996, 1995 and 1994, respectively. J. RELATED PARTY TRANSACTIONS AND SIGNIFICANT CUSTOMERS: In August 1995, the Company sold 1,048,801 shares of Series C Convertible Participating Preferred Stock to an investor that subsequently became a customer of the Company. This customer's purchases from the Company represented 14% and 38% of revenue for the years ended December 31, 1996 and 1995, respectively, and this customer had no outstanding receivable balance as of December 31, 1996 and approximately $266,000 at December 31, 1995. Gross profit from related party transactions approximated those realized in similar transactions with unrelated parties. Purchases by this customer for the year ended December 31, 1995 were made through another shareholder of the Company. 38 40 GEOTEL COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenues attributable to the Company's five largest customers accounted for 49.1% and 94.4% in 1996 and 1995, respectively. The following table summarizes sales as a percentage of total revenue to significant customers for the year ended December 31, 1996 and 1995:
YEAR ENDED DECEMBER 31, ------------- 1996 1995 ---- ---- Related Party Customer...................................... 14% 38% Customer A.................................................. -- 20 Customer B.................................................. -- 26 Customer C.................................................. 11 -- -- -- Percentage of total revenue................................. 25% 84% == ==
Export sales to Australia and the United Kingdom in 1996 were approximately 11% and 4% of total revenues, respectively. No export sales occurred in 1995. 39 41 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of GeoTel Communications Corporation: We have audited the accompanying consolidated balance sheets of GeoTel Communications Corporation as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GeoTel Communications Corporation as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the two years then ended, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Boston, Massachusetts January 17, 1997, except as to the second paragraph in Note I for which the date is March 20, 1997 40 42 REPORT OF INDEPENDENT ACCOUNTANTS To GeoTel Communications Corporation: We have audited the balance sheet (not presented herein) of GeoTel Communications Corporation (a Delaware corporation in the development stage) as of December 31, 1994 and the accompanying statements of operations, stockholders' deficit and cash flows for the year ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GeoTel Communications Corporation as of December 31, 1994, and the results of its operations and its cash flows for the year ended December 31, 1994 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Boston, Massachusetts March 21, 1995 41 43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements with accountants on any matter of accounting principles, financial statement disclosure, or auditing scope or procedures required to be reported under this item. The Company's financial statements for the two years ended December 31, 1996 and 1995 were audited by Coopers & Lybrand L.L.P. The financial statements for the period from inception (June 4, 1993) through December 31, 1993 and for the year ended December 31, 1994 were audited by Arthur Andersen LLP. The Company retained Coopers & Lybrand L.L.P. as its independent accountants in September 1995, after the Company's management, in consultation with the Board of Directors of the Company, decided to dismiss Arthur Andersen LLP. The audit reports of Arthur Andersen LLP for the period from inception (June 4, 1993) through December 31, 1993 and for the year ended December 31, 1994 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the period from inception (June 4, 1993) through December 31, 1994 and through the date of dismissal, there were no disagreements with Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding executive officers set forth under the caption "Executive Officers of the Registrant" in Item 4A of this Annual Report is incorporated herein by reference. The information regarding directors set forth under the caption "Election of Directors" appearing in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 29, 1997, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1996, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Executive Compensation" appearing in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 29, 1997, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1996, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "Security Ownership of Certain Holders and Management" appearing in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 29, 1997, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1996, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Certain Relationships and Related Transactions" appearing in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 29, 1997, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1996, is incorporated herein by reference. 42 44 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (1) FINANCIAL STATEMENTS The following financial statements are filed as part of this Annual Report: Consolidated Balance Sheets as of December 31, 1996 and 1995 Consolidated Statements of Operations for the years ended December 31, 1996, 1995, and 1994 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994 Notes to Consolidated Financial Statements Reports of Independent Accountants (2) FINANCIAL STATEMENT SCHEDULE All schedules are omitted because they are not required. (3) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1996. (4) EXHIBITS Documents listed below, except for documents identified by an asterisk, are being filed as exhibits herewith. Documents identified by parenthetical numbers are not being filed herewith and, pursuant to Rule 12b-32 of the General Rules and Regulations promulgated by the Commission under the Securities Exchange Act of 1934 (the "Act"), reference is made to such documents as previously filed as exhibits with the Commission.
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------------------------------------------------------------------- *3.1 Amended and Restated Certificate of Incorporation of the Company. *3.2 By-Laws of the Company, as amended and restated. *4.1 Specimen of Stock Certificate representing shares of Common Stock. *10.1 Stock Purchase Agreement between the Company and the Investors named therein, dated August 9, 1995. *10.2 Amended and Restated Stockholders Agreement between the Company and certain stockholders of the Company, dated August 9, 1995. *10.3 Amended and Restated Founders Registration Rights Agreement between the Company, G. Wayne Andrews, John C. Thibault and Steven Webber. *10.4 Development/License Agreement between the Company and DANAR Corporation, dated March 4, 1996. *10.5 Software License and Technical Support Agreement between the Company and MCI Telecommunications Corporation, dated as of June 17, 1996. *10.6 Software License and Distribution Agreement between the Company and Optus Systems PTY Ltd. dated as of March 29, 1996. *10.7 Office lease by and between Nationwide Life Insurance Company and the Company, dated as of November 22, 1996. *10.8 Loan Modification Agreement between the Company and Silicon Valley Bank, dated September 11, 1996. *10.9 Letter Agreement between Silicon Valley Bank and the Company, dated September 11, 1996.
43 45
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------------------------------------------------------------------- *10.10 Letter Agreement between Silicon Valley Bank and the Company, dated May 1, 1995. *10.11 Letter Agreement between Silicon Valley Bank and the Company, dated May 18, 1994. *10.12 Promissory Note executed by the Company in favor of Silicon Valley Bank, dated March 1, 1996. *10.13 Executive Change in Control Agreement between the Company and Timothy J. Allen, dated September 26, 1996. *10.14 Executive Change in Control Agreement between the Company and G. Wayne Andrews, dated September 26, 1996. *10.15 Executive Change in Control Agreement between the Company and John C. Thibault, dated September 26, 1996. *10.16 Executive Change in Control Agreement between the Company and Louis J. Volpe, dated September 26, 1996. *10.17 Executive Change in Control Agreement between the Company and Steven H. Webber, dated September 26, 1996. *10.18 GeoTel Communications Corporation 1995 Stock Option Plan. *10.19 GeoTel Communications Corporation 1993 Restricted Stock Purchase Plan. *10.20 GeoTel Communications Corporation 1996 Employee Stock Purchase Plan. +10.22 Software Agreement Incorporating Licensing Rights between the Company and Digital Equipment Co., Limited, dated December 1, 1996 10.23 Sublease Agreement between the Company and National Medical Care, Inc. d/b/k Fresenius Medical Care-North America dated February 7, 1997. 11.1 Statement Regarding Computation of Net Income (loss) Per Common and Common Equivalent Share. 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Arthur Andersen LLP. 24.1 Power of Attorney (included on the signature pages of the Annual Report on Form 10-K).
- --------------- * Incorporated by reference to the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission (Reg. No. 333-13263). + Confidential Treatment Requested. 44 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of Massachusetts on the 27th day of March, 1997. GEOTEL COMMUNICATIONS CORPORATION /s/ JOHN C. THIBAULT By: ................................ JOHN C. THIBAULT PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below constitutes and appoints John C. Thibault and Timothy J. Allen, and each of them, with the power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or in his name, place and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibit is thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents or either of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------------ ------------------------------ --------------- /s/ JOHN C. THIBAULT President, Chief Executive March 27, 1997 ........................................ Officer and Director JOHN C. THIBAULT (Principal Executive Officer) /s/ TIMOTHY J. ALLEN Vice President of Finance, March 27, 1997 ........................................ Chief Financial Officer TIMOTHY J. ALLEN Treasurer and Assistant Secretary (principal accounting and financial officer) /s/ G. WAYNE ANDREWS Director March 27, 1997 ........................................ G. WAYNE ANDREWS /s/ ALEXANDER V. D'ARBELOFF Director March 27, 1997 ........................................ ALEXANDER V. D'ARBELOFF /s/ GARY BOWEN Director March 27, 1997 ........................................ GARY BOWEN /s/ GARDNER C. HENDRIE Director March 27, 1997 ........................................ GARDNER C. HENDRIE /s/ W. MICHAEL HUMPHREYS Director March 27, 1997 ........................................ W. MICHAEL HUMPHREYS
45 47 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 EXHIBITS TO FORM 10-K ANNUAL REPORT UNDER THE SECURITIES EXCHANGE ACT OF 1934 GEOTEL COMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) ================================================================================ 48 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE - ----------- ---------------------------------------------------------------------------- ---- *3.1 Amended and Restated Certificate of Incorporation of the Company. *3.2 By-Laws of the Company, as amended and restated. *4.1 Specimen of Stock Certificate representing shares of Common Stock. *10.1 Stock Purchase Agreement between the Company and the Investors named therein, dated August 9, 1995. *10.2 Amended and Restated Stockholders Agreement between the Company and certain stockholders of the Company, dated August 9, 1995. *10.3 Amended and Restated Founders Registration Rights Agreement between the Company, G. Wayne Andrews, John C. Thibault and Steven Webber. *10.4 Development/License Agreement between the Company and DANAR Corporation, dated March 4, 1996. *10.5 Software License and Technical Support Agreement between the Company and MCI Telecommunications Corporation, dated as of June 17, 1996. *10.6 Software License and Distribution Agreement between the Company and Optus Systems PTY Ltd. dated as of March 29, 1996. *10.7 Office lease by and between Nationwide Life Insurance Company and the Company, dated as of November 22, 1996. *10.8 Loan Modification Agreement between the Company and Silicon Valley Bank, dated September 11, 1996. *10.9 Letter Agreement between Silicon Valley Bank and the Company, dated September 11, 1996. *10.10 Letter Agreement between Silicon Valley Bank and the Company, dated May 1, 1995. *10.11 Letter Agreement between Silicon Valley Bank and the Company, dated May 18, 1994. *10.12 Promissory Note executed by the Company in favor of Silicon Valley Bank, dated March 1, 1996. *10.13 Executive Change in Control Agreement between the Company and Timothy J. Allen, dated September 26, 1996. *10.14 Executive Change in Control Agreement between the Company and G. Wayne Andrews, dated September 26, 1996. *10.15 Executive Change in Control Agreement between the Company and John C. Thibault, dated September 26, 1996. *10.16 Executive Change in Control Agreement between the Company and Louis J. Volpe, dated September 26, 1996. *10.17 Executive Change in Control Agreement between the Company and Steven H. Webber, dated September 26, 1996. *10.18 GeoTel Communications Corporation 1995 Stock Option Plan. *10.19 GeoTel Communications Corporation 1993 Restricted Stock Purchase Plan. *10.20 GeoTel Communications Corporation 1996 Employee Stock Purchase Plan. +10.22 Software Agreement Incorporating Licensing Rights between the Company and Digital Equipment Co., Limited, dated December 1, 1996. 10.23 Sublease Agreement between the Company and National Medical Care, Inc. d/b/k Fresenius Medical Care-North America dated February 7, 1997.
49
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE - ----------- ---------------------------------------------------------------------------- ---- 11.1 Statement Regarding Computation of Net Income (loss) Per Common and Common Equivalent Share. 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Arthur Andersen LLP. 24.1 Power of Attorney (included on the signature pages of the Annual Report on Form 10-K).
- --------------- * Incorporated by reference to the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission (Reg. No. 333-13263). + Confidential Treatment Requested. EX-10.22 2 SOFTWARE AGREEMENT 1 EXHIBIT 10.22 ISSUE 2. DIGITAL & GEOTEL SOFTWARE AGREEMENT INCORPORATING LICENSING RIGHTS 2 CONTENTS PAGE NOS 1. Definitions 3 2. Term of Agreement 5 3. The Work 5 4. Variations 6 5. The Price 6 6. Delivery 7 7. Receipt of the Software 7 8. Acceptance Tests 7 9. Software Licence Rights 8 10. Indemnity - Virus Protection 9 11. Documentation 9 12. Commercial Service 9 13. Interface with other Equipment 10 14. Access, Assistance and Progress Reports 10 15. Mistakes in Information 10 16. Digital and/or BT Supplied Items and Property 11 17. Warranty 11 18. Title and Risk 13 19. Information 13 20. Confidentiality 13 21. Intellectual Property 14 22. Intellectual Property Rights Indemnification 14 23. Escrow 15 24. Indemnity 17 25. Limitation of Liability 17 26. Insurance 17 27. Termination 18 28. Force Majeure 19 29. Suspension of Work 19 30. Working on Site 19 31. Delivery and Removal of the Software and GeoTel's Equipment 21 32. Security 21 33. Quality 22 34. Compliance with Laws and Regulations 22 35. Assignment and Subcontracting 22 36. Contract Personnel 22 37. Non-Nuclear use and Export Control 22 38. Notices 23 39. General 23 40. Publicity 24 APPENDICES Appendix 1. The Work and the Customer Specification Document 25 Appendix 2. Digital Price List and Payment Terms 26 Appendix 3. The Project Plan 29 Appendix 4. Support and Maintenance 30 Appendix 5 Documentation 31 Appendix 6 Potential Exclusivity Agreement in respect of GeoTel's Standard Products 32 2 3 SOFTWARE AGREEMENT INCORPORATING LICENSING RIGHTS AGREEMENT NUMBER: VL/14/11/96 THIS AGREEMENT, effective as at the Agreement Date is made between: GeoTel Communications Corporation of 25 Porter Road, Littleton, MA 01460 ("GeoTel"); and Digital Equipment Co. Limited of Plumtree Court, London. EC4A 4HT ("Digital"). BACKGROUND i) GeoTel is a company carrying out a range of activities relating to information technology including, but not limited to the development and licensing of computer software programs; and ii) Digital, who also operates within the field of information technology and develops, uses, licenses and markets its own computer software programs (together with equipment), desires that GeoTel develops specific computer software programs for Digital pursuant to the requirements of the BT Contract utilising GeoTel's Standard Products; and iii) GeoTel has agreed to develop and deliver to Digital the Software and grant appropriate licensing rights pursuant to the BT Contract in accordance with the terms and conditions of this Agreement. For the avoidance of any doubt, this Agreement shall become effective upon Digital issuing to GeoTel its Purchase Order(s) in accordance with the provisions of this Agreement. NOW IT IS AGREED AS FOLLOWS: 1. DEFINITIONS 1.1 "Software" means collectively or individually: i) GeoTel's Standard Products; and ii) the object computer programs and corresponding documentation, which is clarified in Appendix 5 ("the Documentation"), which are to be developed via modifications to GeoTel's Standard Products to support BT NUP and interconnection with the BT CTN specifically for Digital/BT pursuant to the BT Contract and provided by GeoTel under the terms of this Agreement ("the BT Specific Development") all of which is as defined in and will comply with the details set out in the Customer Specification Document. 1.2 "Customer Specification Document" means the proprietary specification in accordance with which GeoTel shall develop the Software and is as referenced in and attached at Appendix 1. 1.3 "the Work" means all of GeoTel's activities as described in Section 1 of Appendix 1 which result in the creation and completion of the Software. 1.4 "Intellectual Property Rights" ("IPRs") means the copyright, patent, design right, trade secret, tradename or mark or such other rights. 1.5 "the Storage Media" means the agreed media upon which GeoTel shall deliver the Software and Documentation, as detailed in the Customer Specification Document. 3 4 1.6 "the Object Code" means the machine readable code of the Software which can be executed on Digital computer systems for which the Software has been designed. 1.7 "Evaluation Software Licence" means that licence agreement which has been entered into between the parties dated 21 August 1996 and which continues for a period of 180 days from said date ("the Evaluation Period") at the expiry of which the Evaluation Software Licence becomes superseded by the terms and conditions of this Agreement except, for the avoidance of any doubt, payment in respect of the Evaluation Software Licence which shall be made under the terms and conditions of same and not under this Agreement. 1.8 "Development Agreement" means that agreement, the final draft of which was dated 21 August 1996 against which GeoTel carried out the initial proof of concept development work ("the Initial Development Work") and which is superseded as at the Agreement Date by the terms and conditions of this Agreement except, for the avoidance of any doubt, payment in respect of the Initial Development Work which shall be made under the terms and conditions of same and not under this Agreement. 1.9 "the Equipment" means that equipment and associated peripherals (in conjunction with which the Software is required to operate) to be delivered by Digital to BT under the BT Contract. 1.10 "Ready for Service" means the ready for service date upon which the Software is ready for use by BT and is that date specified in the Project Plan. 1.11 "Documentation" means the documentation to be provided hereunder pursuant to the Customer Specification Document to include, but not be limited to directions for and verifications of installation and use of the Software, reports and any other explanatory materials. 1.12 "Revisions" mean all modifications, upgrades, enhancements and new versions of the Software which may be provided under this Agreement. 1.13 "Variations" shall mean any variation to the Customer Specification Document or any other aspect of this Agreement communicated and agreed in writing between the parties pursuant to the provisions set out in the change control process defined Condition 4.1. 1.14 "Acceptance" shall mean a written statement issued by Digital to GeoTel, (in accordance with acceptance criteria and an appropriate acceptance process to be agreed between the parties and BT and documented within the period set for such activities in the Project Plan) following acceptance testing by Digital confirming that the Software complies with the Customer Specification Document. The terms "Acceptance Tests" and "Accepted" shall have the corresponding meanings. 1.15 "the Project Plan" shall mean the agreed timetable, (the key dates of which are detailed in Appendix 3, to which GeoTel shall perform its obligations under this Agreement subject always to Digital's performance of its non GeoTel dependent obligations and BT's performance of its obligations as contained in the BT Contract) and is that document as at the Agreement Date entitled "Project Telemarketing" dated: 4.10.96 version: 3.0 which may subsequently be revised by the mutual written consent of the parties. 1.16 "the Review Process" shall mean any appropriate review process agreed in writing by the parties by which the Work may be measured by Digital on an on-going basis. 1.17 "the Price" shall mean the USS payments to be received by GeoTel from Digital and is as detailed in Appendix 2. 4 5 1.18 "GeoTel's Standard Products" shall mean the C7 cards specified in the Development Agreement and those standard software products proprietary to GeoTel as specified in the Evaluation Software Licence and as may be enhanced by GeoTel pursuant to GeoTel's enhancement policy prior to Acceptance. For the avoidance of any doubt, details of such enchancements shall be advised to Digital and shall not prevent the Software performing in accordance with the Customer Specification Document 1.19 "BT" means British Telecommunications plc of 81 Newgate Street, London EC2 with whom Digital shall contract pursuant to the BT Contract defined in Condition 3.7 below. 1.20 "Contract Personnel" means those personnel whom GeoTel use for the performance of its duties under this Agreement, whether such personnel are employed by GeoTel, act as consultants to GeoTel or otherwise. 1.21 "the Agreement Date" means that date upon which this Agreement becomes effective by its being signed by both parties and Digital's issuing to GeoTel of its Purchase Order(s). 1.22 "Purchase Order(s)" means those Digital purchase order(s) to be issued by Digital under this Agreement. 1.23 "Commercial Service" means that state of commercial service into which Digital requires the Software to be put due to any failure of the Software or any part thereof to pass the Acceptance Tests as set out in Conditions 8.5, 8.6 and 12 below and "Certificate of Commercial Service" shall have the corresponding meaning. 1.24 "Information" means all information whether written or oral or any other form, including, but not limited to documentation, specifications, reports, data, notes, drawings, models, patterns, samples, software, computer outputs, designs, circuit diagrams, inventions, (whether patentable or not) and know how. 2. TERM OF THIS AGREEMENT This Agreement shall commence upon the Agreement Date and shall continue, unless otherwise agreed in writing between the parties to ensure the simultaneous termination of the BT Contract and this Agreement, for a period of 24 months (with the option to extend annually at Digital's discretion for a further 36 months) unless terminated by either party in accordance with Condition 27. 3. THE WORK 3.1 GeoTel agrees to develop, supply, license the Software to Digital and carry out other related activities in accordance with the terms and conditions of this Agreement. 3.2 GeoTel agrees to complete the Work in accordance with the key dates which are detailed in Appendix, to which GeoTel shall perform its obligations under this Agreement subject always to Digital's performance of its non-GeoTel dependent obligations and BT's performance of its obligations as contained in the BT Contract. 3.3 The Work shall be monitored by Digital in accordance with the Review Process. GeoTel agrees to follow the Review Process and co-operate with Digital in its monitoring of the Work. 3.4 The Software and Storage Media will be delivered to Digital at the Digital site as referenced in the Project Plan in object code together with its appropriate Documentation. 5 6 3.5 It is acknowledged and agreed between the parties that support and maintenance in respect of the Work and the resultant Software is, at the date of signing this Agreement, yet to be agreed between the parties. Within 60 days of the Agreement Date, the parties shall have agreed the terms and conditions in respect of such support and the same shall be attached at Appendix 4. 3.6 GeoTel shall provide monthly reports to Digital detailing progress made against milestones indicated in the Project Plan one week prior to progress meetings. GeoTel shall provide suitable representation at these meetings. Such meetings shall be held via conference call or other appropriate and economical means 3.7 In accordance with and subject to Condition 9 below, GeoTel hereby grants to Digital an irrevocable, royalty free license to use the Software and Documentation solely for the purposes of performing Digital's obligations (including but not limited to those relating to the granting of sub-licences to BT and its obligations in respect of support and warranty) under its contracts(s) with BT pursuant to BT's project known as "Signalling Requirement for Telemarketing Near Real Time Control and Reports Platform ("the BT Contract") as set out in the Project Plan. 3.8 The licence as referenced in Condition 3.7 above shall commence upon the date appropriate for such commencement as set out in the Project Plan and shall continue for a period appropriate to the performance of Digital's obligations under the BT Contract. At the end of said period the Software shall be returned to GeoTel. 3.9 Pursuant to the licensing arrangements set out in Condition 3.7 above, Digital agrees that the Software shall not be decompiled, reverse engineered, disassembled, analysed or otherwise examined for the purpose of reverse engineering, except and solely in so far as such activities are permitted pursuant to Condition 50B of the Copyright Designs and Patents Act 1998. 4. VARIATIONS 4.1 Either party shall have the right from time to time during the performance of this Agreement by written request and by mutual agreement, in accordance with and subject to the change control process included in the quality plan referred in Condition 33 below ("the Change Control Process") to alter, amend, add to or otherwise vary any aspect of this Agreement. 4.2 The Price shall be increased or decreased subject to and in accordance with the Change Control Process and dependent contractual timescales shall be adjusted by a fair and reasonable amount. 4.3 No variation shall be carried out under unless it is authorised and processed in accordance with the Change Control Process and notified in writing by Digital as an amendment to this Agreement. 4.4 Any variation carried out other than in accordance with this Condition 4 shall be the sole responsibility of GeoTel and no change in the Price and/or no extension of timescales shall be allowed. 5. THE PRICE Subject to GeoTel's performance of all of its duties and obligations under this Agreement, Digital shall pay GeoTel subject to and in accordance with Appendix 2. 6 7 6. DELIVERY 6.1 GeoTel shall develop and provide the Software in accordance with the key dates as defined in Appendix .3. If no time is so specified, GeoTel shall develop and provide the Software in accordance with such timescales as the parties may agree in writing. 6.2 GeoTel shall not, without the prior permission of Digital, deliver any part order (by quantity or by item). In the event that the Software is not available for delivery at the due time, GeoTel shall (without prejudice to Digital's rights under this Agreement) immediately inform Digital by telephone or facsimile and confirm such communication by post 7. RECEIPT OF THE SOFTWARE 7.1 Initial receipt of the Software at the delivery point may be signed for as unexamined and this shall not affect Digital's rights subsequently to reject the Software. Where subsequent checking shows a deficiency in the quantity of Software items delivered, GeoTel shall make good the deficiency within 14 days of notice from Digital of the deficiency. 8. ACCEPTANCE TESTS 8.1 Digital and GeoTel shall agree a series of Acceptance Tests which shall take place at appropriate stages within the Project as indicated in the Project Plan. 8.2 When the Acceptance Tests have been passed in accordance with this Agreement, Digital shall issue a dated certificate of Acceptance to GeoTel. 8.3 Where the Software consists of sections or portions, the Acceptance procedures outlined above shall be repeated for each section or portion of the Software. 8.4 If the Software or any relevant part of it fails to pass the Acceptance Tests, then GeoTel will either: i) implement free of charge and within a reasonable time such alterations or modifications to the Software as are necessary to make possible the repetition of the Acceptance Tests; or ii) upon the request of Digital and, with GeoTel's agreement, bring the Software into Commercial Service in accordance with Condition 12 below. 8.5. If the Software fails to pass any repetition of the Acceptance Tests then, Digital at its option, may: i) request GeoTel to implement free of charge, and within a reasonable time, such alterations or modifications to the Software as are necessary to make possible the repetition of the Acceptance Tests; or ii) bring the Work into Commercial Service; or iii) terminate future performance of this Agreement. 7 8 9. SOFTWARE LICENCE RIGHTS 9.1 GeoTel hereby grants to Digital: i) where GeoTel shall have failed or been unable to meet Digital and/or BT's reasonable requirements for new facilities and features or shall have ceased to support the Software as provided for in this Agreement; and, ii) an exclusive, irrevocable, royalty free licence to use and copy the BT Specific Development as defined in 1.1 and corresponding Documentation and grant sub licences to BT in respect of the same; and iii) a non exclusive, irrevocable, royalty free licence to use and copy GeoTel's Standard Products and corresponding Documentation and grant sub-licences to BT in respect of the same; and for the purposes of Digital's performance of the BT Contract anywhere in the United Kingdom. Such rights shall include the right, under the Condition entitled "Intellectual Property Rights, in order to: a) Use and copy for the purposes of operating or maintaining the BT Network anywhere in the United Kingdom, including training purposes, and the making of copies for back-up and maintenance purposes; and b) Modify or have modified the Software under the Condition relating to Confidentiality, in the following circumstances: iv) with the written consent of GeoTel, to allow integration with Digital and/or BT support systems; and v) to meet Digital and/or BT urgent operational requirements where GeoTel is unable or fails to meet those operational requirements; and (after proper consultation with GeoTel and with GeoTel's written permission, where GeoTel shall have failed or been unable to meet Digital and/or BT's reasonable requirements for new features and facilities or shall have ceased to support the Software as provided for in this Agreement: a) enhance or have enhanced the Software; and b) merge or have merged Digital and/or BT data with any Software; and, c) supply the Software or copies of the Software to third parties under Conditions of Confidentiality for the purposes of modification or enhancement or merger of the Software as provided for above; and, e) supply the Software or copies of the Software to third parties under Conditions of Confidentiality for the purpose of the design and supply to Digital and/or BT of systems interoperable with the Equipment or Software which are necessary for enabling such design and supply. 9.2 The sub licensing rights mentioned above shall always be subject to the entering into of appropriate licenses containing no less stringent licensing terms and conditions to those as set out in this Agreement. 9.3 Without prejudice to any other obligations of GeoTel under this Agreement, GeoTel undertakes to obtain for Digital and/or BT an irrevocable, royalty free licence upon the same terms from any third party owning Intellectual Property Rights in the Software. 8 9 9.4 Without prejudice to Digital's rights granted hereunder and always subject to and in accordance with the terms and conditions of this Agreement, for the purposes of Section 117 of the Copyright Act of 1976, as amended, and for all other purposes GeoTel shall be considered the owner of the Software and any copies thereof and of its Intellectual Property Rights. Physical copies of the Software, in firmware, diskette, tape, paper, or other form shall be deemed to be in loan to Digital and/or BT during the term of the licence and rights as set out in this Agreement. 9.5 The provisions of this Condition 9 shall survive the expiry or termination of this Agreement except in the event of termination due to Digital's breach of this Agreement. 10. INDEMNITY - VIRUS PROTECTION 10.1 Each party shall take reasonable care to avoid the introduction of any computer virus or malicious code in any Software that either party supplies to the other or uses in the performance of the Work. If any computer virus or malicious code is introduced into Digital or BT's systems and/or network by GeoTel as a result of GeoTel's failure to comply with this condition (including, but not limited to not using any state of the art virus checker), then GeoTel shall, at its own expense, use all reasonable endeavours to remove or, at its option, counteract the virus or malicious code and restore such systems to the state they were in prior to the introduction of the virus or malicious code. GeoTel shall ensure, where possible, to keep adequate back-up copies of all data, software and other materials and will take all reasonable precautions to counteract the spread of any virus or malicious code which has been introduced. 11. DOCUMENTATION 11.1 GeoTel shall, in consideration of the amount specified in Appendix 2 in respect of Documentation, prepare and supply to Digital all installation guides and maintenance guides associated with the Software and all other documentation (including without limitation software documentation) necessary to use and maintain the Software and to meet the requirements of this Agreement. The Documentation is listed in the Customer Specification Document. GeoTel hereby grants to Digital, BT and BT's customers the right to copy the Documentation and make free use of the same for any reasonable purpose connected with the sale, use or maintenance of the Software. Digital and/or BT proprietary software documentation shall not be copied by GeoTel without prior written authorisation from Digital. 12. COMMERCIAL SERVICE 12.1 Where Digital wishes to put the Software (or any portion thereof) into Commercial Service in accordance with Conditions 8.5 and 8.6 above in the event that the Software or any relevant part of it fails to pass the Acceptance Tests, Digital will issue a Certificate of Commercial Service. Such Certificate will detail all outstanding items and deficiencies to be made good by GeoTel, as are known to Digital at the date of issue of such Certificate. 12.2 * 12.3 The warranty arrangements detailed in this Agreement shall apply to any Software put into Commercial Service from the date that such Commercial Service begins. However, such * Confidential Information omitted and filed separately with the Commission. 9 10 arrangements shall be extended (free of additional charge to Digital) for a period equal to that between the formal entry into Commercial Service date and the Acceptance date by up to a maximum of 3 months. 12.4 GeoTel shall carry the risk in respect of any Software put into Commercial Service (and for which title is still vested in GeoTel) until such Software is Accepted by Digital. However, where Digital puts the Software into Commercial Service prior to Acceptance against the advice of GeoTel, then use of such Work shall be at Digital's sole risk. 12.5 Digital and GeoTel shall agree mutually convenient times during which GeoTel may be allowed access to the Software in Commercial Service for the purposes of facilitating Acceptance by Digital of the Software in Commercial Service. Such activities will be performed at no additional expense to Digital. 12.6 When the deficiencies detailed in the Certificate of Commercial Service have been remedied and the Software (or portion thereof) has passed the agreed Acceptance Test(s), Digital will issue a certificate of Acceptance. 12.7 Digital and GeoTel anticipate that for the 12 months subsequent to acceptance of the product or initial placement into commercial service, the licenses granted under this agreement will be deployed in customer applications at rate of two (2) licenses per month. Digital may accelerate this deployment rate at any time. 13. INTERFACE WITH OTHER EQUIPMENT 13.1 GeoTel shall ensure the successful interworking of the Software in or with the BT Network existing at the date of BT's use of the Software pursuant to the BT Contract and that the Software does not impair or degrade the performance or operation of the BT Network or any other telecommunications network. 13.2 GeoTel shall supply within two months of any request, at its own reasonable cost such information as Digital or GeoTel may reasonably require to enable Digital to interface and fully interwork Software with the BT Network or any other telecommunications network. 14. ACCESS, ASSISTANCE AND PROGRESS REPORTS 14.1 GeoTel shall: a) ensure that Digital (or any person authorised by Digital) shall have access.. upon reasonable notice, at all reasonable times to the premises of GeoTel, and those of any sub contractor, as Digital may require to assess the progress of this Agreement; and b) render such reports to Digital on the performance of this Agreement, and attend such meetings, as may be reasonably required by Digital; and nominate a suitable representative to attend all such meetings. c) The representative shall be fully conversant at all times with the performance of this Agreement. 15. MISTAKES IN INFORMATION 15.1 GeoTel shall inform Digital in writing of any mistakes in design information within a reasonable time of receipt. 10 11 15.2 Any mistakes in Information owned or controlled by GeoTel and in any Information relating to GeoTel's Intellectual Property Rights shall be GeoTel's responsibility to remedy at its cost whether such Information has been approved by Digital or not. Where any such remedial work is undertaken by Digital after proper consultation with GeoTel, GeoTel shall bear all costs. 16. DIGITAL AND/OR BT SUPPLIED ITEMS AND PROPERTY 16.1 Any and all items supplied by either Digital and/or BT ("the Digital and/or BT Supplied Items") shall remain the property of Digital and/or BT, as appropriate. GeoTel shall return them to Digital and/or BT upon completion or termination of this Agreement or earlier upon reasonable request. GeoTel shall keep the Digital and/or BT Supplied Items and (before their delivery to Digital and/or BT) any items or things that are or have become Digital's and/or BT Property ("Digital and/or BT Property"), in safe custody and good condition, set aside and clearly marked as Digital and/or BT Property. 16.2 Upon receipt of the Digital and/or BT Supplied Items, GeoTel shall satisfy itself that they are not defective or deficient for the purpose for which they are being provided, and within 14 days of receipt shall notify Digital of any defects or deficiencies. 16.3 GeoTel shall not, without the prior written consent of Digital, use the Digital and/or BT Supplied Items for any purpose other than is necessary for the performance of this Agreement or allow any other party to use, take possession of, or have any rights or lien over the Digital and/or BT Supplied Items or Digital and/or BT Property. 16.4 Without limiting the generality of GeoTel's obligations, GeoTel shall not have, and shall ensure that Contract Personnel shall not have, a lien on the Digital and/or BT Supplied Items or Digital and/or BT Property for any sum due. GeoTel shall take all reasonable steps to ensure the title of Digital and/or BT and the exclusion of such lien are brought to the notice of all Contract Personnel dealing with any Digital and/or BT Supplied Items or Digital and/or BT Property. 16.5 In the event of any threatened seizure of any Digital and/or BT Supplied Items or Digital and/or BT Property or in the event of GeoTel (or any Contract Personnel in possession of such Digital and/or BT Supplied Items or Property) going into receivership, administration or liquidation (or the equivalent of any of these) GeoTel shall: a) notify Digital immediately; and, b) draw to the attention of the relevant official that Digital and/or BT Supplied Items and Digital and/or BT Property are the Property of Digital and/or BT and do not form part of GeoTel's assets; and, c) allow Digital and/or BT to enter GeoTel's premises or those of any Contract Personnel where Digital and/or BT Supplied Items or Digital and/or BT Property are stored and take possession of them. 17. WARRANTY 17.1 GeoTel agrees that it fully understands the nature of the Work and that it has satisfied itself as to the relevance and content of the Customer Specification Document. Accordingly, GeoTel confirms that it has the capacity to complete the Work and deliver the Software and Documentation in accordance with this Agreement. 11 12 17.2 GeoTel agrees that GeoTel are the sole legal and beneficial owner of the Software and Documentation and that the same are free and clear of all liens and encumbrances and free and clear from all claims and demands of third parties. 17.3 GeoTel agrees that the Software and Intellectual Property Rights (or any part thereof) shall not infringe or violate any United States of America and/or United Kingdom patent, copyright, trademark, trade secret or other right of any third party. GeoTel shall give Digital immediate written notice if it becomes aware of any alleged infringement or violation and shall indemnify Digital and Digital in accordance with Condition 22 below. 17.4 GeoTel warrants that the Software shall conform and perform in accordance with the Customer Specification Document and shall at its own cost promptly remedy (by repair, replacement or modification, at Digital's option), any defects in the Software notified by Digital and which become apparent during the period commencing at Acceptance or Commercial Service (as appropriate) and expiring 12 months thereafter ("Warranty Period"), due to: i) defective workmanship; or, ii) faulty design, (other than a design made or furnished or specified by Digital and for which GeoTel has previously disclaimed responsibility in writing within a reasonable time of receipt of design); or, iii) defective material supplied by GeoTel; or, iv) any act, neglect or omission by GeoTel or Contract Personnel. 17.5 GeoTel shall: i) ensure that any remedied part of the Software is compatible with all of the Software and ii) complete the remedy to the satisfaction of Digital within the timescales set out in this Agreement; and iii) ensure that defective Software is not remedied on Digital and/or BT premises without Digital's consent, unless, for operational or technical reasons they can only be removed or replaced with difficulty; and cause the minimum of disruption to Digital and/or BT and said parties' customers in effecting any remedy. The time at which any remedy is to be effected shall be agreed with Digital and Digital may at its discretion direct GeoTel to work outside normal working hours at no cost to Digital. 17.6 The unexpired period of the Warranty Period or, if longer, a further Warranty Period of 90 days, and the provisions of this Condition, shall apply to all repaired or replacement Software and parts. GeoTel shall, upon receipt of the Software returned under this Condition, immediately investigate the Software and take all necessary corrective action to prevent recurrence of the defects in any Software to be supplied under this Agreement. 17.7 GeoTel warrants that the Software is where applicable, fully compatible (without modification, loss of performance, loss of use, or work or expense on the part of Digital and/or BT) with changes to inputs or other information in relation to the dates arising in the year 2000 and beyond and this warranty will remain effective after the end of this Agreement. 12 13 17.8 For the avoidance of any doubt, it is agreed that support and maintenance shall commence from Acceptance or Commercial Service, as appropriate and shall be provided in addition to the warranty arrangements set out in this Condition 17 and that the fee for such support and maintenance is included in the Price. 18. TITLE AND RISK 18.1 For the avoidance of any doubt, no title shall pass to Digital and/or BT under this Agreement except that title in the C7 cards (as defined in the Customer Specification Document) shall pass to Digital upon payment therefor. 18.2 The risk of loss of or damage to the Software shall pass to Digital upon delivery. 19. INFORMATION 19.1 Either party that has during the term of this Agreement received Information in a recorded form from the other (or has recorded received Information) shall return these records upon: a) expiry or termination of this Agreement; or b) earlier upon reasonable request: unless such records are part of the Software. 19.2 Except as expressly set out in this Agreement, no assignment of or licence under any Intellectual Property Right or trade mark or service mark (whether registered or not) is granted by this Agreement. 20. CONFIDENTIALITY 20.1 A party to this Agreement receiving Information ("the Recipient") from the other shall not, without the prior written consent of the other: i) disclose the Information to any person other than the Recipient's employees or a sub-contractor engaged for the purposes of this Agreement; or ii) use the Information other than for the purposes of this Agreement. 20.2 Condition 20.1 of this Condition shall not apply to Information that is: i) published or becomes so otherwise than by breach of this Agreement; ii) lawfully known to the Recipient at the time of disclosure and is not subject to any obligations of confidentiality; iii) lawfully disclosed to the Recipient without any obligations of confidentiality by a third party; or iv) replicated by development independently carried out by or for the Recipient. 13 14 20.3 For the avoidance of doubt, it is agreed that this Condition 20 shall also apply to GeoTel's (and any sub-contractor of GeoTel) disclosure and use of Information relating to Digital and/or BT's Intellectual Property Rights which is owned or controlled by Digital. 20.4 GeoTel shall ensure that each sub-contractor engaged for the purpose of this Agreement is bound by similar confidentiality terms to those in this Condition. 20.5 Nothing in this Agreement shall prevent the Recipient from utilising general skill or knowledge or experience gained from work carried out under this Agreement insofar as such skill, knowledge or experience does not infringe the other party's Intellectual Property Rights or would involve a direct disclosure or unauthorised use of Information which the Recipient is required under this Agreement to keep confidential. 20.6 This Condition shall survive the expiry or termination of this Agreement. 21. INTELLECTUAL PROPERTY 21.1 Due to GeoTel developing the Software (which is a Digital/BT specific requirement) to be incorporated within GeoTel's Standard Products for sub licensing to BT under the terms of this Agreement, the following specific Condition 21.1. i) shall apply to the Software in addition to Conditions 21.2 - 21.4 below: i) The IPRs relating to all parts of the Software shall reside with GeoTel and its licensor(s), as appropriate and Digital are granted rights for the use and copying of the Software in accordance with the terms and conditions of this Agreement. 21.2 The Intellectual Property Rights in any work and software additional to the Work and the Software shall be agreed between the parties pursuant to the Change Control Process. 21.3 To the extent necessary for Digital's use (including any agreed further development) of the Software and the corresponding Intellectual Property Rights, Digital shall have the right (in addition to the rights set out in Conditions 3.7 and 3.8 above) to a non-exclusive irrevocable licence to GeoTel's Intellectual Property Rights. Such licence shall be granted subject to the payment of agreed amounts. 21.4 In the event that GeoTel wishes to license its Intellectual Property Rights under Condition 21.3 on royalty bearing terms, it shall appropriately mark the deliverables hereunder or submit a written notice to Digital indicating that use of the Software requires a licence in respect of GeoTel's Intellectual Property Rights. 22. INTELLECTUAL PROPERTY RIGHTS INDEMNIFICATION 22.1 GeoTel indemnifies Digital against all actions, claims, proceedings, damages, costs and expenses arising from any actual or alleged infringement occurring in the United Kingdom and/or the United States of America of GeoTel's Intellectual Property Rights whether created under this Agreement or otherwise or breach of confidentiality by the possession or use of the Software (or any part thereof) or GeoTel's Intellectual Property Rights whether created under this Agreement or otherwise or any other deliverable under this Agreement. 22.2 Digital shall notify GeoTel in writing of any such allegation received by Digital and shall not make any admissions unless GeoTel gives prior written consent. 14 15 22.3 At GeoTel's request and expense, Digital shall permit GeoTel to conduct all negotiations and litigation. Digital shall give all reasonable assistance and GeoTel shall pay Digital's costs and expenses so incurred. 22.4 GeoTel may (at GeoTel's option and at its expense) modify or replace the Software to avoid any alleged or actual infringement or breach. The modification or replacement must not affect the performance of the Software. 22.5 This indemnity shall not apply to infringement or breaches arising directly from: i) compliance with the design information where such compliance inevitably results in the infringement. This exception does not apply to infringement resulting from a BT requirement that the Software comply with a national or international standard; or ii) the combination of the Software with other items not supplied under this Agreement or the BT Contract. 22.6 Without prejudice to Condition 22.5.i) above, Digital warrants that compliance with the design information for the purposes of the provision of the Software to Digital and/or BT will not cause infringement or breach. 22.7 This Condition 22 shall survive the expiry or termination of this Agreement. 23. ESCROW 23.1.GeoTel shall not incorporate Information which is owned or controlled by a third party into the Software if such Information could be necessary for the maintenance or support of the Software unless GeoTel shall have secured: i) in the case of Information necessary for the maintenance or support of the Software, the right to put the Information into escrow to the benefit of Digital; iv) or the prior written consent of Digital. 23.2 In addition to Condition 23.1 above, the Software (and all Revisions thereto) shall be put into an appropriate escrow deposit in the United Kingdom in accordance with this Condition. GeoTel shall if required by Digital, enter into an agreement upon mutually fair and reasonable terms and conditions for the deposit and maintenance of Documentation and the source code version of the Software and information relating thereto ("the Escrow Items"). The Escrow Items shall be released by the escrow agent to Digital and/or BT in the event that has not been satisfactorily remedied within a 30-day period by: i) Source Code Escrow. Within 10 business days of the successful acceptance by Digital as defined in paragraph 8 GeoTel agrees to deposit the Escrow Items into escrow with a mutually agreed upon escrow agent. This Escrow Agreement requires GeoTel to, and GeoTel will, deposit updates to such deposited material upon delivery of updates and upgrades to Digital hereunder. Evidence of each deposit will be provided annually to Digital. Additionally, such Escrow Agreement will provide for the release of such Escrow Items in the event (each, a "Release Condition") GeoTel: a) ceases to be engaged in normal business operations for period of thirty (30) days; 15 16 b) becomes involved in any voluntary or involuntary bankruptcy or other insolvency proceeding or petition for the benefit of creditors, or makes an assignment for the benefit of creditors, and such proceeding, petition or assignment is not dismissed or set aside within sixty (60) days after it was made; c) * 23.3 The information to be held in escrow in regard to Software shall include the following: i) Details of the programming language and version used (to include, but not be limited to any extensions employed; ii) Details of the compiler used; iii) Full design documentation (this may be held on magnetic or similar media); iv) A copy of the source code listing on magnetic or similar media; v) Any other documentation, records, methodologies, tools, procedures and processes which may be deemed necessary in order that Digital or an agent of Digital could support, maintain, and enhance the Software. This information shall be updated as necessary to incorporate changes resulting from defect fixes and enhancements. It shall be the responsibility of GeoTel to ensure the long term integrity and security of this information. Where information is held on magnetic or similar media, suitable hardware and if necessary software shall be maintained in escrow by GeoTel to enable its retrieval. In the event of the retrieval hardware/software becoming obsolete, it shall be the responsibility of GeoTel to transfer the escrowed information to a current system of storage. 23.4 In respect of Software written by GeoTel or its associate companies and supplied to Digital under this Agreement, GeoTel shall either: i) offer to provide, on fair and reasonable terms, maintenance services for the Software in support of its use by Digital or ii) supply Digital, at the cost of collation, reproduction and dispatch, relevant source code for the relevant Software (or parts thereof) for which GeoTel is no longer willing to offer maintenance services solely for maintenance by or on behalf of Digital of the relevant Software. 23.5 Fees and Expenses. The fees and expenses associated with the creation of the escrow and naming of Digital as a third party beneficiary will be borne by Digital. 23.6 Rights Transferable. Digital shall be entitled to make BT a party to the Escrow Agreement provided for in this Article to the extent required by BT. Notwithstanding anything to the contrary herein, Digital may sublicense its rights to BT under the license described in this Software Agreement under substantially similar terms and conditions as are specified in the Software Agreement to the extent required by BT. * Confidential Information omitted and filed separately with the Commission. 16 17 24. INDEMNITY Without prejudice to any other rights or remedies available to Digital, GeoTel shall indemnify Digital against all loss of or damage to any Digital and/or BT property to the extent arising as a result of the negligence or wilful acts or omissions of GeoTel or Contract Personnel in relation to the performance of this Agreement; and all claims and proceedings, damages, costs and expenses arising or incurred in respect of: a) death or personal injury of any person in relation to the performance of this Agreement, except to the extent caused by Digital's negligence; or b) death or personal injury of any other person to the extent arising as a result of any defect in the Software or the negligence or wilful acts or omissions of GeoTel or Contract Personnel in relation to the performance of this Agreement; or c) loss of or damage to any property to the extent arising as a result of the negligence or wilful acts or omissions of GeoTel or Contract Personnel in relation to the performance of this Agreement. 25. LIMITATION OF LIABILITY 25.1 Subject to Paragraph 3 of this Condition, GeoTel shall not be liable to Digital and Digital shall not in any event be liable to GeoTel whether founded in contract, tort, (including negligence), for any breach of statutory duty or otherwise, or any damages resulting from loss of data or use, corruption of data, loss of profits, anticipated savings or business or for any indirect or consequential losses or damage. 25.2 Subject to Paragraph 3 of this Condition, the liability of GeoTel to Digital under this Agreement shall not exceed $* per unrelated incident or in any event a total maximum of the amount paid to GeoTel under this Agreement exclusive of any amounts paid under Appendix 6. 25.3 Paragraphs 1 and 2 of this Condition shall not apply to loss or damage arising out of or in connection with: i) death or personal injury; or ii) Digital's obligation to pay the Price. 26. INSURANCE 26.1 GeoTel shall at its own expense effect and maintain for this term of Agreement such insurances as required by any applicable law and as appropriate in respect of its obligations under this Agreement. Such insurances shall include third party liability insurance with an indemnity limit of not less than $2,000,000 for each and every claim. Digital insurance is limited to personal injury and damage to property. 26.2 If GeoTel cannot provide evidence of such insurance to Digital on request, Digital may arrange such insurance and recover the cost from GeoTel. 26.3 GeoTel shall notify Digital as soon as it is aware of any event occurring in relation to this Agreement which may give rise to an obligation to indemnify Digital under this Agreement, or to a claim under any insurance required by this Agreement. 26.4 This Condition shall not be deemed to limit in any way GeoTel's liability under this Agreement. * Confidential Information omitted and filed separately with the Commission. 17 18 27. TERMINATION 27.1 If either party commits a material breach or persistent breaches of this Agreement and, in the case of a breach which is capable of remedy, fails to remedy the breach within 30 days (or such longer period as the parties may agree in writing including as indicted by clauses in this Agreement) of written notice from the notifying party to do so, then the notifying party shall have the right: a) at any time to terminate this Agreement forthwith as a whole or in respect of any part of this Agreement to be performed; and b) to recover from the other party all losses and expenses incurred subject always to the Limitation of Liability Condition. 27.2 Either party shall have the right at any time to terminate this Agreement forthwith and to recover from the other all losses and expenses incurred subject always to the Limitation of Liability Condition if the other party shall become insolvent or cease to trade or compound with its creditors; or a bankruptcy petition or order is presented or made against the other party; or where the other party is a partnership, against any one partner, or if a trustee in sequestration is appointed in respect of the assets of the other party or (where applicable) any one partner; or a receiver or an administrative receiver is appointed in respect of any of the other party's assets; or a petition for an administration order is presented or such an order is made in relation to the other party; or a resolution or petition or order to wind up the other party is passed or presented or made or a liquidator is appointed in respect of the other party (otherwise than for reconstruction or amalgamation). 27.3 Digital may at any time on written notice terminate this Agreement forthwith. Where Digital terminates this Agreement under this paragraph 3 and does not have any other right to terminate this Agreement, the following shall apply: a) Digital shall subject to sub-paragraph (b) below, pay GeoTel such amounts as may be necessary to cover its reasonable costs and outstanding and unavoidable commitments (and reasonable profit thereon) necessarily and solely incurred in properly performing this Agreement in relation to Applicable Software (as defined below) prior to termination. b) Digital shall not pay for any such costs or commitments that GeoTel is able to mitigate and shall only pay costs and commitments that Digital has validated to its reasonable satisfaction. Digital shall not be liable to pay for any Applicable Software that, at the date of termination, Digital is entitled to reject (including any Software for which Digital may have issued a Certificate of Commercial Service) or has already rejected. Digital's total liability under sub-paragraph (a) above shall not in any circumstances exceed the price that would have been payable by Digital for Applicable Software if this Agreement had not been terminated. c) In this paragraph 3, "Applicable Software" means Software in respect of which this Agreement has been terminated under this paragraph, which were ordered by Digital under this Agreement before the date of termination, and for which payment has not at that date become due from Digital. d) Sub-paragraphs (a) and (b) above encompass the total liability of Digital for termination pursuant to this Paragraph, and Digital shall be liable for no other costs, claims, damages, or expenses consequent upon such termination. 27.4 The rights of the parties under this Condition is without prejudice to any other right of the parties under this Condition or otherwise. 18 19 28. FORCE MAJEURE 28.1 Neither party shall be liable to the other party for any delay in the performance of this Agreement directly caused by any event beyond its reasonable control provided such party shall have first given the other party written notice within seven days after becoming aware that such delay was likely to occur. 28.2 For the avoidance of any doubt, the provisions of this Condition shall not affect Digital's right to terminate this Agreement under Paragraph 3 of the Condition headed "Termination". 29. SUSPENSION OF WORK 29.1 Digital may suspend the Work at any time (Digital will notify GeoTel if the suspension is likely to be more than 3 months) and will pay to GeoTel all reasonable resulting expenses incurred by GeoTel (other than those arising from GeoTel's own default) provided that: a) no payment shall be made for any period of suspension, prevention or delay less than 2 consecutive working days; and, b) GeoTel has within 10 working days after the event giving rise to the claim, given notice in writing to Digital of its intention to make such a claim; and, c) GeoTel makes such claim giving details of each item claimed and the reason for such cost within 30 days after Acceptance of the Software. 30. WORKING ON SITE 30.1 GeoTel shall be deemed to have examined the BT site in the United Kingdom to which GeoTel may require access to perform its obligations under this Agreement and to which deliveries may be made ("the Site") and no claim from GeoTel for additional payment will be allowed on the grounds of misinterpretation of any matter relating to the Site, or which GeoTel could reasonably have satisfied itself by a visit to the premises, reference to Digital and/or BT or otherwise. 30.2 GeoTel, if applicable, shall inform Digital and/or BT of the number of employees to be brought onto the Site, and Digital and/or BT shall, where reasonably practicable, provide: a) such permanent or temporary sanitary and messing facilities as Digital and/or BT considers are adequate for the number of employees; and b) a lockable office for the use of GeoTel and reasonable, suitable accommodation for equipment and supplier's equipment, including a lockable area for valuable stores and test equipment; and c) a direct exchange line and telephone instrument for GeoTel's use, but GeoTel shall pay all call charges. 30.3 GeoTel shall not (and shall ensure that Contract Personnel shall not) use premium rate service lines or BT service lines or Digital and/or BT customer lines other than for essential test purposes or directly in connection with the performance of this Agreement, ensuring that in all such cases, by the use of charge cards 'answer no charge' lines or otherwise, no charge to any Digital and/or BT customer will arise. 19 20 30.4 GeoTel shall, as appropriate and as mutually agreed with GeoTel and Digital, employ one or more competent representatives to supervise the carrying out of the Work on the Site whose names shall be notified to Digital and/or BT in writing. 30.5 Digital and/or BT shall provide GeoTel with facilities for carrying out installation and commissioning of the Software on the Site and shall provide facilities to carry out the Work on Digital and/or BT premises. If Digital and/or BT envisage working out of hours then they shall inform Digital and/or BT within a reasonable timescale to enable Digital and/or BT to facilitate internal rota/overtime arrangements. 30.6 Where the Work is to be carried out on Digital and/or BT customer premises or other non-Digital and/or BT premises, Digital and/or BT shall wherever possible provide facilities during reasonable working hours as may be applicable to each Site as are agreed between Digital and/or BT and GeoTel. 30.7 Digital and/or BT shall allow the application of electric power to relevant parts of the Software on the Site outside the agreed working hours, provided always that: a) GeoTel has provided both power plant and system prompt alarms to the Software and has successfully demonstrated their operation to the satisfaction of Digital and/or BT; and, b) Digital and/or BT is satisfied as to the adequacy of alarms prior to giving agreement that such Software shall be left unattended; and, c) When a prompt alarm is generated by such Software it shall be attended by the Digital and/or BT emergency call out engineer who shall take such action as may be necessary to disconnect the power supply (following appropriate procedures) and to protect such Supplies, other equipment and the Site. Such action shall be advised to GeoTel at the earliest opportunity of action being taken, and shall be at GeoTel's risk and expense; and, d) GeoTel shall satisfy Digital and/or BT that the power arrangements meet any safety provisions as may be applicable to the Site. 30.8 Any statement of satisfaction by or on behalf of Digital and/or BT shall be without prejudice to the obligations and liabilities of GeoTel. 30.9 Digital and/or BT is responsible for preparing and maintaining a safe and suitable site. GeoTel shall notify Digital and/or BT of any potential health or safety risks that may exist on the Site. The Work may not be performed if GeoTel reasonably believes that conditions at the Site represent a safety or health risk. Where GeoTel so requires, Digital and/or BT shall accompany GeoTel's personnel while on Site for purposes connected with the Work. 30.10 Where there is a need to dispose of magnetic media (eg. computer fixed disc storage) which is either old or faulty, the media shall be securely disposed of in accordance with the requirements of a non-disclosure agreement. 30.11 Operational machines which are used to process Digital and/or BT data shall not be used for software code development purposes. 30.12 A software security policy document ("the Security Policy") shall be prepared by GeoTel outlining the Software, the impact or loss associated with a possible security failure, the threats to the Software and the proposed countermeasures. 20 21 31. DELIVERY AND REMOVAL OF THE SOFTWARE AND GEOTEL'S EQUIPMENT 31.1 GeoTel shall remove any of its equipment and any defective Software (pursuant to the warranty, maintenance and support obligations set out in the Agreement), leaving the Site clean and in no worse condition as at the than commencement of Work, either: a) immediately before submitting Software for Acceptance; or, b) at any time prior to Acceptance, subject to 20 days written notice from Digital. 31.2 If GeoTel fails to remove its equipment from Site as specified above, then Digital may remove it at GeoTel's risk and expense. 32. SECURITY 32.1 GeoTel shall ensure that Contract Personnel conform to all security, safety and works regulations and such other local instructions, as may be notified by Digital or BT whilst on any Digital site or the Site or customer premises. 32.2 Digital may remove from and refuse entry and re-admission to a Digital site, the Site or customer premises any person who is, in the reasonable opinion of Digital, not conforming with these requirements or not a fit person to be allowed on such locations. 32.3 Digital and/or BT may, at its discretion, search any Contract Personnel or their vehicles, huts, lockers or equipment upon any Digital site or the Site or upon entry to and departure from the Site, any Digital site or customer premises. GeoTel shall use its best endeavours to ensure that Contract Personnel are aware of and comply with these requirements and that no Contract Personnel unwilling to comply will be employed on the Site, any Digital site or customer premises. 32.3 GeoTel shall (and shall ensure Contract Personnel shall) access only those parts of the Site, Digital sites or customer premises strictly necessary for the purposes of this Agreement. 32.4 GeoTel shall ensure that no Digital or BT equipment, facilities or materials are used or removed from the Site, any Digital site or customer premises without Digital's written consent and shall immediately notify Digital of any known or suspected breach of security in relation to this Agreement and give Digital full co-operation in any investigation. 32.5 GeoTel shall implement appropriate physical and electronic security measures to safeguard any Digital or BT property it holds (whether in vehicles or otherwise) against loss or theft. Digital shall have the right to examine such arrangements and associated security procedures where necessary, and to inspect all Digital property being held by or on behalf of GeoTel, and GeoTel shall implement such additional reasonable security measures as BT and/or Digital shall require 32.6 GeoTel shall supply on request details (name, address, date of birth) of any Contract Personnel who might have access to the Site, any Digital site or customer premises under this Agreement. 32.7 Digital may examine any Information relating to the handling, processing, transportation and storage of information or property of or supplied by Digital and held by GeoTel under this Agreement, which Information shall be kept by GeoTel for at least one year after the termination or expiry of this Agreement 32.8 Digital shall not be responsible for safeguarding any property or money of Contract Personnel. 21 22 33. QUALITY 33.1 GeoTel and Digital shall, pursuant to the Project Plan, agree in writing an appropriate quality plan to apply to this Agreement. 34. COMPLIANCE WITH LAWS AND REGULATIONS 34.1 GeoTel and the Software shall comply with: a) all applicable legislation, regulations or by-laws of a local or other authority; and any Digital site or Site regulations that may be notified to GeoTel. 35. ASSIGNMENT AND SUBCONTRACTING 35.1 GeoTel shall not without Digital's written consent (such consent not to be unreasonably withheld or delayed), assigned or subcontract the whole or any part of this Agreement. Any consent, if given, shall not affect GeoTel's obligations or liabilities under this Agreement. 35.2 GeoTel shall allow Digital access to its sub - contractors, if any, for technical discussions provided that the proposed agenda for such discussions and the outcome shall be promptly notified to GeoTel. Digital will notify any changes or proposals identified during such discussions to GeoTel who will process them in accordance with this Agreement. 36. CONTRACT PERSONNEL 36.1 Contract Personnel shall be competent, appropriately qualified and to Digital's reasonable satisfaction. 37. NON-NUCLEAR USE AND EXPORT CONTROL 37.1 Non Nuclear Use Digital products are manufactured for standard commercial uses and are not intended to be sold or licenced for use in critical safety systems in nuclear facilities. Digital may require additional contractual safeguard for other nuclear, mass transportation, and aviation applications. 37.2 Export Control GeoTel hereby warrants that the Software and Documentation are licensed for the purpose and use contemplated by this Agreement outside the United States. GeoTel and Digital shall comply with all applicable laws, including without limitation, the export control laws of the United States of America and prevailing regulations which may be issued from time to time by the United States Department of Commerce and Office of Munitions Control, US Department of State concerning the exporting, importing and the re-exporting of the Software and/or Documentation. Without limiting the generality of the foregoing, Digital agrees that it should not export or re-export any Software and/or Documentation in violation of the regulations of the United States Department of Commerce or the US Export Administration Act or without the prior written consent of GeoTel which shall not be unreasonably delayed or withheld. 22 23 38. NOTICES 38.1 Notices required under this Agreement shall be in writing and be delivered by hand, post or facsimile transmission to the Commercial Contact of the recipient and shall be deemed to be given upon receipt (except notices sent by facsimile transmission, which shall be deemed to be given upon transmission). 39. GENERAL 39.1 The invalidity or unenforceability for any reason of any provision of this Agreement shall not prejudice or affect the validity or enforceability of its other provisions. 39.2 The headings to the Conditions are for reference only and shall not affect their interpretation. 39.3 No delay, neglect or forbearance by either party in enforcing any provision of this Agreement shall be deemed to be a waiver or in any way prejudice any rights of that party. No waiver by either party shall be effective unless made in writing or constitute a waiver of rights in relation to any subsequent breach of this Agreement. 39.4 This Agreement governs the relationship between the parties to the exclusion of any other terms and conditions on which any quotation or tender response has been given to Digital and supersedes any terms and conditions printed on the Purchase Order(s), all conditions in the Evaluation Licence Agreement and the Development Agreement, with the exception of the payment terms and acceptance terms contained within said agreements. 39.5 This Agreement is governed by the laws of the Commonwealth of Massachusetts. The parties will try and resolve any dispute relating to this Agreement by negotiation between senior executives of the parties. If the matter is not resolves, the parties agree to consider resolving the dispute by an Alternative Dispute Resolution ("ADR") Procedure using the service of the Centre for Dispure Resolution ("CEDR"), 3 - 5 Norwich Street London EC4A 1EJ. 39.6 GeoTel shall not be, nor in any way represent itself as, an agent of Digital and shall have no authority to enter into any obligation on behalf of Digital or to bind Digital in any way. 39.7 Except as expressly set out in this Agreement, no assignment of or licence under any Intellectual Property Right or trade mark or service mark (whether registered or not) is granted by this Agreement. 39.8 The following provisions of this Agreement shall survive its termination or expiry in addition to those provisions relating to Intellectual Property and those which by their content or nature will so survive: Digital and/or BT Supplied Items and Property Warranty, Information, Confidentiality, Indemnity, Intellectual Property, Intellectual Property Rights Indemnification. 23 24 40. PUBLICITY 40.1 No publicity relating to this Agreement shall be published in any newspaper, magazine journal or any written or electronic (to include, but not be limited to the Internet) or visual media without the prior written consent of Digital and GeoTel. Signed: /s/ John C. Thibault -------------------------- For and on behalf of GeoTel Communications Corporation Name: John C. Thibault ---------------------------- Title: President & CEO --------------------------- Date: November 27, 1996 ---------------------------- Signed: /s/ Virginia Lynch --------------------------- For and on behalf of Digital Equipment Co. Limited Name: Virginia Lynch ---------------------------- Title: Commercial Group Manager ---------------------------- Date: 1st December, 1996 ---------------------------- 24 25 APPENDIX 1 THE WORK AND THE CUSTOMER SPECIFICATION DOCUMENT 1.1 * 1.2 1.3 1.4 1.5 * Confidential Information omitted and filed separately with the Commission. 25 26 APPENDIX 2 DIGITAL PRICE LIST AND PAYMENT TERMS 1. BASE PRICES* * Confidential Information omitted and filed separately with the Commission. 26 27 APPENDIX 2 DIGITAL PRICE LIST AND PAYMENT TERMS - CONT'D Other Extras* * Confidential Information omitted and filed separately with the Commission. 27 28 * * Confidential Information omitted and filed separately with the Commission. 28 29 APPENDIX 3 THE PROJECT PLAN * * Confidential Information omitted and filed separately with the Commission. 29 30 APPENDIX 4 SUPPORT AND MAINTENANCE It is acknowledged and agreed between the parties that support and maintenance has, as at the Agreement Date, yet to be agreed. In view of this, the parties agree that the finalised details will be agreed within 60 days from such date and incorporated into this Agreement at this Appendix. Such exercise will consider the applicability of the including Section 5 of the BT Requirements Document and in any event will be in respect of maintenance and support being provided on the then prevailing current release and the release immediately previous to the then current. In no case will the support extend beyond what is defined in the GeoTel Customer Support policy or the Customer Specification Document unless mutually agreed. 30 31 APPENDIX 5 DOCUMENTATION Final specification of the turnkey documentation (to be supplied to Digital as set out in the Customer Specification Document Section 3.2 - Documentation and Helpscreens) will be completed prior to the Documentation production activity identified in the Project Plan as item 138 commencing on 3/2/1997 31 32 APPENDIX 6 POTENTIAL EXCLUSIVITY AGREEMENT EXCLUSIVITY * * Confidential Information omitted and filed separately with the Commission. 32 EX-10.23 3 SUBLEASE 1 EXHIBIT 10.23 SUBLEASE THIS SUBLEASE made as of the ____day of February, 1997 between National Medical Care, Inc. d/b/a Fresenius Medical Care - North America, a Delaware corporation having a usual place of business at 95 Hayden Avenue, Lexington, Massachusetts 02173 (hereinafter called "Sublandlord"), and Geotel Communications Corporation, a Delaware corporation having a place of business at 25 Porter Drive, Littleton, Massachusetts 01460 (hereinafter called "Subtenant"). WHEREAS, by a lease dated as of October 23,1995, (hereinafter called the "Main Lease"), a copy of which is attached hereto as Exhibit A with the rental amounts deleted, Cross Point Limited Partnership (hereinafter called "Landlord"), leased to Sublandlord approximately 142,753 square feet of space in the building located at 900 Chelmsford Street, Lowell, Massachusetts (the "Main Premises") upon the terms, covenants and conditions therein contained; and WHEREAS, Sublandlord has agreed to sublease to Subtenant a portion of the premises demised under the Main Lease comprised of approximately 31,770 square feet in the location set forth in Exhibit B attached hereto (the "Subleased Premises"), on the terms stated herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Sublandlord hereby leases to Subtenant, and Subtenant hereby takes and leases from Sublandlord, the Subleased Premises; TO HAVE AND TO HOLD the Subleased Premises for a term (the "Term") which commences on the date Landlord gives consent to this Sublease (the "Commencement Date") and ends on December 31, 2006. The foregoing notwithstanding, Subtenant shall have the right to terminate this Sublease at the end of the Seventy-second (72nd) month of the Term (six years), provided Subtenant gives Sublandlord at least twelve (12) months prior written notice. 2. The Subleased Premises shall be delivered to Subtenant in their "as is" condition on the Commencement Date. The existing partitions, lights, doors, ceiling tiles and any and all other building materials belonging to Sublandlord located within the Premises on the Commencement Date shall become the permanent property of Subtenant at no additional cost to Subtenant. Subtenant shall have the same rights to make initial improvements to the Subleased Premises (the "Initial Improvements") as set forth in Section 4 of the Main Lease, except that Sublandlord shall have the same rights to review and approve such work as the rights granted to Landlord under Section 4 of the Main Lease, and that such rights of the Sublandlord shall be in addition to the rights of the Landlord under Section 4 of the Main Lease. The plans and specifications for the Initial Improvements are attached hereto as Exhibit C and made a part hereof. All Initial Improvements and any and all other improvements to the Subleased Premises will be made at the expense of Subtenant and in accordance with all applicable local, state and federal laws, rules and regulations, including the Americans With Disabilities Act. 3. 3.1. Sublandlord grants to Subtenant, to share in common with Sublandlord, all of Sublandlord's rights, benefits, and interests (except as otherwise provided for herein) and Subtenant 2 agrees to accept from Sublandlord and hereby assumes all of Sublandlord's obligations under the Main Lease. Subtenant hereby expressly agrees and covenants to Landlord and to Sublandlord, that Subtenant assumes, is bound by and shall faithfully perform, all of the obligations of Sublandlord as tenant under the Main Lease with respect to the Subleased Premises, except as otherwise expressly provided for herein. It is further agreed that the relationship between, and the rights of, Subtenant and Sublandlord shall, except as expressly provided for herein, be governed by the Main Lease as if they were tenant and landlord, respectively, under the Main Lease, and that Sublandlord specifically shall have all rights granted to Landlord under the Main Lease with respect to enforcement of the provisions of this Sublease and the termination hereof; provided, however, that Sublandlord shall not be deemed to guarantee performance by Landlord of its obligations under the Main Lease, and Sublandlord shall have no liability to Subtenant for any default in this Sublease caused by the default or any other act of Landlord under the Main Lease. However, if Landlord shall default in any of its obligations to Sublandlord under the Main Lease, Sublandlord shall cooperate with Subtenant, upon request by Subtenant, in enforcing Sublandlord's rights against Landlord under the Main Lease. Any out-of-pocket costs associated with enforcing such rights shall be incurred solely by Subtenant unless there is some mutual benefit between Subtenant and Sublandlord in enforcing Landlord's obligations under the Main Lease, in which case such costs shall be equitably shared between Subtenant and Sublandlord. It is further agreed that performance by Sublandlord shall be conditional upon the performance by Landlord of its obligations under the Main Lease. Sublandlord shall be entitled to exercise any of the remedies set forth in Section 16 of the Main Lease upon the occurrence of any of the defaults set forth therein. 3.2. The following provisions of the Main Lease are excluded from the terms hereof, and Subtenant shall have no rights thereunder: items 6,7,8,9, 10 and 15 of the Lease Schedule except as specifically provided for herein; subsection (c) of Section 24 (Parking); Section 26 (First Option to Extend); Section 27 (Second Option to Extend); Section 28 (Right of First Offer to Lease); Section 29 (First Expansion Option); and Section 30 (Second Expansion Option). The second and third sentences of Section 3 are excluded such that Subtenant shall not have the right to operate or maintain a health club or fitness room within the Subleased Premises. The second paragraph of Section 32 (Signage) is excluded such that Subtenant shall have no right to exterior signage. 3.3 The following references to numbers of days in the Main Lease are changed as follows with respect to the relationship between Sublandlord and Subtenant: (i) subsection 2.C (v) - 90 days to inspect Landlord's accounting records relative to Taxes and Expenses is reduced to 75 days; (ii) subsection 2.C.(ix) - 10 working days to pay certain amounts after receipt of notice that amounts are due is reduced to 7 working days; (iii) subsection 5.E - 30 days of utility outage after notice is received by Landlord is increased to 32 days; (iv) subsection 10.A -15 days prior to commencement and expiration of insurance policies to deliver certificates of insurance to Landlord is increased to 20 days; 2 3 (v) subsection 12.F - 60 days after casualty for Landlord to notify Tenant of its decision to restore is increased to 65 days, and 15 days for Tenant to inform Landlord of exercise of a certain termination right is reduced to 7 days; (vi) Section 13 - 30 days after notice of condemnation to give notice of exercise of right to terminate is reduced to 20 days in the case of Tenant's notice to Landlord and increased to 35 days in the case of Landlord's notice to Tenant; (vii) subsection 16.A.(ii) - all references regarding cure that prescribe 30 days are reduced to 25 days, and all references prescribing 20 days are reduced to 15 days; (viii) subsection 16.A.(iii) - 60 days for discharge of levy or attachment is reduced to 45 days; (ix) subsection 16.A.(v) -10 days to deliver certificates is reduced to 7 days; (x) subsection 16.A.(vi) -10 days to deliver instruments is reduced to 7 days; (xi) Section 18 -10 days' prior request to deliver certificates is reduced to 7 days; (xii) Section 33 - 30 day cure periods and payment periods are increased to 40 days. 3.4. Subtenant's parking rights shall be comprised of its pro rata share of Sublandlord's allocable share of vehicular parking spaces in the Parking Lot and the Parking Garage, if any, as set forth in subsections 24.A. and 24.B. of the Main Lease. Subtenant shall not be entitled to any credit against the Rent due under this Sublease notwithstanding any provision of subsection 24.B. 3.5. Notwithstanding anything herein to the contrary, Subtenant's rights of access to Tower 2 Roof shall be limited as follows: All rights of Subtenant pursuant to Section 35 of the Main Lease are subject to Landlord's consent, and shall be limited by Sublandlord as reasonably appropriate to enable Sublandlord's other subtenants in the Main Premises, existing now or hereafter, to have access to the Tower 2 roof in accordance with Section 35 of the Main Lease. To the extent practicable, Sublessor's grant of Subtenant's rights under this Section 3.8 shall be based on Subtenant's proportionate share of the Main Premises. 4. Subtenant covenants and agrees with Sublandlord to pay to Sublandlord as rent during the term hereof as follows: 4.1. Base Rent shall be paid in advance on the first day of each month of this Sublease beginning on the Occupancy Date and continuing through the remaining term of this Sublease. For purposes of this Sublease, the Occupancy Date is defined as the date Subtenant substantially completes its Initial Improvements or occupies the Subleased Premises, whichever occurs first. However, in the event of unreasonable delays caused by Subtenant which result in Subtenant being unable to occupy the Subleased Premises on or before May 15, 1997, the Commencement Date will be May 15, 1997. Base Rent will be as follows: 3 4 Occupancy Date through March 31, 2002: $25,151.25 April 1, 2002 through December 31, 2006: $30,446.25
4.2 All Adjustment Rent as defined in Section 3 of the Main lease and all other additional rent including, without limitation, operating costs, taxes, expenses, charges and fees required by the Main Lease allocable to the Subleased Premises during the term on a pro rata square footage basis, shall accrue and be payable by Subtenant beginning on the Occupancy Date and continuing for the remaining term of this Sublease. However, the cost of electrical power and other utilities supplied to the Subleased Premises shall accrue and be payable by Subtenant beginning on the Commencement Date and continuing for the entire term of this Subleases. There will be a pro rata adjustment to the Base Rent and all Adjustment and additional rent for the month in which either the Commencement Date or the Occupancy Date occurs, if such date is a day other than the first day of the month. 4.3 After the end of each calendar year during the Term after the Base Year, Sublandlord shall deliver to Subtenant a written statement prepared in accordance with generally accepted accounting principles showing for the calendar year just ended (i) the amount of building expenses, as defined in the Main Lease, (ii) the excess of building expenses above the Base Year amount, and (iii) the aggregate amount previously paid by Subtenant for the calendar year. If the statement shows the excess for the calendar year just ended exceeded the amount paid by Subtenant on account thereof, Subtenant shall pay the amount of such difference to Sublandlord on the later of thirty (30) days or when the next Base Rent payment is due. If the statement shows that the amount paid by Subtenant hereof on account of Adjustment Rent for the calendar year just ended exceeded the excess of Adjustment Rent above the Base Year amount, such amount shall be credited by Sublandlord against the monthly installments of Adjustment Rent next due. Should such excess occur during the last month of the term, Sublandlord shall refund such excess to Subtenant. Sublandlord shall provide Subtenant appropriate documentation that itemizes all the building expenses for the previous calendar year, upon Subtenants request. 4.4. All payments under this Section 4 shall be made by Subtenant without any setoff or deduction whatsoever, in lawful money of the United States. Such payments shall be paid to Sublandlord at Sublandlord's office hereinabove set forth or at such other place or to such other party or parties as Sublandlord may from time to tome designate by notice to Subtenant. Subtenant shall pay Sublandlord interest at the default rate set forth in the Main Lease on any payments required by this Section 4 which are not made by Subtenant when due. 5. Subtenant covenants and agrees to use the Subleased Premises for office purposes consistent with a first-class office building and for no other purpose. Subject to Landlord's consent and to the terms of the Main Lease, Subtenant may use the Subleased Premises for the following: general and executive offices; sales, service and display of computers and related equipment and supplies; computer operations; demonstration of Subtenant's products and customer/employee training in the use thereof; receiving, shipping and storage of computers, equipment and supplies associated with the foregoing; computer related research and development; prototype assembly; and shipping and receiving packages and equipment. To the extent permitted by Landlord, Subtenant shall be 4 5 permitted to ship and receive packages and equipment by and between the loading docks and other areas within the Main Premises. 6. Sublandlord warrants and represents that it has no knowledge of any default by itself or by landlord under the Main Lease; that the Main Lease is in full force and effect and that Sublandlord has a good right to sublease its interest in the same provided Sublandlord obtains the consent of Landlord in accordance with Subsection 14(A) of the Main Lease and obtains the consent of Landlord's lender or lenders who may have approval rights in connection with this Sublease; and that Sublandlord has done nothing to defeat or impair this Sublease. Sublandlord further warrants and covenants that Subtenant, upon performance of Subtenant's obligations hereunder and subject to the provisions hereof, shall for the term hereof, succeed to all rights of Sublandlord under the Main Lease with respect to the Subleased Premises and will have quiet possession of the Subleased Premises unless the Main Lease be terminated for any reason; provided, however, that this Sublease shall be in all respects subject to the Main Lease and if the Main Lease shall terminate during the term hereof for any reason, this Sublease shall terminate upon such termination with the same force and effect as if such termination date had been named herein as the termination date hereof; and if any provisions of this Sublease shall be in violation of the provisions of the Main Lease, the provisions of the Main Lease shall be deemed to limit the provisions hereof. It is expressly understood and agreed, however, that nothing stated in this Section 6 shall be deemed to confer upon Subtenant any greater rights than are set forth herein nor limit any of the Subtenant's obligations hereunder. 7. Subtenant agrees to do nothing which will subject the Main Lease to termination by Landlord under the provisions of the Main Lease, and it is further agreed that if Subtenant is in default of the provisions of the Main Lease, Sublandlord may, after seven (7) days written notice to Subtenant or immediately in the event of an emergency, but need not, cure said default specifically on behalf of and for the account of Subtenant, in which case all costs, damages, and expenses incurred by Sublandlord in connection therewith shall be paid to Sublandlord immediately upon its demand as additional rent hereunder. By curing Subtenant's default on its behalf and account, as aforesaid, Sublandlord shall not be deemed to have waived any of its rights nor to have released Subtenant from any of its obligations under this Sublease. It is agreed, however, that Sublandlord may cure said default on its own account to preserve its interest in the Main Leases and may terminate this Sublease pursuant to the terms hereof by reason of said default by Subtenant, if Subtenant does not pay as additional rent to Sublandlord all costs, damages and expenses incurred by Sublandlord in connection with such cure within the applicable grace period provided for in the Main Lease, as amended by Section 3 above. In the event of such termination, Sublandlord shall be entitled to all remedies and damages provided for Landlord in the Main Lease, or as otherwise provided by law. In the event that the Sublease is terminated by reason of Subtenant's default, Subtenant shall indemnify and hold Sublandlord harmless from such damages as Sublandlord may become liable to pay under the Main Lease with respect to the Sublease Premises resulting from such default, plus all other expenses and costs related thereto, including without limitation attorneys' fees. 8. Subtenant shall be permitted to install its own signage within the Building, subject to approval by the Landlord. 9. Subtenant shall have the right to sublet or assign this Sublease subject to the consent of the Landlord and Landlord's right to recapture under the terms and conditions of the Main Lease and 5 6 also subject to Sublandlord's independent consent, such consent by Sublandlord not to be unreasonably withheld. 10. Subtenant shall maintain with respect to the Subleased Premises the insurance required by the Main Lease to be taken out by the tenant thereunder, which insurance shall name Landlord and Sublandlord as additional insureds, all in accordance with said sections of the Main Lease. 11. At the expiration or earlier termination of this Lease, Subtenant shall surrender and yield up the Subleased Premises in the condition required under Section 15 of the Main Lease, and shall remove all equipment and trade fixtures of Subtenant therefrom. If Subtenant shall remain in possession of the Subleased Premises after the expiration or earlier termination of this Sublease without any express agreement as to such holding over, Subtenant shall be liable to Sublandlord in accordance with the Main Lease. 12. Subtenant further agrees to indemnify and hold Sublandlord harmless from any claim of Landlord under the Main Lease, and against any claim for injury to persons, including death, and for property damages, arising out of the occupancy and use of the Subleased Premises by Subtenant its officers, agents, employees or invitees. 13. Subtenant shall deposit with Sublandlord upon Subtenant's execution hereof a security deposit in the amount of $37,726.88 (the "Security Deposit") as security for Subtenant's faithful performance of Subtenant's obligations under this Sublease. Subtenant shall pay an additional security deposit of $5,295.00 on or before the first day of the 61st month of the term of this Sublease, whereupon the Base Rent increases proportionally. If Subtenant fails to pay Base Rent or other rent or charges due hereunder, or otherwise defaults under this Sublease, Sublandlord may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Sublandlord or to reimburse or compensate Sublandlord for any liability, cost, expense, loss or damage (including attorneys' fees) which Sublandlord may suffer or incur by reason thereof. If Sublandlord uses or applies all or any portion of said Security Deposit, Subtenant shall within ten (10) days after written request therefore deposit monies with Sublandlord sufficient to restore said Security Deposit to the full amount required by this Sublease. Sublandlord shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Sublandlord shall, at the expiration or earlier termination for the term hereof and after Subtenant has vacated the Premises, return to Subtenant (or, at Sublandlord's option, to the last assignee, if any, of Subtenant's interest herein), that portion of the Security Deposit not used or applied by Sublandlord unless otherwise expressly agreed in writing by Sublandlord, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any monies to be paid by Subtenant under this Sublease. 14. All notices required to be given under this Sublease shall be sent by prepaid registered or certified mail, return receipt requested, to Sublandlord, to the attention of the Corporate Law Department, at the addresses above stated, and to Subtenant at the Sublease Premises, unless in either case a different address is specified by either party to the other in writing by prepaid registered or certified mail, return receipt requested. Any such notices shall be deemed to have been given when deposited with the U.S. Mail. 6 7 15. Sublandlord hereby reserves the right to enter onto the Subleased Premises, from time to time at reasonable times and upon prior notice to Subtenant which is reasonable under the circumstances, to ascertain whether Subtenant is in compliance with the provisions of this Sublease. 16. Upon written request by Subtenant, Sublandlord agrees to use reasonable efforts to obtain consent of the Landlord in a timely manner wherever such consent is required in the Main Lease. 17. Sublandlord agrees to use reasonable efforts in a timely manner in exercising its remedies under the Lease in the event the Landlord fails to perform its obligations under the Main Lease. 18. If any provision of this Sublease, or the particular application thereof, shall to any extent be held invalid or unenforceable by a court of competent jurisdiction, the invalidity of such provision shall not be deemed to affect the validity of any other provision of this Sublease. Such invalid provisions shall be deemed to be stricken from this Sublease, which shall otherwise continue in full force and effect in all respects. 19. This Sublease shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors, assigns, heirs and legal representatives. 20. This Sublease shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. 21. Sublandlord and Subtenant each warrant to the other that it has had no dealings with any broker or agent in connection with this Sublease except for Spaulding & Slye who shall be paid by Sublandlord pursuant to a separate written agreement. Sublandlord and Subtenant covenant to hold harmless and indemnify the other party from and against any and all costs (including, without limitation, attorney's fees for defense of an action), expenses or liability for any compensation, commissions and charges which result from the breach of this warranty. 22. Notwithstanding anything to the contrary contained herein, this Sublease shall not become or be deemed to have become effective until mutually executed and delivered by Subtenant and Sublandlord and consented to by Landlord in writing. 23. ADDITIONAL SPACE. Sublandlord agrees to sublease to Subtenant additional space on the 10th floor of Tower II of the Main Premises under the terms and conditions contained in Addendum I and Addendum II attached hereto and made a part hereof. EXECUTED under seal as of the day and year first above written. SUBLANDLORD: NATIONAL MEDICAL CARE, INC. By:______________________________ Its:_____________________________ 7 8 hereunto duly authorized SUBTENANT: GEOTEL COMMUNICATIONS CORPORATION By:______________________________ Its:_____________________________ hereunto duly authorized 8 EX-11.1 4 STATEMENT RE: COMPUTATION OF NET INCOME 1 EXHIBIT 11.1 GEOTEL COMMUNICATIONS CORPORATION STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE AND COMMON AND EQUIVALENT SHARE
YEAR ENDED DECEMBER 31, ------------------------------------- 1994 1995 1996 --------- ---------- ---------- (DOLLARS IN THOUSANDS) Historical -- Primary (3): Weighted average issued common stock outstanding..... 1,874,300 2,304,134 3,466,160 Cheap stock(1)....................................... 850,595 850,595 821,847 Weighted average common stock equivalents............ -- -- 7,442,899 --------- ---------- ---------- Weighted average number of common and common equivalent shares outstanding................. 2,724,895 3,154,729 11,730,906 ========= ========== ========== Net income (loss)......................................... $(2,966) $(3,862) $754 Less: accretion of redeemable convertible preferred stock to redemption value..................................... (35) (77) (97) --------- ---------- ---------- Net income (loss) available (attributable) to common shareholders............................................ $(3,001) $(3,939) $657 ========= ========== ========== Net income (loss) per common and common equivalent shares.................................................. $(1.10) $(1.25) $0.06 ========= ========== ========== Supplemental (2): Weighted average issued common stock and preferred stock outstanding.................................. 6,626,131 9,514,870 10,909,059 Cheap stock(1)....................................... 850,595 850,595 821,847 --------- ---------- ---------- Pro Forma weighted average number of common and common equivalent shares outstanding.......... 7,476,726 10,365,465 11,730,906 ========= ========== ========== Net income (loss)......................................... $(2,966) $(3,862) $754 ========= ========== ========== Pro Forma net income (loss) per common and common equivalent shares....................................... $(0.40) $(0.37) $0.06 ========= ========== ==========
- --------------- (1) In accordance with Securities and Exchange Commission Staff Accounting Bull issuances of common stock, common stock equivalents and Convertible Preferred Stock within one year prior to the initial filing of the registration statement, at share prices below the assumed initial public offering price of $12.00 are considered to have been made in anticipation of the contemplated public of which this registration statement was prepared. Accordingly, these stock issuance treated as if issued and outstanding, using the treasury stock method for option the inception of the Company. (2) Supplementary net income (loss) per common share has been computed in the same manner as historical, except that all outstanding shares of Convertible Preferred Stock converted into Common Stock upon the closing of the IPO are treated as having been converted into Common Stock at the date of original issuance. (3) Fully diluted net income (loss) per share is not presented as it is the same as the disclosed in historical net income (loss) per share for all periods presented. EX-23.1 5 CONSENT OF COOPERS & LYBRAND LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of GeoTel Communications Corporation on Form S-8 (File No. 33-21525) of our report dated January 17, 1997, except as to the second paragraph in Note I for which the date is March 20, 1997, on our audits of the consolidated financial statements of GeoTel Communications Corporation as of December 31, 1996 and 1995, and for the two years then ended, which report is included in this Annual Report on Form 10-K. /s/ COOPERS & LYBRAND L.L.P. Boston, Massachusetts March 27, 1997 EX-23.2 6 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated March 21, 1995 included in this Form 10-K, into the Company's previously filed Registration Statement No. 33-21525. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP; Boston, Massachusetts March 26, 1997 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 US DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 33,263 0 2,121 0 0 35,908 2,052 (1,036) 36,924 4,487 0 0 0 134 39,967 36,924 9,047 9,047 1,711 8,609 0 0 70 754 0 754 0 0 0 754 0.06 0.06
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