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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-20749
ASPECT DEVELOPMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1622857
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 CHARLESTON ROAD
MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices, including zip code)
(415) 428-2700
(Registrant's telephone number, including area code)
Indicate by check x 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.
(1) Yes x No
------- --------
(2) Yes No x
------- -------
The number of shares outstanding of the registrant's common stock as of August
8, 1996 was 11,778,993.
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ASPECT DEVELOPMENT, INC.
FORM 10-Q
INDEX
PART 1. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
At June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income
For the three months and six months ended
June 30, 1996 and June 30, 1995 4
Condensed Consolidated Statements of Cash Flows
For the six months ended
June 30, 1996 and June 30, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Securities Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibits:
11 - Computation of Net Income Per Share
for the three months and six months ended
June 30, 1996 and June 30, 1995 19
2
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PART 1. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
ASPECT DEVELOPMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
June 30, Dec. 31,
1996 1995 (1)
------------- -------------
Current assets: (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 13,290 $ 3,159
Short-term investments 32,500 --
Accounts receivable 3,746 4,382
Other current assets 1,360 694
------------- -------------
Total current assets 50,896 8,235
Property and equipment, net 2,310 1,397
Other assets, net 370 347
------------- -------------
Total assets $ 53,576 $ 9,979
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 593 $ 224
Deferred revenue 4,205 4,338
Capital lease obligations 625 531
Third-party royalties and fees 564 817
Other current liabilities 1,840 1,301
-------------- -------------
Total current liabilities 7,827 7,211
Capital lease obligations 554 634
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
Authorized 3,805,118 shares, issued and
outstanding - none and 3,687,117, respectively
Common stock, $0.001 par value per share; 20,000,000 -- 4,916
shares authorized, 11,748,270 issued and
outstanding at June 30, 1996 and 5,385,312 shares
issued and outstanding at December 31, 1995 48,360 653
Notes receivable from stockholders (320) (320)
Deferred compensation (522) (241)
Accumulated deficit (2,323) (2,874)
-------------- -------------
Total stockholders' equity 45,195 2,134
-------------- -------------
Total liabilities and stockholders'
equity $ 53,576 $ 9,979
-------------- -------------
(1) Derived from audited financial statements as of December 31, 1995.
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
3
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<TABLE>
<CAPTION>
ASPECT DEVELOPMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED)
Three months ended Six months ended
June 30, June 30,
------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Licenses $ 3,114 $ 1,644 $ 5,465 $ 3,340
Subscription and maintenance 2,248 1,084 4,186 1,961
Service and other 425 417 737 714
-------- -------- -------- --------
Total revenues 5,787 3,145 10,388 6,015
Cost of revenues:
Licenses 147 138 246 214
Subscription and maintenance 258 221 528 471
Service and other 392 136 598 347
-------- -------- -------- --------
Total cost of revenues 797 495 1,372 1,032
-------- -------- -------- --------
Gross profit 4,990 2,650 9,016 4,983
Operating expenses:
Research and development 1,794 1,100 3,342 2,201
Sales and marketing 2,168 1,054 3,856 1,852
General and administrative 748 367 1,335 713
-------- -------- -------- --------
Total operating
expenses 4,710 2,521 8,533 4,766
-------- -------- -------- --------
Operating income 280 129 483 217
Interest/other income(expense) 124 (3) 130 4
-------- -------- -------- --------
Income before income taxes 404 126 613 221
Provision for income taxes 40 6 61 10
-------- -------- -------- --------
Net income $ 364 $ 120 $ 552 $ 211
======== ======== ======== ========
Net income per share $ 0.03 $ 0.01 $ 0.05 $ 0.02
======== ======== ======== ========
Shares used in per share
computations 12,407 10,780 11,629 10,805
======== ======== ======== ========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
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ASPECT DEVELOPMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
1996 1995
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 552 $ 211
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 606 171
Noncash legal dispute settlement charge 90 -
Changes in assets and liabilities:
Accounts receivable 636 (1,114)
Prepaid expenses and other current assets (666) (345)
Accounts payable 369 (56)
Accrued liabilities 538 67
Deferred revenue (133) 304
Third party royalties & fees (253) 57
----------- ---------
Net cash provided by (used for) operating
activities 1,739 (705)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,076) (62)
Purchase of short term investments (32,500) -
Increase in other assets (23) (153)
----------- ---------
Net cash used for investing activities (33,599) (215)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Initial Public Offering 42,286 -
Principal payments on capital lease obligations (366) (199)
Proceeds from issuance of common stock 71 14
----------- ---------
Net cash provided by (used for) financing
activities 41,991 (185)
Net increase (decrease) in cash and cash
equivalents 10,131 (1,105)
Cash and cash equivalents at beginning of
period 3,159 2,437
----------- ---------
Cash and cash equivalents at end of period $ 13,290 $ 1,332
=========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for interest $ 63 $ 31
=========== =========
Income taxes paid $ 49 $ 4
=========== =========
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES
Equipment acquired under capital lease
obligations $ 380 $ 183
=========== =========
Issuance of common stock for note receivable $ - $ 210
=========== =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
5
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ASPECT DEVELOPMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Basis of Presentation
The Company develops, markets and supports enterprise client/server and
reference data products that enable manufacturers to improve product development
and business processes through component and supplier management. The Company
was incorporated in 1990 and was in the development stage and engaged primarily
in research and development until 1992. The Company sells licensed software and
reference data products to customers and provides software and data services for
customers both within and outside the United States.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments which
in the opinion of management are necessary to fairly state the Company's
consolidated financial position, results of operations, and cash flows for the
periods presented. These financial statements should be read in conjunction
with the Company's audited consolidated financial statements as included in the
Company's Registration Statement on Form SB-2 as declared effective by the
Securities and Exchange Commission on May 23, 1996 (Reg. No. 333-3840-LA). The
consolidated results of operations for the period ending June 30, 1996 are not
necessarily indicative of the results to be expected for any subsequent interim
or annual period. The December 31, 1995 condensed consolidated balance sheet
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principals.
The condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
2. Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments purchased with a
maturity of three months or less at date of acquisition to be cash equivalents.
Short-term investments generally mature within two years of purchase. Gross
realized and unrealized gains and losses are not material.
The following is a summary of the estimated fair value of available-for-
sale securities at June 30, 1996. The securities are carried at amortized cost
which approximates fair value, and therefore, there are no unrealized gains or
losses recorded to stockholders' equity.
June 30, 1996
-------------
(in thousands)
Commercial Paper $32,500
========
3. Revenue Recognition
Licenses are comprised of perpetual license fees, which are recognized as
revenue after execution of a license agreement or receipt of a definitive
purchase order, and shipment of the product if no significant vendor obligations
remain and collection of the resulting receivables is deemed probable. Where
delivery involves significant installation obligations at multiple sites,
revenues are
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recognized on a per-site basis upon completion of installation. Product returns
and sales allowances (which were not significant through June 30, 1996) are
estimated and provided for at the time of sale.
Revenue from subscription and maintenance agreements is deferred and
recognized on a straight-line basis over the life of the related agreement,
typically one year.
Service and other revenues are comprised of service, consulting and
development fees. Service revenues from training and consulting are recognized
upon completion of the work to be performed. Development fees are recognized as
revenue in accordance with the terms of the agreements, generally when related
costs have been incurred. The Company retains complete ownership of all
technology developed under these agreements.
3. Net Income Per Share
Net income per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of the incremental common shares
issuable upon conversion of the Series A, B, and C convertible preferred stock
(using the if-converted method) and shares issuable upon the exercise of options
(using the treasury stock method). Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins and staff policy, such computations
include all common and common equivalent shares issued within 12 months of the
filing date of the Company's Registration Statement on Form SB-2 as if they were
outstanding for all periods presented using the treasury stock method.
4. Initial Public Offering
In May 1996, the Company completed its initial public offering and issued
2,322,500 new shares of its common stock to the public at $20.00 per share. The
Company received approximately $42.3 million in cash, net of underwriting
discounts, commissions and other offering costs. Simultaneously with completion
of the offering, 3,687,117 outstanding shares of preferred stock were
automatically converted into common stock on a one-to-one basis.
5. Settlement of Dispute
In May 1996, the Company issued an option to a third party to purchase
up to 100,000 shares of common stock at a price of $8.10 per share to obtain the
release of all claims arising from a dispute with such party. The Company
recorded a charge of $90,000 in connection with this grant. Such amount is
included within Interest/other income(expense).
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this Report contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in "Factors
That May Affect Future Results" as well as those discussed in this section and
elsewhere in this Report, and the risks discussed in the "Risk Factor's" section
included in the Company's Registration Statement on Form SB-2 as declared
effective by the Securities and Exchange Commission on May 23, 1996 (Reg. No.
333-3840-LA).
RESULTS OF OPERATIONS
REVENUES
The Company's revenues are divided into three categories: license
revenues, subscription and maintenance revenues, and service and other revenues.
License revenues are comprised principally of perpetual license fees for the
Company's client/server software and reference data products. Subscription and
maintenance revenues are comprised principally of annual subscription and
maintenance fees for the Company's products, including its Explore client/server
software, its VIP family of component reference databases and the CAPS reference
data product. Service and other revenues are comprised principally of fees for
consulting, development and training services performed by the Company. The
Company recognizes revenues in accordance with the American Institute of
Certified Public Accountants Statement of Position 91-1 on Software Revenue
Recognition. License revenues are recognized after execution of a license
agreement, or receipt of a definitive purchase order, and shipment of the
product if no significant vendor obligations remain and collection of the
resulting receivables is deemed probable. Product returns and sales allowances
(which were not significant through June 30, 1996) are estimated and provided
for at the time of sale. When delivery involves significant obligations at
multiple sites, revenues are recognized on a per-site basis upon completion of
installation. Revenues from subscription and maintenance agreements are
deferred and recognized on a straight-line basis over the life of the related
agreement, which is typically twelve months. Service revenues from training and
consulting are recognized upon completion of the work to be performed.
Development revenues are recognized in accordance with the terms of the
agreements, generally when related costs have been incurred.
Licenses. Revenues from licenses increased from $1,644,000 for the three
months ended June 30, 1995, to $3,114,000 for the three months ended June 30,
1996, and increased from $3,340,000 for the six months ended June 30, 1995, to
$5,465,000 for the six months ended June 30, 1996. This increase was due
primarily to the increased acceptance of the Company's Explore and VIP products.
Subscription and Maintenance Revenues. Subscription and maintenance
revenue increased from $1,084,000 for the three months ended June 30, 1995, to
$2,248,000 for the three months ended June 30, 1996, and increased from
$1,961,000 for the six months ended June 30, 1995, to $4,186,000 for the six
months ended June 30, 1996. This increase was due primarily to the renewals of
subscriptions and maintenance agreements from the installed base of customers
and the increased market acceptance of the Company's Explore and VIP products.
Service and Other Revenue. Service and other revenue increased from
$417,000 for the three months ended June 30, 1995, to $425,000 for the three
months ended June 30, 1996, and increased from $714,000 for the six months ended
June 30, 1995, to $737,000 for the six months ended June 30, 1996. This
increase was due primarily to increased consulting fees in 1996 offset by a
decrease in development revenues caused by the conclusion of a development
contract in 1995.
8
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COST OF REVENUES
Cost of Licenses. Cost of licenses consists primarily of license fees
and royalties paid to third party vendors, primarily Oracle, and shipping
expenses. Cost of licenses increased from $138,000 for the three months ended
June 30, 1995, to $147,000 for the three months ended June 30, 1996, and
increased from $214,000 for the six months ended June 30, 1995, to $246,000 for
the six months ended June 30, 1996, representing 8.4%, 4.7%, 6.4% and 4.5% of
license revenues for the three months ended June 30, 1995 and 1996 and for the
six months ended June 30, 1995 and 1996. The decrease in cost of licenses as a
percent of license revenues from 1995 to 1996 were due primarily to the higher
revenue base.
Cost of Subscription and Maintenance Revenues. Cost of subscription and
maintenance revenues consists primarily of license fees and royalties paid to
third-party vendors, primarily Information Handling Systems for the CAPS
reference data product, and personnel-related costs incurred in providing
centralized telephone support and related technical support to customers. Cost
of subscription and maintenance revenues increased from $221,000 for the three
months ended June 30, 1995, to $258,000 for the three months ended June 30,
1996, and increased from $471,000 for the six months ended June 30, 1995, to
$528,000 for the six months ended June 30, 1996, representing 20.4%, 11.5%,
24.0% and 12.6% of subscription and maintenance revenues for the three months
ended June 30, 1995 and 1996 and for the six months ended June 30, 1995 and
1996, respectively. While the absolute dollars increased for each period
presented, the cost of subscription and maintenance revenues decreased as a
percentage of related revenues over such periods primarily as a result of
allocating related costs over a larger customer base.
Cost of Service and Other Revenues. Cost of service and other revenues
consist primarily of personnel related costs incurred in providing consulting
services, development services and training to customers. Cost of service and
other revenues increased from $136,000 for the three months ended June 30, 1995,
to $392,000 for the three months ended June 30, 1996, and increased from
$347,000 for the six months ended June 30, 1995, to $598,000 for the six months
ended June 30, 1996, representing 32.6%, 92.2%, 48.6% and 81.1% of service and
other revenues for the three months ended June 30, 1995 and 1996 and for the six
months ended June 30, 1995 and 1996, respectively. The increase in cost of
service and other revenues as a percent of service and other revenues was due
primarily to an increase in the number of consultants being engaged by the
Company in advance of the build up of consulting revenues.
OPERATING EXPENSES
Research and Development. Research and development expenses consist
primarily of engineering personnel costs. Research and development expenses
increased from $1,100,000 for the three months ended June 30, 1995, to
$1,794,000 for the three months ended June 30, 1996, and increased from
$2,201,000 for the six months ended June 30, 1995, to $3,342,000 for the six
months ended June 30, 1996, representing 35.0%, 31.0%, 36.6% and 32.2% of total
revenues for the three months ended June 30, 1995 and 1996 and for the six
months ended June 30, 1995 and 1996, respectively. The increase in research and
development expenses in absolute dollars was primarily attributable to increased
staffing and associated support for technical staff throughout 1995 and during
the first half of 1996.
Sales and Marketing. Sales and marketing expenses include salaries,
commissions, advertising, travel, trade show, public relations and other selling
and marketing related expenses. Sales and marketing expenses increased from
$1,054,000 for the three months ended June 30, 1995, to $2,168,000 for the three
months ended June 30, 1996, and increased from $1,852,000 for the six months
ended June 30, 1995, to $3,856,000 for the six months ended June 30, 1996,
representing
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33.5%, 37.5%, 30.8% and 37.1% of total revenues for the three months ended June
30, 1995 and 1996 and for the six months ended June 30, 1995 and 1996,
respectively. The increase in sales and marketing expenses both in absolute
dollars and as a percentage of revenues was due primarily to the addition of
sales and marketing personnel and increased marketing activities, including
trade shows and promotional expenses. The Company expects sales and marketing
expenses to increase in absolute dollars as the Company releases and promotes
new products; however, there can be no assurance that increased sales and
marketing spending will result in increased revenues.
General and Administrative. General and administrative expenses include
personnel costs for administration, finance, human resources and general
management, along with legal and accounting expenses and other professional
services. General and administrative expenses increased from $367,000 for the
three months ended June 30, 1995, to $748,000 for the three months ended June
30, 1996, and increased from $713,000 for the six months ended June 30, 1995, to
$1,335,000 for the six months ended June 30, 1996, representing 11.7%, 12.9%,
11.9% and 12.9% of total revenues for the three months ended June 30, 1995 and
1996 and for the six months ended June 30, 1995 and 1996, respectively. The
increase in general and administrative expenses was primarily the result of
increased staffing and associated expenses necessary to manage and support the
Company's growth. The Company believes that its general and administrative
expenses will increase in absolute dollars in the future as the Company expands
its staffing, but may decrease as a percentage of total revenues in the event
that revenues increase.
INTEREST / OTHER INCOME AND EXPENSE
Interest and other income and expense represents interest income earned
on the Company's cash, cash equivalents and short-term investments, and other
items. Interest and other income and expense increased from a net expense of
$3,000 for the three months ended June 30, 1995, to net income of $124,000 for
the three months ended June 30, 1996 and from net income of $4,000 for the six
months ended June 30, 1995, to $130,000 for the six months ended June 30, 1996,
primarily due to higher cash balances resulting from the infusion of cash from
the initial public offering, offset in the second quarter of 1996 by a $90,000
expense related to the settlement of a dispute.
PROVISION FOR INCOME TAXES
The Company has provided for income taxes at an estimated effective tax
rate of 10% for the six months ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
In May 1996, the Company completed its initial public offering, and its
common stock began trading on the NASDAQ National Market System under the symbol
ASDV. Through the offering, the Company sold 2,322,500 new shares of its common
stock which generated approximately $42.3 million of cash, net of underwriting
discounts, commissions and other offering costs.
As of June 30, 1996, the Company had approximately $45.8 million in cash,
cash equivalents and short-term investments. Net cash provided by operating
activities was $1,739,000 for the six months ended June 30, 1996, and was
primarily due to net income of $552,000 and increases in accrued liabilities of
$538,000 and accounts payable of $369,000 and a decrease in accounts receivable
of $636,000 offset by an increase in prepaid expenses and other current assets
of $666,000 and a decrease in third party royalties & fees of $253,000.
At June 30, 1996, the Company had available a $2 million bank line of
credit agreement, secured by certain assets of the Company. Borrowings bear
interest at the bank's prime rate plus 0.5%. The Company also had available a
$500,000 capital lease line of credit. There were no borrowings outstanding
under these lines of credit as of June 30, 1996.
10
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As of June 30, 1996, the Company's principal commitments consisted of
obligations under operating and capital leases. As of June 30, 1996, the
Company had $1.2 million in outstanding borrowings under capital leases which
are payable through 1999.
The Company believes that its current cash balances, its credit facility
and the cash flows generated from operations, if any, will be sufficient to meet
its working capital and capital expenditure requirements for at least the next
12 months. In addition, although there are no present understandings,
commitments or agreements with respect to any acquisition of other businesses,
products or technologies, the Company from time to time evaluates potential
acquisitions of businesses, products and technologies and may in the future
require additional equity or debt financings to consummate such potential
acquisitions.
11
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FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks. These risks should be read in
conjunction with the "Risk Factors" section included in the Company's
Registration Statement on Form SB-2 as declared effective by the Securities and
Exchange Commission on May 23, 1996 (Reg. No. 333-3840-LA).
FLUCTUATIONS IN OPERATING RESULTS
The Company's revenues and results of operations have varied on a
quarterly and an annual basis in the past and are expected to vary significantly
in the future. The Company's revenues and results of operations are difficult to
forecast and could be materially adversely affected by many factors, some of
which are outside the control of the Company, including, among others, the
relatively long sales and implementation cycles for the Company's products; the
size and timing of individual license transactions; seasonality of revenues;
changes in the Company's operating expenses; changes in the mix of products and
services sold; timing of introduction or enhancement of products by the Company
or its competitors; market acceptance of new products; technological changes in
software or database technology; personnel changes and difficulties in
attracting and retaining qualified sales, marketing, technical and consulting
personnel; changes in customers' budgeting cycles; foreign currency exchange
rates; quality control of products sold; and economic conditions generally and
in specific industry segments.
The Company's business has experienced and is expected to continue to
experience seasonality, in part due to customer buying patterns and the
Company's expense patterns. In recent years, the Company has generally had
stronger demand for its products during the quarter ending December 31, and has
incurred higher personnel costs in the quarter ending March 31. The Company
believes that these patterns will continue for the foreseeable future.
License of the Company's client/server software and reference data
products have historically accounted for the substantial majority of the
Company's revenues, and the Company anticipates that this trend will continue
for the foreseeable future. The Company generally ships its products within a
short period of time after execution of a license. As a result, the Company
typically does not have a material backlog of unfilled license orders, and
revenues in any quarter are substantially dependent on license revenues
recognized in that quarter. The Company's expense levels are based, in part, on
its expectations as to future revenues and to a large extent are fixed in the
short term. Accordingly, the Company may be unable to adjust spending in a
timely manner to compensate for any unexpected shortfall in revenues, and any
significant shortfall of demand in relation to the Company's expectations or any
material delay of customer orders would have an almost immediate material
adverse effect on the Company's business, financial condition or results of
operations.
As a result, it is likely that in some future period the Company's
results of operations could fail to meet the expectations of public market
analysts or investors. In such event, or in the event that adverse conditions
prevail or are perceived to prevail generally or with respect to the Company's
business, the price of the Company's Common Stock would likely drop
significantly. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
LENGTHY SALES AND IMPLEMENTATION CYCLES
The license of the Company's client/server software and reference data
products generally requires the Company to engage in a sales cycle lasting six
to twelve months or longer, during which the Company typically provides a
significant level of education to prospective customer regarding the use and
benefits of the Company's products. In addition, the implementation of the
Company's
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standard products typically involves a significant commitment of resources by
its customers over an extended period of time and is commonly associated with
reengineering of product development and business processes. For these reasons,
sales and customer implementation cycles are subject to a number of significant
delays over which the Company may have little or no control. Accordingly, any
delay in the sale or customer implementation of a larger license or a number of
smaller licenses would have material adverse effect on the Company's business,
financial condition or results of operations and cause the Company's operating
results to vary significantly from quarter to quarter.
LIMITED HISTORY OF PROFITABILITY
The Company was founded in 1990 and commenced shipment of its initial
products in 1992. The Company did not achieve operating profitability on a
quarterly basis until the fourth quarter of 1994. Accordingly, the Company has
only a limited operating history upon which an evaluation of its business and
prospects can be based. Although the Company has experienced significant growth
in revenues during recent periods, there can be no assurance that the Company
will sustain such growth or that the Company will remain profitable in the
future on a quarterly or an annual basis. As of June 30, 1996, the Company had
an accumulated deficit of approximately $2.3 million.
RELIANCE ON ACCEPTANCE OF CSM SOLUTION
Substantially all of the Company's revenues are derived from fees for
licensed products and for services which enable component and supplier
management ("CSM") by manufacturers. The Company's future financial performance
will depend to a large extent on the growth in the number of organizations
adopting client/server software and reference data solutions for CSM and
engaging outside vendors to provide and maintain such solutions. The Company's
future growth, if any, will also depend upon the extent to which such
organizations choose to implement CSM solutions in general, and the Company's
CSM solutions in particular, across their enterprises and on their continued
reliance on the Company's subscription, maintenance and support offerings.
Because the CSM market is new and evolving, it is difficult to assess or predict
with any assurance its size or growth rate, if any. There can be no assurance
that the market for CSM products and services will develop, or that the
Company's CSM products or services will achieve market acceptance. If the CSM
market fails to develop, develops more slowly than expected or attracts new
competitors, or if the Company's products do not achieve broader market
acceptance, the Company's business, financial condition or results of operations
could be materially adversely affected.
DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS
The Company currently derives substantially all of its revenues from the
licensing of its Explore client/server software and VIP family of reference
databases and fees from related services. These products and services are
expected to continue to account for substantially all of the Company's revenues
for the foreseeable future. The Company first made its Explore client/server
software and VIP reference databases generally commercially available in the
second quarter of 1995, and has issued regular updates since then. As a result,
the Company has only a limited number of fully implemented, operational product
installations at customer sites. There can be no assurance that such products
will not require modifications to satisfy performance requirements of existing
or potential customers or to fix previously undetected errors. While the
Company believes that to date its customers have not experienced significant
problems with such products, if the Company's customers were to do so in the
future or if they were dissatisfied with product functionality or performance,
the Company's business, financial condition or results of operations could be
materially adversely affected.
There can be no assurance that the Company's products will achieve
broader market acceptance or that the Company will be successful in marketing
its products or enhancements thereto.
13
<PAGE>
In the event that the Company's current or future competitors release new
products that have more advanced features, offer better performance or are more
price competitive than the Company's products, demand for the Company's products
would decline. A decline in demand for, or market acceptance of, the Explore
client/server software or the VIP family of reference databases as a result of
competition, technological change, evolution of the Internet or other factors
would have a material adverse effect on the Company's business, financial
condition or results of operations.
MANAGEMENT OF EXPANDING OPERATIONS
The Company's business has grown rapidly in recent periods, with revenues
increasing from $4.0 million in 1993, to $8.5 million in 1994, to $13.7 million
in 1995 and to $10.4 million in the first six months of 1996. In addition, the
Company has experienced significant growth in the number of its employees, the
scope of its operating and financial systems and the geographic area of its
operations, which has placed a significant strain on the Company's management.
The Company's future results of operations will depend in part on the ability of
its officers and other key employees to continue to implement and expand its
operational, customer support and financial control systems and to expand, train
and manage its employee base. In order to successfully manage its future
growth, if any, the Company will be required to hire additional general and
administrative personnel and to augment its existing financial and management
systems or to implement new such systems. In this regard, the Company's Chief
Financial Officer joined the Company in April 1996. There can be no assurance
that the existing and new management will be able to augment or to implement
such systems efficiently or on a timely basis, and the failure to do so could
have a material adverse effect on the Company's business, financial condition or
results of operations. There can be no assurance that the Company will be able
to manage any future expansion, if any, successfully; and any inability to do so
would have a material adverse effect on the Company's business, financial
condition or results of operations. In addition, the Company believes that its
future success will also depend to a significant extent upon its ability to
attract, train and retain highly skilled technical, management, sales, marketing
and consulting personnel. Competition for such personnel is intense, and the
Company expects that such competition will continue for the foreseeable future.
The Company has from time to time experienced difficulty in locating candidates
with appropriate qualifications. There can be no assurance that the Company
will be successful in attracting or retaining such personnel, and the failure to
attract or retain such personnel could have a material adverse effect on the
company's business, financial condition or results of operations.
COMPETITION
The market for the Company's products is competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. The Company's products are targeted at the
emerging market for open, client/server software solutions, and the Company's
competitors offer a variety of products and services to address this market.
Among the Company's principal competitors are Cadis, a privately held software
company, and the Information Handling Systems division of IHS Group, Inc.
("IHS"), a privately held software and data publishing company. The Company has
licensed a reference data product from IHS since 1992 which the Company
continues to offer on a limited basis to certain current and potential customers
who typically use it in addition to the Company's VIP reference databases.
Because IHS competes directly with the Company, there can be no assurance that
it will not seek to terminate the Company's license to the IHS reference data
product. The Company anticipates that its revenues from subscription agreements
for the IHS reference data product will not be material in the current period or
future periods and that subscription agreements and renewals for the IHS
reference data product will decrease over time as the Company's reference data
products become more comprehensive. However, if IHS were to terminate such
license, there can be no assurance that the Company would be able to retain all
the customers who license such data. The Company also
14
<PAGE>
currently faces indirect competition from third-party professional service
organizations and internal management information systems and computer-aided
design departments of potential customers that develop custom internal software.
In the future, because there are relatively low barriers to entry in the
software industry, the Company could experience additional competition from
other established or emerging companies as the client/server application
software market continues to develop and expand. In particular, RDBMS vendors,
ERP vendors, PDM vendors, CAD vendors or professional service providers may, in
the future, enter the Company's market with competitive products. To the extent
that the Company expands into Internet-based or other forms of delivery of data,
the Company may encounter additional competition from its existing competitors
and other established or emerging companies. Many of these potential
competitors have well-established relationships with the Company's current and
potential customers, have extensive knowledge of the client/server industry,
better name recognition and significantly greater financial, technical, sales,
marketing and other resources and are capable of offering single vendor
solutions which span multiple industries. It is also possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. The Company also expects that competition will
increase as a result of software industry consolidations. The Company's
competitors 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.
Increased competition could result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely affect
the Company's business, financial condition or results of operations. There can
be no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures will not materially
and adversely affect its business, financial condition or results of operations.
DISTRIBUTION RISKS
An integral part of the Company's strategy is to expand its direct sales
force and to establish marketing, selling and consulting relationships both
domestically and internationally. In addition, the Company intends to leverage
its relationships with hardware and software vendors and systems integrators to
encourage these parties to recommend or distribute the Company's products. The
Company has invested resources and may invest additional resources to develop
these channels. The ability of the Company to achieve revenue growth in the
future will depend on its success in adding a substantial number of direct
sales employees and establishing marketing, selling and consulting relationships
during 1996 and future periods. There can be no assurance that the Company will
be able to attract sufficient direct sales personnel, hardware and software
vendors, systems integrators or other marketing or selling partners to market
the Company's products effectively. There can be no assurance that the cost of
the Company's investment in direct and indirect sales channels will not exceed
the revenues generated from such investment, if any, or that the Company's sales
and marketing organization will successfully compete against the sales and
marketing organizations of the Company's competitors.
NEED TO DEVELOP, MAINTAIN AND IMPROVE REFERENCE DATA PRODUCTS
The Company's VIP component reference databases are composed of a large
amount of information supplied by component suppliers which requires frequent
updating and expansion. As a result, the Company must continue to invest
substantial resources in its reference data products. The information regarding
components and suppliers contained in the Company's VIP component reference
databases is not proprietary to the Company and is derived from supplier
databooks. Therefore, other parties may independently create similar reference
data products. The Company first released its VIP component reference databases
in 1995, and accordingly has only limited experience
15
<PAGE>
with building, maintaining and upgrading such products. Furthermore, the Company
currently plans to develop, license or acquire reference data products for
additional global vertical markets, which will impose significant additional
burdens on its data product development efforts. As the information contained in
the Company's reference data products expands or if the demand for frequency of
updates increases, unforeseen problems with entering, updating, managing or
delivering the data may arise. Because the Company's customers rely on the
information contained in the Company's VIP family of component reference
databases to design and procure components for their products, the accuracy,
completeness and currency of the information in those data products is critical.
To the extent that the Company is unable to keep its reference data products
accurate, complete or current, its customers may become dissatisfied with the
Company's products and discontinue their purchase of the Company's products and
services. In the event that the Company's VIP family of component reference
databases is or is perceived to be inaccurate, incomplete or out of date, the
Company's business, financial condition or results of operations could be
materially adversely affected.
NEED TO DEVELOP NEW SOFTWARE PRODUCTS AND ENHANCEMENTS
The market for the Company's client/server software products is
characterized by rapid technological change, changing customer requirements,
frequent new product introductions and evolving industry standards. The
introduction of products incorporating new technologies and the emergence of new
industry standards could render existing products obsolete or unmarketable. The
life cycles of the Company's client/server software products are difficult to
estimate. The Company's future success will depend in large part upon its
ability to enhance its current client/server software products and to develop
and introduce on a timely basis new products that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. The success of the Company's software
development efforts will depend on various factors, including the integration of
additional software modules under development with existing products. 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 or
marketing of these products, or that the Company's new products and product
enhancements will adequately address the requirements of the marketplace and
achieve market acceptance. If the Company is unable to develop and introduce
new software products or enhancements of existing products in a timely manner or
if the Company experiences delays in the commencement of commercial shipments of
new products and enhancements, the Company's business, financial condition or
results of operations could be materially adversely affected.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11.1 -- Computation of Net Income Per Share
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 13, 1996 /s/ David S. Dury
------------------
David S. Dury
Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11.1
ASPECT DEVELOPMENT, INC.
COMPUTATION OF NET INCOME
PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
1996 1995 1996 1995
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Common Stock:
Weighted average common stock 10,321 5,046 7,866 5,021
outstanding during the period
Common Stock Equivalents:
Net effect of dilutive options
based upon modified treasury stock
method 2,086 1,226 1,509 1,275
Convertible preferred stock - 3,687 1,843 3,687
Stock related to SAB No.64 and 83 - 821 411 822
--------- -------- --------- ---------
Shares used in per share
computation 12,407 10,780 11,629 10,805
========= ======== ========= =========
Net income $ 364 $ 120 $ 552 $ 211
========= ======== ========= =========
Net income per share $ 0.03 $ 0.01 $ 0.05 $ 0.02
========= ======== ========= =========
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 13,290
<SECURITIES> 32,500
<RECEIVABLES> 3,828
<ALLOWANCES> 82
<INVENTORY> 0
<CURRENT-ASSETS> 50,896
<PP&E> 3,860
<DEPRECIATION> 1,550
<TOTAL-ASSETS> 53,576
<CURRENT-LIABILITIES> 7,827
<BONDS> 0
0
0
<COMMON> 48,360
<OTHER-SE> (3,165)
<TOTAL-LIABILITY-AND-EQUITY> 53,576
<SALES> 10,388
<TOTAL-REVENUES> 10,388
<CGS> 1,372
<TOTAL-COSTS> 1,372
<OTHER-EXPENSES> 8,533
<LOSS-PROVISION> 113
<INTEREST-EXPENSE> (130)
<INCOME-PRETAX> 613
<INCOME-TAX> 61
<INCOME-CONTINUING> 552
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 552
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
