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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 0-20749
ASPECT DEVELOPMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 25-1622857
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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1300 CHARLESTON ROAD, MOUNTAIN VIEW CA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(650) 428-2700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
(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 No X
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. [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant (based on the closing sale price of the Common Stock as reported on
the Nasdaq National Market on March 25, 1998) was approximately $449,347,000.
For purposes of this determination, shares of Common Stock held by each
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. The number of outstanding shares
of the Registrant's Common Stock as of the close of business on March 25, 1998
was 14,778,833.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders (the "1998 Proxy Statement") to be held on June 16, 1998 is
incorporated by reference in Part III of the Form 10-K to the extent stated
herein.
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ASPECT DEVELOPMENT, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
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PART I
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 14
Item 3. Legal Proceedings.............................................. 14
Item 4. Submission of Matters to a Vote of Security Holders............ 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 14
Item 6. Selected Consolidated Financial Data........................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 21
Item 8. Consolidated Financial Statements.............................. 32
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 52
PART III
Item 10. Directors and Executive Officers of the Registrant............. 52
Item 11. Executive Compensation......................................... 54
Item 12. Security Ownership of Certain Beneficial Owners and Management. 54
Item 13. Certain Relationships and Related Transactions................. 54
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K.............................................................. 55
Signatures............................................................... 60
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PART I
Forward looking statements in this Annual Report on Form 10-KSB are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Stockholders are cautioned that all forward-looking
statements pertaining to the Company involve risks and uncertainties,
including, without limitation, those contained in Item 7 of this report under
the caption entitled, "Management's Discussion and Analysis Of Financial
Condition and Results of Operations--Business Factors" and other risks
detailed from time to time in the Company's periodic reports and other
information filed with the Securities and Exchange Commission.
ITEM 1. BUSINESS.
Aspect Development, Inc. ("Aspect" or the "Company") develops, markets and
supports enterprise client/server software and content products that enable
manufacturers to improve product development and business processes through
component and supplier management ("CSM"). Aspect's CSM solution can reduce
the costs of production and non-production parts and accelerate manufacturing
time-to-market by enabling users to effectively manage the components and
commodities they buy, as well as the suppliers of those commodities across the
enterprise. Aspect's products enable rapid search, comparison and selection of
the optimal components and suppliers, promote the reuse of design and
manufacturing knowledge, support the consolidation of the supply chain and
facilitate automation of the related design and procurement processes.
Aspect's CSM solution plays the role of "in-bound supply chain management,"
providing the information bridge between design and procurement, complementing
the role of enterprise resource planning ("ERP") systems in planning,
manufacturing and order entry and the role of product data management ("PDM")
systems in design release and configuration management. The Aspect CSM
solution provides several key business advantages, including a unified
repository of all CSM data, powerful decision support, desktop access to
industry-wide component content, rapid deployment and workflow/process
automation. Aspect's CSM solution is licensed to global enterprises in many
industry verticals including electronics and high technology, aerospace and
defense, automotive, industrial process and consumer package goods.
The Aspect CSM solution incorporates four interrelated elements: the Explore
family of enterprise client/server software products, the VIP family of
component and supplier content databases, Professional Services for legacy
data conversion and business process consulting and the Krakatoa Web Catalog
Publisher.
. Aspect's Explore software, based on patent-pending, third generation
object-relational technology, enables the creation and management of a
unified enterprise repository of knowledge regarding components,
suppliers and designs, facilitates the organization and cross-referencing
of such knowledge for rapid search and reuse, and supports
workflow/process automation.
. The VIP family includes three major content databases: standard parts,
known as VIP; commodity suppliers, known as VIS; and operational
Maintenance Repair Operations ("MRO") products, known as VIP-OPS. VIP, or
very important parts, contains frequently updated industry-wide
information regarding approximately 3 million standard electronic,
electromechanical, and mechanical devices from more than 800 suppliers
worldwide. VIS, or very important suppliers, is a consolidated database
of major suppliers of commodities, including company, financial,
qualification, and rating information. VIP-OPS, or very important parts-
operational is a comprehensive catalog of operational and maintenance
items, including information from more than 5,000 suppliers of equipment,
tools, supplies, and similar products.
. CSM Professional Services include Data Services for migration, cleansing,
normalization of existing customer component and supplier data,
electronic catalog creation, and Business Process Services to implement
CSM best practices for preferred parts management, supply chain
consolidation, design reuse, and similar uses.
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. Krakatoa supplies the technology to give manufacturers instant access to
their specialized online databases. This software is currently being used
by suppliers and the data aggregators who seek to publish content in an
easily accessible manner on the World Wide Web.
Aspect's CSM solution operates in an open client/server environment allowing
customers to use various UNIX servers from Sun Microsystems, Inc. ("Sun"),
International Business Machines, Hewlett Packard and Digital Equipment
Corporation, as well as servers based on Microsoft NT. Customers can provide
access to CSM data from all major client platforms, including traditional
Windows and UNIX native clients as well as Web browser access. The Aspect CSM
solution also includes standard interfaces and tools that facilitate CSM
integration with ECAD, MCAD, ERP, PDM and other enterprise systems, including
legacy systems. Aspect's products are designed to provide an out-of-the-box
solution for rapid enterprise-wide deployment and are scalable from a
divisional solution to an enterprise deployment of hundreds or thousands of
users in a heterogeneous information technology environment. In order to
provide a complete solution, Aspect offers consulting services to accelerate
CSM data migration and implementation.
The Aspect CSM solution delivers the following key business advantages:
Rapid Return-on-Investment through Strategic Sourcing. One of the leading
business benefits from a CSM system is the ability to consolidate and
standardize component and commodity data across the enterprise, enabling
customers to instantly leverage consolidated procurement with strategic
suppliers. In addition, the CSM solution enables procurement to encourage
selection of preferred components from preferred suppliers. In contrast to
most enterprise systems, these savings are measurable, in actual dollars,
in the form of reduced cost of goods.
Improved Product Cost, Quality and Time-to-Market. The Aspect CSM
solution enables the management, cross-referencing, integration and sharing
of relevant technical and business information regarding components,
commodities, suppliers and designs, even when some or all of the source
data is physically resident in other systems or databases. In addition,
users may add internal component and supplier information such as
specifications, CAD drawings, cost and availability to the electronics
catalogs in Aspect's VIP component content databases. Designers and
procurement professionals are therefore able to access both the business
and technical information necessary for them to make better and faster
decisions, which can reduce costs and shorten time-to-market, all from a
single unified repository of CSM content.
Low-Risk Implementation. CSM delivers a variety of process benefits,
without requiring substantial changes to existing procedures or enterprise
systems. Its implementation offers extremely high rewards in return-on-
investment, without the inherent deployment time risks of a mission-
critical transaction system. The form of the deployment of a CSM system can
significantly accelerate the transaction system deployment by providing the
basis for clean item masters and bills-of-materials for existing and new
designs.
Powerful Decision Support. The Aspect CSM solution supports advanced
search techniques that enable users to rapidly search and select the
optimal components, suppliers and reusable designs from a multitude of
possible choices. This solution allows users to access this information
much more rapidly and reliably than using paper catalogs or accessing
documents, if available, on suppliers' World Wide Web servers. Advanced
analytical capabilities also enable spreadsheet style comparison of
technical and business features.
Desktop Access to Industry-Wide Reference Data. The VIP component
reference databases provide search and select parameters and electronic
catalogs for a wide range of standard components and commodities,
classified and organized for consistency and ease of search. These
reference data products include approximately 3 million components from
approximately 800 suppliers worldwide and are updated frequently. These
content databases are designed to provide desktop access for a wide variety
of choices and are organized under a standard classification scheme ("SCS")
to enable rapid and consistent search, comparison and selection of standard
components and suppliers.
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Rapid Deployment. The deployment of a CSM system is targeted to be
available to users within 200 days. Explore provides powerful Soft Model
technology that enables companies to model their business processes rapidly
and to keep this data model up-to-date as these processes evolve. A full
suite of application programming interfaces ("APIs") and batch data loading
tools are available to speed legacy data migration and accelerate
integration with other enterprise systems.
Workflow/Process Automation. Explore automates the management of ongoing
changes in component and supplier information from qualification through
obsolescence, enabling companies to manage their information in the context
of best business practices and to improve design and procurement
productivity.
CUSTOMERS
Aspect's customers include more than 125 of the world's largest
manufacturers. Aspect has traditionally been strong in the electronics and
high technology manufacturing sector. The acquisition of CADIS, Inc. in
November 1997, has given the Company an additional customer base primarily in
the industrial/mechanical sector. Recent expansion of the product line to
include solutions for operations/MRO has allowed the company to sell its CSM
solution into the process manufacturing sector as well. The Company's revenues
in any period are substantially dependent upon a relatively small number of
large sales. The Company expects that this trend will continue for the
foreseeable future.
For the year ended December 31, 1997, sales to SAP AG ("SAP") accounted for
11% of revenues. No other customer in any of the three years ended December
31, 1997 accounted for more than 10% of revenues.
PRODUCTS
Aspect offers a comprehensive CSM solution that enables companies to address
component and supplier management demands in today's competitive global
marketplace. The Aspect CSM solution includes the Explore family of
client/server software products, the WEB, VIS and VIP-OPS family of content
databases and CSM business process and data consulting services and products
and services.
EXPLORE SOFTWARE PRODUCTS
The Company's Explore client/server software products are available in three
primary application configurations: Explore-CIS, Explore-Enterprise and
Strategic Sourcing Management ("SSM"). Explore-CIS is a system that enables
design and procurement teams to rapidly classify and search components from
legacy data or from VIP content databases licensed by the customer. Explore-
Enterprise is an enterprise-wide solution that enables, in addition to
component classification and search, preferred component and supplier
management, design reuse, design and procurement process automation and
integration with other enterprise systems. SSM expands Explore-Enterprise with
the addition of a consolidated repository, navigation, and analysis solution
for commodity and supplier information from customers' ERP systems, the CSM
system and outside suppliers to enable procurement to identify strategic
sourcing opportunities. Each of these three configurations is based on the
Explore Server and the Explore Client software, although Explore-CIS is
licensed for only a subset of the available functionality. In addition, the
Company offers a range of software options, including CAD/PDM/ERP Interfaces,
Enterprise Integration APIs, and a Rapid Development Server.
EXPLORE SERVER. The Explore Server provides a variety of features for
component and supplier management, including a parametric search engine, a
cascade search engine, a forms editor for workflow/process automation and a
class and object editor. The Explore Server enables the storage and management
of parametric data, metadata, text, images, graphics and CAD files. Objects
such as components, suppliers or reusable design elements can be organized
into one or more classes, which can be organized into one or more hierarchies
for ease of classification and search. Objects can also be characterized by
their form, fit, function and technical parameters, their business or other
parameters, and by their catalogs, specifications or CAD drawings/models.
Relationships and cross-references between classes or objects can also be
defined via Soft Models. The Explore Server is a portable object-oriented
application written in C++ that is supported on various UNIX server
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platforms (Sun, IBM and HP) and on Microsoft NT Servers, and operates in
conjunction with the embedded Oracle RDBMS.
. Parametric Search Engine. The parametric search engine enables the
browsing of class hierarchies and searching for components, items or
other objects by specifying simple or complex parametric criteria, such
as speed, temperature, material, packaging, technology, cost or
availability. Results of these parametric searches can be displayed in a
spreadsheet-like comparison window and compared side-by-side, and
differences can be highlighted to accelerate selection. Datasheets,
notes, CAD files or other information related to the selected objects can
be immediately retrieved and viewed.
. Cascade Search Engine. The cascade search engine enables simultaneous ad-
hoc parametric searching across a combination of component, supplier,
design reuse or other class hierarchies. Relationships between a class of
components, such as memory devices, and its manufacturers, distributors,
CAD design libraries and preferred parts and suppliers lists can be
viewed graphically to assist in the rapid setup of the search criteria.
This functionality is particularly important for analytical searches
which involve complex combinations of technical and business parameters.
For example, a user may search for certain memory devices with an access
time of 50 nanoseconds, lead time of less than two weeks, and cost of
less than two dollars from preferred suppliers that are ISO 9000
certified and for which reusable CAD libraries are already available.
This type of complex search across multiple classes is significantly more
difficult to manage without the cascade search capability.
. Forms Editor for Workflow/Process Automation. The Explore Server provides
the ability to automate manual, paper-based processes with an automated
forms generation and management capability. For example, new part
requests and approvals can be created and managed in the system as
objects, just like component or supplier information. Customer-defined
routings, signoffs and approvals can be accomplished electronically.
. Class and Object Editor. This editor enables the easy addition and
modification of classes, objects and parameters, as well as the
relationships between them, using the graphical user interface ("GUI").
It also enables the use of a spreadsheet-like edit window to make
simultaneous changes to a large number of objects.
EXPLORE CLIENT. Explore Client software is supported on a variety of PC and
UNIX platforms, as well as commercially available Web browsers. The client
software presents the services and features of the Explore Server software
through such familiar GUI features as folders, icons and toolbars and supports
Windows and other graphical environments. Class hierarchies and relationships
can be viewed in a graphical browser. Using point-and-click methods, users can
rapidly locate the desired class of information for subsequent searching,
initiate parametric or cascade searches, compare results using spreadsheet
windows, organize component information into user-specified lists, and view
related data or documents. The Explore client software GUI configures itself
directly from the data model stored in the Explore Server. Therefore, if the
model changes, the GUI reconfigures itself automatically without any custom
programming.
. Dashboard. In order to make searching easier for novices and to automate
repetitive searches, Aspect introduced Explore Dashboard. With the push
of a button, users can call up a list of preferred parts for the
corporation, for a division, even for a project, view a list of
functionally equivalent parts, or upgrades or downgrades according to a
wide range of specifications. Procurement professionals can generate
graphs showing commitment levels to suppliers, reports monitoring
supplier performance according to agreed-upon delivery logistics and
timeframes, quality, and other performance metrics. In performing these
CSM operations, Dashboard draws on the full power of the classification
browser, parametric search engine, results display, search configurations
and patterns, permissions, and report generation capabilities of Explore.
. Explore List Manager. Explore List Manager allows users to collect and
analyze a group of components. For example, users can analyze a group of
components by cost, availability, and other business criteria. Designers
can easily construct a preliminary bill of materials ("BOMs"). Explore
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Manager also facilitates the ability to import parts information (such as
product structure and BOMs) from external sources to enrich that
information with VIP and VIS information, to view the combined
information as a group, and to analyze the collective grouping for usage
within designs.
. ACE. Explore's Alternate Component Expert ("ACE") opens new opportunities
for consolidation, volume buying, component obsolescence management, and
cost cutting through elimination of redundant part numbers. ACE quickly
and easily searches both legacy data and VIP reference databases.
Searches for equivalent parts with ACE, based on dozens of parameters,
are more accurate and efficient than searches based on part numbers only.
If an exactly equivalent component cannot be found, users can then turn
to performance upgrades where a part may actually cost less due to volume
discounts of consolidated purchases or downgrades where, for example,
defense contractors retool products for commercial markets, whose
performance requirements are less stringent, creating the opportunity to
lower product cost. ACE is a complete software and data solution, and
includes the underlying rules for equivalents, upgrades and downgrades,
based on best practices.
EXPLORE OPTIONS. In addition to the basic functionality available with the
Explore-CIS, the Explore-Enterprise, or SSM applications, customers can choose
to enhance their CSM solution with the following options:
. Replication. The Explore Replication Server is designed for corporations
seeking to integrate their global enterprise with preferred component and
supplier information. Aspect's robust database replication solution links
remote, network-optimized divisions to allow different divisions to
maintain control of certain information yet effectively share it. This
ability to ensure that corporate preferences for components and suppliers
are visible enterprise-wide significantly aids in the development of
strategic component and supplier programs. Replications to multiple
servers can be made that include Explore database objects, attachments
and notes.
. SAP and Baan Integration. All of Aspect's applications integrate directly
into SAP's environment and that of Baan Company N.V. ("Baan"). Aspect is
an SAP and Baan certified partner, which guarantees that Aspect software
will maintain integration integrity with each partner's products
throughout release cycles, and that customers will be supported by each
partner's support organization.
. Explore Interfaces. The Explore interfaces integrate the Explore software
with tools from leading electronic and mechanical design automation
vendors, allowing designers to work in the environment in which they are
most comfortable while at the same time providing access to the Explore
Server to select components, obtain information about components used in
the current design, find alternatives, or reuse CAD libraries. The
Explore interfaces also integrate the Explore software with leading PDM
vendors, allowing users to select components, find alternatives, and
obtain information about components and where they are used in various
versions of products and configurations stored in the PDM system. To
date, the Company has released interfaces to electronic design automation
tools of Mentor Graphics Corporation ("Mentor Graphics"), Cadence Design
Systems, Inc. ("Cadence") and Parametric Technology Corporation
("Parametric Technology").
. Explore Integration Toolkit. A range of enterprise integration tools is
provided to enable integration with existing enterprise systems. An API
is available to allow real-time, programmatic interfaces between Explore
and other systems. Batch data import-export utilities are also available
to enable the uploading and downloading of data and data models to and
from Explore. This toolkit can be used for developing or extending data
models or integrating them with other systems. Certain of these tools can
be used to create new data models for new applications, add special
functions, create or modify class hierarchies and create one-to-one, one-
to-many or many-to-many relationships using high-level object-oriented
methods.
. Explore Rapid Application Development ("RAD"). RAD is a software toolkit
targeted at the application development programmer rather than the
Explore client end user. RAD is used to develop Softmodels (datamodel) to
customize Explore, integrations to legacy systems, or unique
applications, such as a bill of materials analysis, layered on Explore.
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THE ASPECT FAMILY OF COMPONENT, COMMODITY AND SUPPLIER REFERENCE DATABASES
The Company's family of reference databases provides regularly-updated
information in the area of parts and components, commodity suppliers and
operational maintenance goods.
VIP REFERENCE DATABASES. Aspect's VIP database contains almost 3 million
standard electronic, electro-mechanical and mechanical components. The content
of the VIP component reference databases includes, for most components, an
index of search and select parameters that enables rapid component search,
comparison and selection based on form, fit and function and other technical
characteristics, as well as electronic versions of databooks and datasheets.
VIP component reference databases provide broad, industry-wide coverage of
component manufacturers, enabling users to rapidly access component
information at their desktops instead of searching manually through many
different and often inconsistent paper databooks or receiving information from
one manufacturer at a time. The VIP component reference databases are
organized by major device groups, including ICs and discrete semiconductors,
passive components, electromechanical components and mechanical components,
and contain information on approximately 3 million standard components
available from over 800 suppliers. The Company updates its VIP component
reference databases regularly and delivers these updates to its customers on
computer tape. VIP component reference databases are integrated with the
Company's Explore client/server software to enable a comprehensive CSM
solution for enterprise data management.
VIP reference databases utilize the Company's Standard Classification Scheme
and VIP data dictionary, which defines the classification structure in which
the part classes reside and the standard definitions of the search parameters,
including names, descriptions, units of measure, allowable values and other
criteria.
The VIP family of component reference databases includes the following
individual databases:
. VIP IC and Discrete Semiconductors Reference Database, which includes
memory, programmable logic, digital logic, microprocessor, analog and
interface devices and discrete device types including transistor, diode,
transformer, crystal, trigger, optoelectronic and sensor devices.
. VIP Passives Reference Database, which includes capacitor, resistor,
inductor and transformer components.
. VIP Electro-Mechanical Reference Database, which includes connectors,
relays, and switches.
. VIP IC Military Specifications Database, which includes military
specifications for military-rated IC and semiconductor components.
. VIP Package Standards Database, which provides package dimensions and
outline drawings to international specifications for certain IC
components.
. VIP Fasteners Standards Database, which includes international
specifications for nuts, bolts, screws, washers, clips, and other
standard fasteners.
VIS DATABASES. The Company also resells and sublicenses reference data on
thousands of suppliers from Dunn & Bradstreet Corporation ("Dunn &
Bradstreet"), providing such information as headquarters and distributor
locations, contact information, supplier credit rating and UN-SPSC codes for
products and services they provide.
VIP-OPS DATABASE. The Company expects to launch version 1.0 of its VIP-OPS
database, containing information on products from over 5,000 suppliers of
operational management items, including pipes, valves, fittings, solvents,
cleansers, repair items and hardware, in the second quarter of 1998. The
Company is sourcing data for VIP-OPS from a variety of suppliers and
publishers, including Howard W. Sams & Co. ("Sams") and Cahners Publishing
Company.
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PRODUCTS AND SERVICES FOR THE WORLD WIDE WEB
The Company has developed a product and service designed to expand its
business utilizing Web technology, including a Web client for the Explore
Server, based on a combination of the Java programming language and HTML. This
technology will enable authorized users in an intranet or Internet environment
to use parametric search and other search techniques to access information in
any specific Web-enabled Explore Server, utilizing standard Web browsers. For
intranet applications the Company offers the intranet client as an additional
option to its UNIX or PC/Windows client software. For Internet applications,
the Company offers a Web-based product called Aspect Online, through which
authorized subscribers can access the VIP-Reference Databases via the Web.
Aspect Online is sold through authorized value added resellers to small and
medium sized companies whose primary requirement is access to reference data
with minimal setup costs. As a result of the acquisition of CADIS, in November
1997, the Company has expanded its Web product line to include Krakatoa Web
Catalog Publisher. As a Web catalog technology designed to be embedded in e-
commerce solutions for re-sale, Krakatoa allows customers to quickly create
and easily maintain large catalogs with parametric searching. There can be no
assurance, however, that the revenues generated from such Web-based products
will exceed the cost of developing, modifying and supporting products and
services for such use.
PRODUCT PRICING
The Company's Explore software is priced based on a number of factors,
including the base application configuration (Explore-CIS, Explore-Enterprise
or SSM), the modules licensed and the number of licensed users. The list price
for perpetual licenses of the Explore software may range from approximately
$250,000 to more than $5 million depending on the configuration and number of
users. The list price for software maintenance is typically based on a
percentage of the associated software list price. The Company's content
databases are offered under a perpetual license or an annual subscription
license, with list prices typically ranging from approximately $50,000 to
approximately $800,000 depending on the specific content databases licensed,
the number of licensed users and other factors. The Company may offer
discounts to customers based on the scope of the customer's commitment and
other commercial considerations. Additionally, the Company may in the future
offer new or different configurations at significantly lower prices.
CUSTOMER SERVICE AND SUPPORT
The Company's customer service and support organization provides customers
with technical support, training, consulting and implementation services. All
of the Company's current customers have software maintenance agreements with
the Company that provide for one or more of the following services:
Professional Services. The Company's consultants work closely with customers
to deliver legacy data conversion and business process consulting services.
Legacy data conversion services include legacy data migration,
standardization, enrichment, and integration of legacy data with the Company's
content databases. Business process services include process engineering, data
modeling, best practice development, and enterprise architecture definition
and integration to deliver global preferred part management, global preferred
supply chain consolidation, and design reuse programs. Fees for legacy data
conversion services are charged in addition to and separate from the license
fees charged for the Company's application software and content products and
are charged on a per part and per database, or a per diem basis. Fees for
business process services are typically charged in addition to and separate
from the Company's software and content products on a per diem or fixed price
based on deliverables basis. The professional services provided by the Company
may be obtained from a third party. The Company also provides customers with
Rapid Deployment support, including installation and technical support, the
fees for which are charged in addition to and separate from the Company's
software and content products, typically on a per diem basis.
Customer Education and Training. The Company offers training courses
designed to meet the needs of end users, data modeling, knowledge, and
integration experts and system administrators. The Company also trains
customer personnel who in turn train end users in large global enterprise
deployments. Training classes
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are provided at the Company's offices in Mountain View, California; Boston,
Massachusetts; London, England; Tokyo, Japan; and Bangalore, India. The
Company provides on-site training services upon request by customers at a
higher cost. Fees for education and training services are in addition to and
separate from the fees for software and content products and are typically
charged either per student and per class, or on a per diem basis.
Software Maintenance and Support. The Company offers telephone, e-mail and
facsimile customer support through its central technical support staff at the
Company's headquarters and regional support centers in North America, Europe,
and Asia. The Company also provides customers with product documentation,
release notes, and on-line help that describe features in new products, known
problems and workarounds, and application notes. Software product license fees
do not cover maintenance. Each customer is entitled to receive certain
software updates, maintenance releases and technical support for an annual fee
based on a percentage of the price of the products under license to such
customers. The annual subscription service fee for the Company's content
products covers all data updates and maintenance on an ongoing basis for the
term of the subscription.
SALES AND MARKETING
The Company markets and sells its products and services primarily through a
direct sales force based in Mountain View, California and field sales offices
in North American metropolitan areas of Atlanta, Boston, Cincinnati,
Cleveland, Chicago, Dallas, Denver, Los Angeles, New York and Toronto, and
abroad in London, Milan, Paris, Munich, Tokyo and Bangalore. As of December
31, 1997 the Company's sales and marketing organization consisted of 114
employees. To support its sales force, the Company conducts a number of
marketing programs, which includes public relations, telemarketing, seminars,
direct mail, trade shows and customer advisory board meetings. The Company's
sales team includes persons performing strategic account manager,
applications, and consulting and business development roles. The Company also
has worldwide strategic reselling agreements with SAP and Baan, a joint
marketing and systems integrator agreement with Digital Equipment Corporation
Japan ("Digital Japan") in Japan, a sales representative agreement in South
Korea with Advanced Technology of Engineering Systems Co., Ltd. ("ATE") and a
sales representative agreement in Israel with Onyx Technologies, Ltd.
("Onyx").
The Company's near-term strategy is to focus its sales and marketing efforts
to a highly targeted "Aspect 500" list of the top 500 worldwide discrete
manufacturers and top 500 manufacturers in the process, CPG and related
industries, as well as exploring additional sales opportunities among its
current customer base. The Company's field sales force conducts multiple
presentations and demonstrations of the Company's CSM solution to management
and users at the customer site as a part of the direct sales effort. Sales
cycles generally range from six to twelve months or longer. The direct sales
force is responsible for joint sales efforts and management of multiple
channels.
International sales accounted for 18.9%, 20.3% and 17.0% of the Company's
total revenues in 1995, 1996 and 1997, respectively. In addition, although the
Company records revenues based on the billing location, certain domestic
billings include licenses that may be deployed by customers or resold through
indirect channels into international locations. The Company believes that in
order to increase sales opportunities and profitability, it will be required
to expand its international sales. The Company intends to continue to expand
its direct and indirect sales and marketing activities worldwide, which will
require significant management attention and financial resources.
The Company has committed and continues to commit significant time and
financial resources to developing international sales and support channels.
There are a number of risks inherent in the Company's international business
activities, including unexpected changes in regulatory requirements, tariffs
and other trade barriers, costs and risks of localizing products for foreign
countries, longer accounts receivable payment cycles, potentially adverse tax
consequences, currency fluctuations, repatriation of earnings and the burdens
of complying with a wide variety of foreign laws. In addition, revenues of the
Company earned in various countries where the Company does business may be
subject to taxation by more than one jurisdiction, thereby adversely affecting
the Company's earnings. There can be no assurance that such factors will not
have an adverse effect on the
10
<PAGE>
revenues from the Company's future international sales and, consequently, the
Company's business, financial condition or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Business Factors."
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 at any given time, and the Company
does not consider backlog to be a meaningful indicator of future performance.
STRATEGIC ALLIANCE PARTNERS
The Company believes that in order to provide comprehensive CSM solutions,
it will be necessary to develop, maintain and enhance close alliances with
vendors of hardware, software, database, data and professional services. In
addition to the strategic reselling agreements with SAP and Baan, the Company
has established marketing and strategic alliances with a number of major
vendors, including Cadence, Electronic Data Systems Corp., HP, IBM, Mentor
Graphics, SDRC/Metaphase Technology, Inc., Oracle, Origin Technology Corp.,
Parametric Technology, Sherpa Corporation, Siemens Business Systems, Sun,
Viewlogic and a relationship with the consulting group of a Big 6 accounting
firm. The Company's alliances with hardware vendors have enabled it to
integrate its solution with several industry standard hardware platforms. The
Company has formed an Enterprise Partners Program with vendors of
complementary products and meets regularly with its Enterprise Partners to
enhance integration between their complementary products and the Company's
products. The Company believes these alliances can enhance the Company's
ability to deliver a CSM solution that supports customers' existing enterprise
data management architecture and that is tailored to the specific requirements
of their industry. Although the Company seeks to maintain close alliances with
these companies, if the Company is unable to develop and retain effective,
long-term alliances with these third parties, the Company's competitive
position could be materially adversely affected.
RESEARCH AND DEVELOPMENT
The Company has committed, and expects to continue to commit in the future,
substantial resources to product development. Research and development efforts
are directed at increasing product functionality and solution modules,
improving product performance and expanding the capabilities of the products
to interoperate with third party software. The Company originally introduced
its CIS software in 1992 and introduced commercial availability of the next
generation Explore client/server software and its VIP content databases in
1995. The Company has regularly released new products and enhancements to
existing products. The latest software release, Explore Version 4.0 and the
latest content release, VIP version 98.1, are each expected to ship as of the
second quarter of 1998. Although the Company expects that certain of its new
products will be developed internally, the Company may, based on timing and
cost considerations, acquire technology and products from third parties.
The Company supplements its product development efforts by reviewing
customer feedback on existing products and working with customers and
potential customers to anticipate future functionality requirements. To assist
this effort, the Company hosts a customer advisory board made up of
representatives from many of its key customers, which meets periodically to
provide feedback to the Company's current and future product plans.
The Company's future success will depend in part 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, emerging industry
standards and the increasingly sophisticated needs of its customers. There can
be no assurance that the Company will be successful in developing or 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 or 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
11
<PAGE>
or enhancements, the Company's business, financial condition and results of
operations could be materially adversely affected.
In addition, applications software and content products as complex as those
offered by the Company frequently contain undetected errors or failures when
first introduced or when new versions are released. The Company has in the
past discovered software and data errors in certain of its products and
enhancements, both before and after initial shipments, and has experienced
delays or lost revenues during the period required to correct these errors.
There can be no assurance that, despite testing by the Company and by current
and potential customers, errors will not occur in products, data or releases
after commencement of commercial shipments, resulting in loss of or delay in
market acceptance, which could have a material adverse effect upon the
Company's business, financial condition and results of operations.
As of December 31, 1997, the Company's research and development organization
consisted of 242 full time employees, 152 of whom are employed by the
Company's operations in Bangalore, India. During 1997, 1996 and 1995, research
and development expenses were approximately $11.2 million, $8.8 million and
$6.0 million, respectively.
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, content
databases and services solutions, and many of the Company's competitors offer
software or content to address this market. Among the Company's principal
competitors is Information Handling Systems, Inc. ("IHS"). The Company may
face future competition from International Computex Inc., a consulting company
which has announced its intention to sell low-end CSM systems. Further, the
Company currently faces indirect competition from third-party professional
service organizations and internal 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
enter the Company's market with competitive products. As the Company expands
into Internet-based or other forms of product delivery, it 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 client/server technology, 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 may 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 adversely affect its business, financial condition or results of
operations.
The Company believes that the principal competitive factors affecting its
market include features such as the ongoing development of comprehensive
software and integrated content products, openness, scalability, ability to
integrate with third party products, functionality, adaptability, ease of use,
product reputation, quality,
12
<PAGE>
performance, price, customer service and support, effectiveness of sales and
marketing efforts and company reputation. 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.
PROPRIETARY RIGHTS AND LICENSING
The Company's success is heavily dependent upon proprietary technology. The
Company relies primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions with its
employees, consultants and business partners and in its license agreements to
protect its proprietary rights. The Company currently has one patent
application pending for object technology use for parametric searching. The
Company seeks to protect its software, published data, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
product or to obtain and use information that the Company regards as
proprietary. While the Company is not aware that any of its products infringes
the proprietary rights of third parties, there can be no assurance that third
parties will not claim infringement by the Company with respect to current or
future products.
In addition, the Company relies on certain software and data that it
licenses from third parties, including software and data that are used in the
Company's products to perform certain functions. There can be no assurance
that such firms will remain in business, that they will continue to support
their products or that their products will otherwise continue to be available
to the Company on commercially reasonable terms. The Company believes that
substantially all of the software it licenses is available from vendors other
than the Company's current vendors and could be replaced with equivalent
software in a timely manner. However, it is possible that the loss of or
inability to maintain any of these software licenses could result in delays or
cancellations in product shipments until equivalent software can be identified
and licensed or developed and integrated with the Company's products. Any such
delay or cancellation could materially adversely affect the Company's
business, financial condition or results of operations.
The Company's products are generally provided to customers in object code
format only. From time to time, in limited circumstances, the Company has
licensed source code format subject to customary protections such as use
restrictions and confidentiality agreements. In addition, certain customers
have entered into source code escrow arrangements with the Company, pursuant
to which the Company's source code could be released to the customer upon the
occurrence of certain events, such as certain material breaches of the
agreement. In the event of any such release of source code from escrow, the
customer's license is generally limited to use of the source code to maintain,
support and configure the Company's software products.
EMPLOYEES
As of December 31, 1997, the Company employed 536 persons, of whom 264 were
based in the United States, and 272 were based in India and other foreign
countries. Of the total, 114 were engaged in sales and marketing, 250 were in
product development and technical support, 135 were engaged in consulting
services, and 37 were in finance and administration. None of the Company's
employees is represented by a labor union with respect to his or her
employment by the Company. The Company has experienced no organized work
stoppages and believes its relationships with its employees are good. 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 in the computer software industry in both the United States and
India is intense. 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 or results of operations.
13
<PAGE>
ITEM 2. PROPERTIES.
The Company's principal administrative, sales, marketing, support and
software research and development facility is located in approximately 28,000
square feet of space in Mountain View, California. This facility is leased to
the Company through May 1998. The Company also leases facilities of
approximately 14,000 square feet of space in Nashua, New Hampshire and
approximately 37,000 square feet of space in three locations in Bangalore,
India. The Nashua facility is leased to the Company through August 2002. The
Bangalore facilities are occupied under leases which expire in 1999 through
2004. In addition, the Company maintains sales and support offices in the
metropolitan areas of Atlanta, Boston, Boulder, Chicago, Cleveland, Dallas,
Denver, Detroit, Los Angeles, New York, London, Munich, Milan, Paris, and
Tokyo. The Company believes that its current facilities are adequate for its
needs through the end of 1998, and that, should it be needed, suitable
additional or alternative space will be available in the future on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Company may be involved in legal
proceedings. As of the date hereof, to the Company's knowledge there are no
material legal proceedings in which the Company is involved or litigation
pending against the Company. The Company is not a party to any material
pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET PRICE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock $0.001 par value per share (the "Stock") has been
traded in the over-the-counter market and the Nasdaq National Market since the
Company's initial public offering in May 1996. According to the Company's
transfer agent, the Company had approximately 177 stockholders of record as of
February 28, 1998. Because many of such shares are held by brokers and other
institutions on behalf of stockholders, the Company is unable to estimate the
total number of stockholders represented by these record holders. The
following table sets forth the low and high sale price as of the close of
market of the Stock in each of the fiscal quarters in which the Stock was
publicly traded:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Second quarter (May 24 to June 30)........................ $36.50 $19.50
Third quarter............................................. 33.25 18.00
Fourth quarter............................................ 41.00 20.25
YEAR ENDED DECEMBER 31, 1997
First quarter............................................. $34.00 $18.88
Second quarter............................................ 30.00 16.75
Third quarter............................................. 44.00 24.25
Fourth quarter............................................ 53.13 36.75
</TABLE>
The Company's policy has been to reinvest earnings to fund future growth.
Accordingly, the Company has not paid dividends and does not anticipate
declaring dividends on its Common Stock in the foreseeable future.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data and separate
unconsolidated Company financial data is qualified by reference to and should
be read in conjunction with the consolidated financial statements and related
notes thereto and the section captioned "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and other financial
information included elsewhere in this Annual Report on Form 10-K.
The information in the tables below, representing Consolidated Statement of
Operations Data and Consolidated Balance Sheet Data has been restated to
include the financial position of CADIS, Inc. ("CADIS") at the respective year
end dates and results of its operations for each of the five years in the
period ended December 31, 1997.
CONSOLIDATED STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses........................ $ 2,521 $ 3,998 $ 8,123 $16,043 $26,892
Subscription and maintenance.... 715 2,974 5,141 9,392 13,594
Service and other............... 762 2,327 2,299 5,023 9,443
------- ------- ------- ------- -------
Total revenues................ 3,998 9,299 15,563 30,458 49,929
------- ------- ------- ------- -------
Cost of revenues:
Cost of license revenues........ 106 197 298 612 346
Cost of subscription and
maintenance revenues........... 261 735 1,142 1,206 2,676
Cost of service and other
revenues....................... 353 1,634 1,291 2,689 5,027
------- ------- ------- ------- -------
Total cost of revenues........ 720 2,566 2,731 4,507 8,049
------- ------- ------- ------- -------
Gross profit...................... 3,278 6,733 12,832 25,951 41,880
------- ------- ------- ------- -------
Operating expenses:
Research and development........ 3,481 4,012 6,031 8,762 11,213
Sales and marketing............. 2,295 3,982 7,128 13,540 26,730
General and administrative...... 926 1,629 2,253 4,030 5,304
Costs incurred in merger........ -- -- -- -- 4,312
------- ------- ------- ------- -------
Total operating expenses...... 6,702 9,623 15,412 26,332 47,559
------- ------- ------- ------- -------
Net loss before interest and
taxes............................ (3,424) (2,890) (2,580) (381) (5,679)
Interest and other income......... 104 112 268 1,805 3,066
Interest and other expense........ (70) (46) (83) (209) (665)
------- ------- ------- ------- -------
Net income (loss) before taxes.... (3,390) (2,824) (2,395) 1,215 (3,278)
Taxes............................. -- 144 150 330 1,593
------- ------- ------- ------- -------
Net income (loss)................. $(3,390) $(2,968) $(2,545) $ 885 $(4,871)
======= ======= ======= ======= =======
Net income (loss) per share-basic
(1) (2).......................... $ (0.28) $ 0.07 $ (0.35)
======= ======= =======
Net income (loss) per share-
diluted (1) (2).................. $ (0.28) $ 0.06 $ (0.35)
======= ======= =======
Number of shares used in computing
per share amounts-basic (1)...... 9,025 12,005 13,817
Number of shares used in computing
per share amounts- diluted (1)... 9,025 13,755 13,817
</TABLE>
- --------
(1) Earnings per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
per Share" (SFAS 128) and Staff Accounting Bulletin No. 98 (SAB 98). See
Note 1 of Notes to Consolidated Financial Statements.
(2) Net income (loss) per share for 1995 and 1996 are pro forma computations.
15
<PAGE>
CONSOLIDATED BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------
1993 1994 1995 1996 1997
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Cash and short-term investments.......... $4,258 $3,999 $ 6,095 $57,831 $55,056
====== ====== ======= ======= =======
Working capital.......................... $3,413 $2,344 $ 3,927 $56,440 $48,521
====== ====== ======= ======= =======
Total assets............................. $6,499 $7,696 $14,159 $73,273 $81,720
====== ====== ======= ======= =======
Long-term obligations, less current
portion................................. $2,259 $2,297 $ 2,620 $ 2,365 $ 11
====== ====== ======= ======= =======
Stockholders' equity..................... $1,953 $1,331 $ 3,855 $58,746 $58,574
====== ====== ======= ======= =======
</TABLE>
16
<PAGE>
ASPECT DEVELOPMENT, INC.
STATEMENT OF OPERATIONS DATA
(EXCLUDING THE OPERATING RESULTS OF CADIS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses........................ $ 2,476 $ 3,478 $ 7,143 $12,263 $24,238
Subscription and maintenance.... 715 2,962 4,964 8,943 12,596
Service and other............... 762 2,044 1,586 3,029 7,532
------- ------- ------- ------- -------
Total revenues................ 3,953 8,484 13,693 24,235 44,366
------- ------- ------- ------- -------
Cost of revenues:
Cost of license revenues........ 106 197 298 612 346
Cost of subscription and
maintenance revenues........... 261 735 938 1,116 2,503
Cost of service and other
revenues....................... 353 1,333 612 1,679 3,055
------- ------- ------- ------- -------
Total cost of revenues........ 720 2,265 1,848 3,407 5,904
------- ------- ------- ------- -------
Gross profit...................... 3,233 6,219 11,845 20,828 38,462
------- ------- ------- ------- -------
Operating expenses:
Research and development........ 2,388 3,096 4,859 7,052 8,697
Sales and marketing............. 1,728 3,047 4,490 8,819 18,922
General and administrative...... 517 1,084 1,660 2,975 4,379
Costs incurred in merger........ -- -- -- -- 1,712
------- ------- ------- ------- -------
Total operating expenses...... 4,633 7,227 11,009 18,846 33,710
------- ------- ------- ------- -------
Net income (loss) before interest
and taxes........................ (1,400) (1,008) 836 1,982 4,752
Interest and other income......... 37 78 78 1,566 2,740
Interest and other expense........ (70) (46) (83) (209) (665)
------- ------- ------- ------- -------
Net income (loss) before taxes.... (1,433) (976) 831 3,339 6,827
Taxes............................. -- 144 150 330 1,593
------- ------- ------- ------- -------
Net income (loss)................. $(1,433) $(1,120) $ 681 $ 3,009 $ 5,234
======= ======= ======= ======= =======
</TABLE>
17
<PAGE>
ASPECT DEVELOPMENT, INC
BALANCE SHEET DATA
(EXCLUDING THE ASSETS AND LIABILITIES OF CADIS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Cash and short-term investments........... $2,955 $2,437 $3,159 $47,818 $52,675
====== ====== ====== ======= =======
Working capital........................... $2,163 $ 854 $1,024 $45,485 $47,872
====== ====== ====== ======= =======
Total assets.............................. $4,990 $5,439 $9,979 $59,000 $75,456
====== ====== ====== ======= =======
Long-term obligations, less current
portion.................................. $ 273 $ 311 $ 634 $ 379 $ 11
====== ====== ====== ======= =======
Stockholders' equity...................... $2,490 $1,374 $2,134 $48,754 $56,861
====== ====== ====== ======= =======
</TABLE>
18
<PAGE>
CADIS, INC.
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses....................... $ 45 $ 520 $ 980 $ 3,780 $ 2,654
Subscription and maintenance... -- 12 177 449 998
Service and other.............. -- 283 713 1,994 1,911
------- ------- ------- ------- --------
Total revenues............... 45 815 1,870 6,223 5,563
------- ------- ------- ------- --------
Cost of revenues:
Cost of license revenues....... -- -- -- -- --
Cost of subscription and
maintenance revenues.......... -- -- 204 90 173
Cost of service and other
revenues...................... -- 301 679 1,010 1,972
------- ------- ------- ------- --------
Total cost of revenues....... -- 301 883 1,100 2,145
------- ------- ------- ------- --------
Gross profit..................... 45 514 987 5,123 3,418
------- ------- ------- ------- --------
Operating expenses:
Research and development....... 1,093 916 1,172 1,710 2,516
Sales and marketing............ 567 935 2,638 4,721 7,808
General and administrative..... 409 545 593 1,055 925
Costs incurred in merger....... -- -- -- -- 2,600
------- ------- ------- ------- --------
Total operating expenses..... 2,069 2,396 4,403 7,486 13,849
------- ------- ------- ------- --------
Net loss before interest and
taxes........................... (2,024) (1,882) (3,416) (2,363) (10,431)
Interest and other income........ 67 34 190 239 326
------- ------- ------- ------- --------
Net loss......................... $(1,957) $(1,848) $(3,226) $(2,124) $(10,105)
======= ======= ======= ======= ========
</TABLE>
19
<PAGE>
CADIS, INC.
BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
Cash and short-term investments.......... $1,303 $1,562 $2,936 $10,013 $2,381
====== ====== ====== ======= ======
Working capital.......................... $1,250 $1,490 $2,903 $10,955 $ 649
====== ====== ====== ======= ======
Total assets............................. $1,509 $2,257 $4,180 $14,273 $6,264
====== ====== ====== ======= ======
Long-term obligations, less current por-
tion.................................... $1,986 $1,986 $1,986 $ 1,986 $ --
====== ====== ====== ======= ======
Stockholders' equity (deficit)........... $ (537) $ (43) $1,721 $ 9,992 $1,893
====== ====== ====== ======= ======
</TABLE>
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This section contains certain trend analysis and forward-looking statements.
Actual results may differ materially from the results described in such trend
analysis and forward looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "Business
Factors."
OVERVIEW
The Company develops, markets and supports enterprise client/server software
and reference content 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,
engaging primarily in research and development, until 1992. In 1992, the
Company commenced shipment of its first generation component and supplier
management software product, CIS 1.0. The Company's second generation CSM
software product, Explore, first became generally commercially available in
the second quarter of 1995. In 1993, the Company began development of
component reference content products, and its first internally developed
reference content products, VIP, became generally commercially available in
the second quarter of 1995.
In November 1997, the Company acquired CADIS, a developer of CSM solutions.
In the acquisition, the Company issued approximately 1.4 million shares of its
Common Stock in exchange for all of the outstanding Common Stock and options
of CADIS. The acquisition was accounted for as a pooling of interests, and,
except where specified, the financial statements of the Company and the
information herein have been restated to include the results of CADIS for all
periods. The acquisition of CADIS augmented the Company's portfolio of CSM
products with the addition of Krakatoa, a Web based catalog publishing
software product.
Excluding the effects of the acquisition of CADIS, the Company's revenues
have increased from $4.0 million in 1993 to $44.4 million in 1997 as a result
of greater market acceptance of the Company's CIS products and the
introduction of the Explore and VIP products. Taking the CADIS acquisition
into account, the Company's revenues have grown to $49.9 million over the same
period. Excluding the effects of the CADIS acquisition, the Company realized
operating losses in 1993 and 1994 but achieved limited profitability in 1995
and increased profitability in 1996 and 1997. The losses in 1993 and 1994 and
the limited profitability in 1995 primarily reflect the Company's substantial
investment in research and development to build its software and reference
content products and in sales and marketing to expand its marketing presence,
while the increased profitability in 1996 and 1997 reflected increased market
acceptance of the Company's products, which caused revenues to increase at a
greater rate than operating expenses. Taking the CADIS acquisition into
account, the Company recorded a smaller profit in 1996 and losses in 1995 and
1997. The differences between these results on a consolidated basis and
Aspect's results on a stand-alone basis primarily reflect the fact that,
during this period, CADIS was an early-stage company whose primary focus was
on developing its initial commercial products and entering the CSM market, and
therefore incurred substantial software development and marketing expenses
that were only partially offset by licensing revenues. The consolidated loss
incurred in 1997 also reflected costs and expenses associated with the
Company's acquisition of CADIS. See Note 2 of Notes to Consolidated Financial
Statements.
Licenses of the Company's software and reference content products have
historically accounted for the substantial majority of the Company's revenues,
and the Company anticipates that this will continue for the foreseeable
future. Accordingly, any decline in the demand for or market acceptance of the
Company's software or reference content products would have a material adverse
effect on the Company's business, financial condition and results of
operations. Although the Company has experienced significant revenue growth in
recent periods, there can be no assurance that the Company will sustain such
growth in revenues or that the Company will return to profitability in the
future on a quarterly or an annual basis. A significant portion of the
Company's revenues has historically been derived from relatively large sales
to a limited number of customers, and the Company expects that this trend will
continue for the foreseeable future. The license of the Company's software
21
<PAGE>
and data products generally requires the Company to engage in a sales cycle of
six to twelve month or longer and to provide a significant level of education
to prospective customers regarding the use and benefits of the Company's
products. For these reasons, sales cycles are subject to a number of
significant delays over which the Company has little or no control.
Accordingly, any delay in the sale of a larger license or a number of smaller
licenses would have a material adverse effect on the Company's business,
financial condition and results of operations and would cause the Company's
operating results to vary significantly from quarter to quarter.
The Company's revenues consist of: 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 content 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 content product. CAPS was licensed from IHS pursuant to a
license that expired in October 1997, after which the Company discontinued
offering it for sale. 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 (the "AICPA") Statement of Position
("SOP") 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 December 31,
1997) are estimated and provided for at the time of sale. When delivery
involves significant installation 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in a full set of general-
purpose financial statements and is required to be adopted by the Company
beginning in fiscal 1998. Additionally, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for the way that public business enterprises report
information in annual statements and interim financial reports regarding
operating segments, products and services, geographic areas and major
customers. SFAS No. 131 will be effective for the Company for fiscal 1998 and
will apply to both annual and interim financial reporting. The Company is
evaluating the potential impact of these accounting pronouncements on required
disclosures, but believes that SFAS No. 130 and SFAS No. 131 will not have a
material impact on the financial condition or results of operations of the
Company.
In October 1997, the Accounting Standards Executive Committee of the AICPA
issued SOP 97-2, "Software Revenue Recognition," which is effective for all
transactions entered into after December 31, 1997. The statement provides
guidance on applying GAAP in recognizing revenue on software transactions.
Based upon the Company's review and interpretation of SOP 97-2, the Company
does not believe that the implementation of the statement will have a material
adverse effect on the results of operations. However, detailed procedures for
executing the guidelines have not been released. Once issued, such procedures
could lead to unanticipated changes in the Company's reported revenues and
earnings. In the event implementation guidance is contrary to the Company's
current revenue accounting practices, the Company believes it can change its
accounting practices to comply with the guidance and avoid any material
adverse effect on revenues and earnings. However, there can be no assurance
this will be the case. Management is currently engaged in reviewing the
Company's present licensing, subscription and service contracts for compliance
with the revenue recognition guidelines of the statement.
22
<PAGE>
Effective December 31, 1997, the Company adopted the provisions of SFAS No.
128, "Earnings per Share" ("EPS"). As required by SFAS No. 128, all prior
periods presented have been restated. Under the new requirements for
calculating EPS, the dilutive effect of stock options and convertible
securities is excluded from a new EPS measure, basic EPS. Except as noted
below, diluted EPS is computed using the weighted average number of common
shares outstanding after the issuance of common stock upon exercise of stock
options (using the treasury stock method) and the issuance of common stock
upon the conversion of convertible preferred stock (using the as-if-converted
method) when their effect is dilutive.
Basic and diluted EPS for all years prior to 1997 have been retroactively
restated to apply the requirements of Staff Accounting Bulletin No. 98 issued
by the SEC in February 1998 (SAB 98). Under SAB 98, certain shares of common
stock and options and warrants to purchase shares of common stock issued at
prices substantially below the per share price of shares sold in the Company's
initial public offering previously included in the computation of shares
outstanding pursuant to the Staff Accounting Bulletin Nos. 55, 64 and 83 are
now excluded from the computation.
SIGNIFICANT SEGMENT INFORMATION
The Company derived approximately 14.1%, 19.5% and 14.9% of its revenues
from its European operations in 1995, 1996 and 1997, respectively. The Company
generated income before interest and taxes of 83.3%, 80.5% and 47.2% on those
revenues in each of the years listed, while incurring losses on substantially
larger revenue from its North American operations (See Note 8 of the Notes to
Consolidated Financial Statements). This apparent disparity is due to the fact
that in those years most of the Company's research and development, sales and
marketing and general and administrative costs were allocated to the Company's
operations in North America. In addition, the 1997 North American results
include expenses of approximately $4.3 million associated with the acquisition
of CADIS. Management expects this concentration of research and development
costs and other infrastructure expenses in North America to become less
significant in the future as more operational functions are organized and
developed in the countries in which the Company sells its products and as the
Company continues to expand its sales efforts in foreign markets.
23
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth certain operating data, expressed as a
percentage of net revenue, for each of the years ended December 31, 1995, 1996
and 1997 for the Company on a consolidated basis, for the Company excluding the
operating results of CADIS and for CADIS on a stand-alone basis.
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues:
Licenses................................................ 52.2% 52.7% 53.9%
Subscription and maintenance............................ 33.0 30.8 27.2
Service and other....................................... 14.8 16.5 18.9
----- ----- -----
Total revenues........................................ 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Cost of licenses........................................ 1.9 2.0 0.7
Cost of subscription and maintenance.................... 7.3 4.0 5.3
Cost of service and other............................... 8.3 8.8 10.1
----- ----- -----
Total cost of revenues................................ 17.5 14.8 16.1
----- ----- -----
Gross margin............................................. 82.5 85.2 83.9
----- ----- -----
Operating expenses:
Research and development................................ 38.8 28.8 22.5
Sales and marketing..................................... 45.8 44.5 53.6
General and administrative.............................. 14.5 13.2 10.6
Merger costs............................................ -- -- 8.6
----- ----- -----
Total operating expenses.............................. 99.1 86.5 95.3
----- ----- -----
Operating loss........................................... (16.6) (1.3) (11.4)
Interest and other income................................ 1.7 5.9 6.1
Interest and other expense............................... (0.5) (0.6) (1.3)
----- ----- -----
Income (loss) before income taxes........................ (15.4) 4.0 (6.6)
Provision for income taxes............................... 1.0 1.1 3.2
----- ----- -----
Net income (loss)........................................ (16.4)% 2.9% (9.8)%
===== ===== =====
ASPECT STATEMENTS OF OPERATIONS (EXCLUDING CADIS)
Revenues:
Licenses................................................ 52.2% 50.6% 54.6%
Subscription and maintenance............................ 36.2 36.9 28.4
Service and other....................................... 11.6 12.5 17.0
----- ----- -----
Total revenues........................................ 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Cost of licenses........................................ 2.2 2.5 0.8
Cost of subscription and maintenance.................... 6.8 4.6 5.6
Cost of service and other............................... 4.5 6.9 6.9
----- ----- -----
Total cost of revenues................................ 13.5 14.0 13.3
----- ----- -----
Gross margin............................................. 86.5 86.0 86.7
----- ----- -----
Operating expenses:
Research and development................................ 35.5 29.1 19.6
Sales and marketing..................................... 32.8 36.4 42.6
General and administrative.............................. 12.1 12.3 9.9
Merger costs............................................ -- -- 3.9
----- ----- -----
Total operating expenses.............................. 80.4 77.8 76.0
----- ----- -----
Operating income......................................... 6.1 8.2 10.7
Interest and other income................................ 0.6 6.5 6.2
Interest and other expense............................... (0.6) (0.9) (1.5)
----- ----- -----
Income before income taxes............................... 6.1 13.8 15.4
Provision for income taxes............................... 1.1 1.4 3.6
----- ----- -----
Net income............................................... 5.0% 12.4% 11.8%
===== ===== =====
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
------ ----- ------
<S> <C> <C> <C>
CADIS STATEMENTS OF OPERATIONS (STAND-ALONE BASIS)
Revenues:
Licenses............................................. 52.4% 60.7% 47.7%
Subscription and maintenance......................... 9.5 7.2 17.9
Service and other.................................... 38.1 32.1 34.4
------ ----- ------
Total revenues..................................... 100.0 100.0 100.0
------ ----- ------
Cost of revenues:
Cost of licenses..................................... -- -- --
Cost of subscription and maintenance................. 10.9 1.5 3.1
Cost of service and other............................ 36.3 16.2 35.5
------ ----- ------
Total cost of revenues............................. 47.2 17.7 38.6
------ ----- ------
Gross margin.......................................... 52.8 82.3 61.4
------ ----- ------
Operating expenses:
Research and development............................. 62.7 27.5 45.2
Sales and marketing.................................. 141.1 75.8 140.4
General and administrative........................... 31.7 17.0 16.6
Merger costs......................................... -- -- 46.7
------ ----- ------
Total operating expenses........................... 235.5 120.3 248.9
------ ----- ------
Operating loss........................................ (182.7) (38.0) (187.5)
Interest and other income............................. 10.2 3.9 5.9
------ ----- ------
Net loss.............................................. (172.5)% (34.1)% (181.6)%
====== ===== ======
</TABLE>
REVENUES
Licenses. Revenues from licenses increased from approximately $8.1 million
in 1995 to approximately $16.0 million in 1996, due primarily to general
commercial introduction of the Company's Explore client/server software and
VIP component reference databases in 1995. License revenues increased from
$16.0 million in 1996 to $26.9 million in 1997. This increase was due
primarily to the growing market acceptance of the Company's products and an
increased emphasis on marketing the Company's products. The Explore
client/server software and VIP component reference databases generally have
higher average selling prices than the CIS products.
Subscription and maintenance. Subscription and maintenance revenues were
$5.1 million, $9.4 million, and $13.6 million in 1995, 1996 and 1997,
respectively. The increase in subscription and maintenance fee revenues from
1995 to 1996 was principally the result of the general commercial introduction
of the Company's VIP component reference databases in 1995 and the increased
base of customers entering into maintenance contracts. The increase between
1996 and 1997 was primarily due to the expansion of the Company's customer
base.
Service and other. Service and other revenues increased from $2.3 million in
1995 to $5.0 million in 1996 due primarily to the increased number and size of
consulting contracts in 1996 offset by a decrease in development revenues
caused by the conclusion of a significant development contract in 1995.
Service and other revenues increased $4.4 million to $9.4 million in 1997 due
to management's continuing recognition of the need to offer superior service
support to the Company's customers in order to enhance the market's acceptance
of the Company's products.
International sales were $2.9 million, $6.2 million and $8.5 million in
1995, 1996 and 1997, respectively, representing 18.9%, 20.3% and 17.0% of
total revenues, respectively, in each year. The increased volume of
international sales from 1995 to 1997 in absolute dollars is primarily
attributable to an increase in the Company's international marketing efforts.
The Company intends to continue to expand its international operations and to
enter additional international markets. The Company currently maintains sales
offices in the United Kingdom, France, Germany, Japan, Canada, India and Italy
and has sales representative agreements with ATE in South Korea and Onyx in
Israel, a joint marketing/systems integrator agreement with Mentor Graphics
and Digital
25
<PAGE>
Japan in Japan and worldwide strategic reselling agreements with SAP and Baan.
In addition, although the Company records revenues based on the billing
location, certain domestic billings include licenses that may be deployed by
customers or resold by indirect channel partners into international locations.
International sales are denominated and collected in both U.S. and foreign
currency. Accordingly, a portion of the Company's international revenues are
subject to foreign currency fluctuation risks. In those jurisdictions in which
the Company's sales are denominated in foreign currency, fluctuations in such
currencies could adversely affect the profitability of sales made in such
jurisdictions and, therefore, materially adversely affect the Company's
business, financial condition and results of operations. Further, an increase
in the value of the U.S. dollar relative to foreign currencies could make the
Company's products more expensive and, therefore, potentially less competitive
in those markets in which the Company's sales are denominated in U.S. dollars.
To a limited extent, the Company has engaged in some insignificant foreign
currency hedging activities to offset the potential risks mentioned above.
This hedging activity has not had a material effect on the financial
statements and no hedging contracts remained open at December 31, 1997. If
considered appropriate, the Company will enter into hedging contracts in the
future.
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 was $298,000, $612,000 and $346,000 in 1995, 1996
and 1997, respectively, representing 3.7%, 3.8% and 1.3%, respectively, of the
related license revenues for each of those years. The increase in the dollar
amount of cost of licenses between 1995 and 1996 reflects the higher volumes
of licenses entered into in 1996. The dollar decrease between 1996 and 1997 is
primarily due to the fact that more customers already owned Oracle or other
relational database software and the Company was not obligated to obtain the
product for them. The increase as a percentage of revenues from 1995 to 1996
was primarily due to the addition of an additional third-party vendor's
product licensed in conjunction with Aspect's products. The percentage
decrease between 1996 and 1997 was primarily due to new customers providing
their own database software, eliminating that cost from the Company's
operations. Because all development costs incurred in the research and
development of products and enhancements to existing software products have
been expensed as incurred, cost of licenses includes no amortization of
capitalized software development costs. See Note 1 of Notes to Consolidated
Financial Statements.
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 IHS 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 was $1.1 million, $1.2 million and $2.7 million, in 1995,
1996 and 1997, representing 22.2%, 12.8% and 19.7%, respectively, of related
subscription and maintenance revenues for each year. The decrease in cost of
subscription and maintenance revenues as a percentage of related revenues
between 1995 and 1996 is primarily the result of allocating related costs over
a larger customer base and an increased proportion of sales of the VIP
reference databases over the CAPS reference data product. The increase between
1996 and 1997 is primarily due to the Company's high level of interest in
continued customer support and the resulting increase in facilities and
employees assigned to that effort.
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 was $1.3 million, $2.7 million and $5.0 million, respectively,
in 1995, 1996 and 1997, representing 56.2%, 53.5% and 53.2%, respectively, of
related revenue for each year. The increase in absolute dollars in each of the
years presented is due to an increase in the number and size of consulting
contracts. The overall decrease in terms of percentages is due to the
increasing profit margin associated with each individual contract due to
management's continuing effort to more efficiently manage them and an
increasing percentage of the fulfillment of these contracts from this lower
cost of labor in India.
26
<PAGE>
GROSS PROFIT
Gross profit was $12.8 million, $26.0 million and $41.9 million in 1995,
1996 and 1997, respectively, representing 82.5%, 85.2% and 83.9%,
respectively, of total revenues for each year. The increase in absolute
dollars and as a percentage of total revenues from 1995 to 1996 was primarily
the result of an increased level of revenues and the allocation of costs over
a larger customer base. The decrease in terms of percentages between 1996 and
1997 is due to the larger percentage growth in service and other revenue as
compared to the Company's other revenue sources. The Company currently expects
that gross profits may decrease as a percentage of total revenues in the
future as services and other revenues, which generally have lower gross
margins than the Company's other revenues, increase as a percentage of total
revenues.
OPERATING EXPENSES
Research and development. Research and development expenses consist
primarily of engineering personnel costs. Research and development expenses
for 1995, 1996 and 1997 were approximately $6.0 million, $8.8 million and
$11.2 million, respectively. These expenses as a percentage of total revenues
were 38.8%, 28.8% and 22.5%, respectively, during the three years. The
increases in research and development expenses in absolute dollars since 1995
were primarily attributable to increased staffing and associated support for
technical staff and the use of consultants and outside service providers
required to develop and enhance the Company's products. The reduction as a
percentage of revenue is due to revenues increasing at a higher rate than
research and development expenses. The Company believes that a significant
level of research and development expenses will be required to be competitive
in the future. Accordingly, the Company expects that the absolute dollar
amounts of research and development expenses may increase in the future, but
may decline as a percentage of total revenues in the event that revenues
increase.
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 for 1995,
1996 and 1997 were approximately $7.1 million, $13.5 million and $26.7
million, respectively, representing 45.8%, 44.5%, and 53.5% of total revenues,
respectively. The increases in sales and marketing expenses in absolute
dollars were primarily due to the addition of sales and marketing personnel
and increased marketing activities, including trade shows and promotional
expenses and substantial growth in international sales and marketing channels.
The Company believes that such expenses will increase in dollar amounts and
may increase as a percentage of total revenues in the future as the Company
expands its sales and marketing staff and enters new markets, worldwide.
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 $2.3 million in
1995 to $4.0 million in 1996 and $5.3 million in 1997. These expenses
represented 14.5%, 13.2% and 10.6% of total revenues, respectively during
those three years. The increases in dollar amounts were 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 dollar amounts in the future as the Company expands
its staffing and as the Company experiences higher costs associated with being
a public company, but may decrease as a percentage of total revenues in the
event that revenues increase.
Merger costs. The costs associated with the acquisition of CADIS were
approximately $4.3 million, including $0.9 million in consulting fees to
financial advisors, $0.7 million for legal and other professional fees, $0.7
million for personnel severance and outplacement expenses and $0.6 million for
facilities consolidation expense. Of the merger expenses, a total of
approximately $2.9 million was accrued at December 31, 1997. The Company may
incur similar expenses should management determine that further acquisitions
are strategically important to the Company's future growth.
27
<PAGE>
INTEREST AND OTHER INCOME
The Company's net interest and other income for 1995, 1996 and 1997 was
$268,000, $1.8 million and $3.1 million, respectively. Interest income
consists primarily of interest accrued on the Company's cash generated from
financing and operating activities. The increase in interest income in 1996
was primarily due to higher cash and investment balances resulting from the
infusion of cash from the initial public offering. The increase in 1997 was
primarily due to improved cash flows from operations and the resulting
investment in short-term securities of the funds generated.
INTEREST AND OTHER EXPENSE
Interest and other expense was $83,000, $209,000 and $665,000 in 1995, 1996
and 1997 respectively. The increase between 1995 and 1996 was primarily due to
a $90,000 expense related to the settlement of a dispute, while the increase
in 1997 was due to a $612,000 charge to record the Company's proportionate
share of the loss in a joint venture.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes was $150,000 in 1995, $330,000 in
1996 and $1.6 million in 1997. The 1995 provision amount was primarily due to
foreign withholding taxes in connection with product license sales to Korea.
The increase in the provision in 1997 is primarily due to increased income
generated by the Company (excluding the acquisition of CADIS) and the
Company's inability to use CADIS's net operating loss carryforwards or its
losses generated in 1997. As of December 31, 1997, the Company had federal net
operating loss carryforwards of approximately $37 million. The Company also
had federal research and development tax credit carryforwards of approximately
$1.7 million. The federal net operating loss and credit carryforwards will
expire in 2007 through 2012, if not utilized sooner. Utilization of the net
operating losses and credits will be subject to a substantial annual
limitation for losses previously incurred by CADIS and obtained by the Company
in the acquisition and merger (as described in Note 2 to the Consolidated
Financial Statements) due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. Net operating
losses and credits related to Aspect may also be subject to a substantial
limitation due to ownership change limitations provided by the Internal
Revenue Code of 1986 and similar state provisions. Based upon current values,
however, the annual limitation are not expected to result in the expiration of
net operating losses and credits before utilization. See Note 6 of Notes to
Consolidated Financial Statements.
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 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.
In 1995 and 1996, the Company's investing activities consisted primarily of
purchases of property and equipment. In 1995 and 1996, the Company used
approximately $800,000 and $3.5 million, respectively, of cash to purchase
property and equipment, primarily for personal computers and for furniture and
other office equipment. During 1997 the Company continued to invest heavily in
property and equipment and also acquired CADIS (as discussed in Note 2 to the
Consolidated Financial Statements). The Company expects that the rate of
purchases of property and equipment will increase as the Company's employee
base grows. As of December 31, 1997, the Company's principal commitments
consisted primarily of capital lease obligations for equipment and operating
leases for office facilities. See Notes 3 and 9 of Notes to Consolidated
Financial Statements.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk. The
Company expects that, in the future, cash in excess of current requirements
will be invested in investment grade, interest-bearing securities.
28
<PAGE>
At December 31, 1997, the Company had $14.6 million in cash and cash
equivalents, $40.5 million in short-term investments and $48.5 million of
working capital.
The Company believes that its current cash balances and short term
investments are sufficient to support the Company's operations and planned
growth over the next year. Although operating activities may provide cash in
certain periods, to the extent that the Company experiences growth in the
future, the Company anticipates that its operating and investing activities
may use cash. Consequently, any such growth may require the Company to obtain
additional equity or debt financing. 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.
The Company will continue to invest in its sales and marketing
infrastructure. In addition, the Company will commit substantial cash
resources to research and development activities.
BUSINESS FACTORS
The Company's revenues and results of operations 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.
Licenses 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.
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 customers regarding the use and
benefits of the Company's products. In addition, the implementation of the
Company's standard products typically involves a
29
<PAGE>
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 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 a 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.
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. 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. 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.
The Company's business has grown rapidly in recent periods. 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 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.
Historically, a relatively small number of customers has accounted for a
significant percentage of the Company's total revenues, and the Company
expects that it will continue to experience significant customer concentration
for the foreseeable future. There can be no assurance that such customers or
any other customers will in the future continue to license or purchase
products or services from the Company at levels that equal or exceed those of
prior periods, or at all.
The Company believes that, in order to provide competitive CSM solutions, it
will be necessary to develop, maintain and enhance close associations with
other enterprise data management vendors such as database, hardware, data,
ERP, PDM, CAD and professional service companies. The Company has established
marketing, selling and consulting relationships with many such vendors, but
there can be no assurance that the Company will be able to maintain its
existing relationships or enter into new relationships with such vendors.
Although the Company believes that all of its products will record, store,
process, calculate and present calendar dates falling on or after (and if
applicable, spans of time including) January 1, 2000, and will calculate any
information dependent on or relating to such dates in the same manner, and
with the same functionality, data integrity and performance, as such products
record, store, process, calculate and present calendar dates on or before
December 31, 1999, or calculate any information dependent on or relating to
such dates (collectively,
30
<PAGE>
"Year 2000 Compliant"), Year 2000 Compliant issues may arise with respect to
customers' internal management systems or third party suppliers that may
result in unforeseen costs or delays to the Company and therefore may have a
material adverse effect on the Company.
The Company has operations in Bangalore, India with 244 employees as of
December 31, 1997. The Company is dependent to a significant extent upon the
ability of its Indian operations to successfully maintain and upgrade its
reference data products. The Company believes that the success of its Indian
operations will depend in large part upon its ability to attract, train and
retain highly skilled technical and management personnel in India. Competition
for such personnel in India is intense, and there can be no assurance that the
Company will be successful in attracting a sufficient number of qualified
personnel. The Company is directly affected by the political and economic
conditions to which India is subject. In addition, many of the Company's
expenses in India are paid in Indian currency, thereby subjecting the Company
to the risk of foreign currency fluctuations. Any difficulties in coordinating
or managing the Indian operations due to cultural, geographic, communication
or other reasons could have a material adverse effect on the Company's
business, financial condition or results of operations.
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Financial Statements are filed as part of this Report.
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................... 33
Report of Arthur Andersen LLP, Independent Auditors................... 34
Consolidated Balance Sheets as of December 31, 1997 and 1996.......... 35
Consolidated Statements of Operations for each of the three fiscal
years
in the period ended December 31, 1997................................ 36
Consolidated Statements of Stockholders' Equity for each of the three
fiscal years
in the period ended December 31, 1997................................ 37
Consolidated Statements of Cash Flows for each of the three fiscal
years
in the period ended December 31, 1997................................ 38
Notes to the Consolidated Financial Statements........................ 39
</TABLE>
32
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Aspect Development, Inc.
We have audited the consolidated balance sheets of Aspect Development, Inc.
as of December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the management of the Company. Our responsibility is to
express an opinion on these financial statements based on our audits. In
November, 1997, the Company merged with CADIS, Inc. in a transaction that was
accounted for as a pooling of interests. We did not audit the financial
statements of CADIS, Inc., which statements reflected total assets of $6.3
million and $14.3 million as of December 31, 1997 and 1996, respectively, and
net losses of $10.8 million, $2.1 million and $3.2 million, for the years
ended December 31, 1997, 1996 and 1995, respectively. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for CADIS, Inc., is based
solely on the report of the other auditors.
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 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 and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Aspect Development, Inc. at
December 31, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, after giving retroactive effect to the business combination with CADIS,
Inc., as described in the notes to the consolidated financial statements, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Palo Alto, California
January 26, 1998
33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CADIS, Inc.;
We have audited the consolidated balance sheets of CADIS, Inc. (a Delaware
corporation) and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, mandatorily redeemable convertible
preferred stock, junior mandatorily redeemable preferred stock and
stockholders' equity (deficit) and cash flows for each of the three years in
the period ended December 31, 1997, not presented separately herein. 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, not presented
separately herein, present fairly, in all material respects, the consolidated
financial position of CADIS Inc. and subsidiary as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
January 20, 1998
34
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 14,550 $16,683
Short-term investments.................................... 40,506 41,148
Accounts receivable, net of allowance for doubtful
accounts of $295 and $250 in 1997 and 1996, respectively. 13,366 9,493
Employee receivables...................................... 151 65
Prepaid expenses and other current assets................. 3,083 1,213
-------- -------
Total current assets.................................... 71,656 68,602
Property and equipment, net................................. 8,771 4,301
Other assets, net........................................... 1,293 370
-------- -------
$ 81,720 $73,273
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,009 $ 951
Accrued bonuses and commissions........................... 2,077 910
Accrued merger costs...................................... 2,883 --
Income taxes payable...................................... 1,608 45
Other accrued liabilities................................. 2,488 2,146
Deferred revenue.......................................... 11,136 6,656
Capital lease obligations--current portion................ 346 482
Third-party royalties and fees............................ 588 972
-------- -------
Total current liabilities............................... 23,135 12,162
Capital lease obligations................................... 11 379
Junior mandatorily redeemable preferred stock............... -- 1,986
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value per share, 2,000
authorized, none issued or outstanding................... -- --
Common stock, $0.001 par value per share; 20,000 shares
authorized, 14,433 and 13,497 issued and outstanding in
1997 and 1996, respectively.............................. 81,627 76,729
Notes receivable from stockholders........................ (320) (320)
Deferred compensation..................................... (376) (544)
Accumulated translation adjustment........................ (302) 65
Accumulated deficit....................................... (22,055) (17,184)
-------- -------
Total stockholders' equity.............................. 58,574 58,746
-------- -------
$ 81,720 $73,273
======== =======
</TABLE>
See accompanying notes.
35
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Revenues
Licenses.......................................... $26,892 $16,043 $ 8,123
Subscription and maintenance...................... 13,594 9,392 5,141
Service and other................................. 9,443 5,023 2,299
------- ------- -------
Total revenues.................................. 49,929 30,458 15,563
Cost of revenues
Cost of license revenues.......................... 346 612 298
Cost of subscription and maintenance revenues..... 2,676 1,206 1,142
Cost of service and other revenues................ 5,027 2,689 1,291
------- ------- -------
Total cost of revenues.......................... 8,049 4,507 2,731
------- ------- -------
Gross profit........................................ 41,880 25,951 12,832
------- ------- -------
Operating expenses:
Research and development.......................... 11,213 8,762 6,031
Sales and marketing............................... 26,730 13,540 7,128
General and administrative........................ 5,304 4,030 2,253
Merger costs...................................... 4,312 -- --
------- ------- -------
Total operating expenses............................ 47,559 26,332 15,412
------- ------- -------
Operating loss...................................... (5,679) (381) (2,580)
Interest and other income........................... 3,066 1,805 268
Interest and other expense.......................... (665) (209) (83)
------- ------- -------
Income (loss) before income taxes................... (3,278) 1,215 (2,395)
Provision for income taxes.......................... 1,593 330 150
------- ------- -------
Net income (loss)................................... $(4,871) $ 885 $(2,545)
======= ======= =======
Net income (loss) per share-basic (1)............... $ (0.35) $ 0.07 $ (0.28)
======= ======= =======
Net income (loss) per share-diluted (1)............. $ (0.35) $ 0.06 $ (0.28)
======= ======= =======
Number of shares used in computing per share
amounts-basic (1).................................. 13,817 12,005 9,025
Number of shares used in computing per share
amounts-diluted (1)................................ 13,817 13,755 9,025
</TABLE>
- --------
(1) Net income (loss) per share for 1995 and 1996 are pro forma computations.
See accompanying notes.
36
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE ACCUMULATED TOTAL
---------------- -------------- FROM DEFERRED TRANSLATION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION ADJUSTMENT DEFICIT EQUITY
------- ------- ------ ------- ------------ ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 3,687 $ 4,916 5,314 $12,049 $(110) $ -- $ -- $(15,524) $ 1,331
Issuance of common
stock for cash net of
issue costs of $20.... -- -- 250 4,980 -- -- -- -- 4,980
Issuance of common
stock upon exercise of
options............... -- -- 413 79 -- -- -- -- 79
Issuance of common
stock for note
receivable............ -- -- 300 210 (210) -- -- -- --
Deferred compensation
related to grant of
stock options......... -- -- -- 255 (255) -- -- --
Foreign currency
translation
adjustments........... -- -- -- -- -- -- (4) -- (4)
Amortization of
deferred compensation. -- -- -- -- -- 14 -- -- 14
Net loss............... -- -- -- -- -- -- -- (2,545) (2,545)
------- ------- ------ ------- ----- ----- ----- -------- -------
Balance at December
31,1995................ 3,687 4,916 6,277 17,573 (320) (241) (4) (18,069) 3,855
Conversion of preferred
stock................. (3,687) (4,916) 3,687 4,916 -- -- -- -- --
Issuance of common
stock upon exercise of
options............... -- -- 641 263 -- -- -- -- 263
Deferred compensation
related to grant of
stock options......... -- -- -- 441 -- (441) -- -- --
Amortization of
deferred compensation. -- -- -- -- -- 138 -- -- 138
Tax benefit from stock
options............... -- -- -- 250 -- -- -- -- 250
Issuance of common
stock through Initial
Public Offering net of
issuance costs of
$938.................. -- -- 2,323 42,261 -- -- -- -- 42,261
Issuance of common
stock for cash, net of
issuance costs of
$663.................. -- -- 399 10,298 -- -- -- -- 10,298
Issuance of common
stock upon exercise of
warrants.............. -- -- 95 30 -- -- -- -- 30
Option granted for
dispute settlement.... -- -- -- 90 -- -- -- -- 90
Issuance of common
stock upon exercise of
options from
settlement (see note
4).................... -- -- 75 607 -- -- -- -- 607
Foreign currency
translation
adjustments........... -- -- -- -- -- -- 69 -- 69
Net income............. -- -- -- -- -- -- -- 885 885
------- ------- ------ ------- ----- ----- ----- -------- -------
Balance at December 31,
1996................... -- -- 13,497 76,729 (320) (544) 65 (17,184) 58,746
Issuance of common
stock upon exercise of
options............... -- -- 673 1,027 -- -- -- -- 1,027
Issuance of common
stock under Employee
Purchase Plan......... -- -- 182 1,307 -- -- -- -- 1,307
Foreign currency
translation
adjustments........... -- -- -- -- -- -- (367) -- (367)
Amortization of
deferred compensation. -- -- -- -- -- 168 -- -- 168
Issuance of common
stock for Redeemable
Preferred Stock....... -- -- 42 1,986 -- -- -- -- 1,986
Issuance of common
stock for software.... -- -- 14 375 -- -- -- -- 375
Issuance of common
stock upon exercise of
options from
settlement (see Note
4).................... -- -- 25 203 -- -- -- -- 203
Net loss............... -- -- -- -- -- -- -- (4,871) (4,871)
------- ------- ------ ------- ----- ----- ----- -------- -------
Balance at December 31,
1997................... -- $ -- 14,433 $81,627 $(320) $(376) $(302) $(22,055) $58,574
======= ======= ====== ======= ===== ===== ===== ======== =======
</TABLE>
See accompanying notes
37
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $(4,871) $ 885 $(2,545)
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization.................... 3,096 1,792 717
(Gain) loss on disposals of assets............... 61 (9) 1
Compensation related to options granted in
settlement of dispute........................... -- 90 --
Changes in items affecting operations:
Accounts receivable............................ (3,873) (4,801) (2,912)
Prepaid expenses and other current assets...... (1,870) (526) ( 24)
Accounts payable............................... 1,058 599 976
Other accrued liabilities...................... 342 956 52
Accrued merger costs........................... 2,883 -- --
Income taxes payable........................... 1,563 45 --
Accrued bonuses and commissions................ 1,167 910 --
Deferred revenue............................... 4,480 2,106 2,370
Third-party royalties and fees................. (384) 155 --
------- ------- -------
Net cash provided by (used in) operating activi-
ties.............................................. 3,652 2,202 (1,365)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.............. (7,429) (3,453) (808)
Proceeds from sales of property and equipment.... 15 25 1
Acquisition of Aspect-India...................... -- -- (90)
Proceeds from sales of short-term investments.... 56,662 30,949 5,085
Purchases of short-term investments.............. (56,020) (70,289) (6,307)
Decrease (increase) in employee note receivable.. (86) 157 (170)
Increase in other assets......................... (548) 61 (115)
------- ------- -------
Net cash used in investing activities.............. (7,406) (42,550) (2,404)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease obligations.. (553) (705) (413)
Proceeds from initial public offering, net of
offering costs.................................. -- 42,261 --
Proceeds from additional issuance of common
stock, net of offering costs.................... 2,548 11,197 5,059
------- ------- -------
Net cash provided by financing activities.......... 1,995 52,753 4,646
------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... (1,759) 12,405 877
Effect of exchange rates on cash................... (374) (9) (3)
Cash and cash equivalents at the beginning of the
period............................................ 16,683 4,287 3,413
------- ------- -------
Cash and cash equivalents at the end of the period. $14,550 $16,683 $ 4,287
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest......... $ 44 $ 116 $ 83
======= ======= =======
Income taxes paid................................ $ 143 $ 67 $ 51
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
ACTIVITIES
Equipment acquired under capital lease
obligations..................................... $ 49 $ 401 $ 953
======= ======= =======
Conversion of preferred stock to common stock.... $ 1,986 $ 4,916 $ --
======= ======= =======
Issuance of common stock for note receivable..... $ -- $ -- $ 210
======= ======= =======
Issuance of common stock for software............ $ 375 $ -- $ --
======= ======= =======
Tax benefits from stock options.................. $ -- $ 250 $ --
======= ======= =======
</TABLE>
See accompanying notes.
38
<PAGE>
ASPECT DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Principles of Consolidation
Aspect Development, Inc. (the "Company") develops, markets and supports
enterprise client/server software and reference data products that enable
manufacturers to improve product development and business processes through
component and supplier management. 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 consolidated financial statements comprise the accounts of the Company
and its wholly-owned subsidiaries after elimination of all significant
intercompany balances and transactions. On November 25, 1997, the Company
acquired CADIS, Inc. in a merger transaction accounted for as a pooling of
interests (see Note 2).
Foreign Exchange
Assets and liabilities of the Company and its wholly-owned foreign
subsidiaries are translated from the local currency to the United States
dollar at year-end exchange rates. Income and expense items are translated on
a quarterly basis at the average rates of exchange prevailing during the
quarter. The adjustment resulting from translating the financial statements of
the Company and its foreign subsidiaries is reflected as an accumulated
translation adjustment in stockholders' equity. Foreign currency transaction
gains and losses are included in results of operations and were immaterial for
all periods presented. The Company has not entered into any material hedging
contracts in the three years ended December 31, 1997.
Use of Estimates
The preparation of 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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results inevitably will differ
from those estimates, and such differences may be material to the financial
statements.
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 recognized on a per-site basis upon completion of
installation. Product returns and allowances (which were not significant
through December 31, 1997) 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,
which is 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. Generally, the Company retains complete
ownership of technology developed under these agreements. The related costs
are charged as incurred. Under these development agreements, costs totaled
approximately $167,000 for fiscal year 1995 and none for fiscal years 1996 and
1997.
39
<PAGE>
ASPECT DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Per Share Amounts
Effective December 31, 1997, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." As
required by SFAS No. 128, all prior periods presented have been restated.
Under the new requirements for calculating EPS, the dilutive effect of stock
options and convertible securities is excluded from a new EPS measure, basic
EPS. Except as noted below, diluted EPS is computed using the weighted average
number of common shares outstanding after the issuance of common stock upon
exercise of stock options (using the treasury stock method) and the issuance
of common stock upon the conversion of convertible preferred stock (using the
as-if-converted method) when their effect is dilutive.
Basic and diluted EPS for 1996 and 1995 have been retroactively restated to
apply the requirements of Staff Accounting Bulletin No. 98 issued by the SEC
in February 1998 ("SAB 98"). Under SAB 98, certain shares of common stock and
options and warrants to purchase shares of common stock issued at prices
substantially below the per share price of shares sold in the Company's
initial public offering that were previously included in the computation of
shares outstanding pursuant to the Staff Accounting Bulletin Nos. 55, 64, and
83 are now excluded from the computation.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Basic:
Weighted average common stock outstanding............. 13,817 10,530 5,338
Convertible preferred stock........................... -- 1,475 3,687
------- ------ -------
Total weighted average common and common equivalent
shares outstanding................................... 13,817 12,005 9,025
Net income (loss)..................................... $(4,871) $ 885 $(2,545)
Net income (loss) per share (1)....................... $ (0.35) $ 0.07 $ (0.28)
Diluted:
Weighted average Common stock outstanding............. 13,817 10,530 5,338
Common stock equivalents (treasury stock method)...... -- 1,750 --
Convertible preferred stock........................... -- 1,475 3,687
------- ------ -------
Total weighted average common and common equivalent
shares outstanding................................... 13,817 13,755 9,025
Net income (loss)..................................... $(4,871) $ 885 $(2,545)
Net income (loss) per share (1)....................... $ (0.35) $ 0.06 $ (0.28)
</TABLE>
- --------
(1) Net income (loss) per share for 1995 and 1996 are pro forma computations.
Concentration of Credit Risk and Significant Customers
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash investments and trade
receivables. The Company has a cash investment policy that limits
40
<PAGE>
ASPECT DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
investments to investment grade securities. The Company's revenues consist
primarily of license and subscription fees for its applications software and
reference data products from large manufacturers in the United States, Europe
and Asia. The Company has historically sold primarily to large financially
stable institutions and has not obtained collateral. The Company has not
incurred significant credit losses during any of the periods presented.
Increases in the Company's allowance for bad debts (expense) in 1997, 1996 and
1995 were approximately $52,000, $281,000 and $70,000, respectively.
Outstanding customer receivables written off and deducted from the allowance
account in each of those years were approximately $7,000, $112,000 and
$11,000, respectively.
During the year ended December 31, 1997 one customer accounted for 11% of
revenues. No other customer in any of the three years ended December 31, 1997
accounted for more than 10% of revenues.
Product Concentration
The Company currently derives substantially all of its revenues from the
licensing of its Explore client/server software, the VIP family of reference
databases, the Krakatoa Web Catalog Publisher, 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. 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.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with minimum yield risks
and maturities of less than 90 days at time of purchase to be cash
equivalents.
The Company's investment policy is to protect the value of its investment
portfolio and to minimize principal risk by earning returns based on current
interest rates.
At December 31, 1997, all of the Company's cash equivalents and short term
investments were designated as "available-for-sale" and, in accordance with
FAS 115, are presented at fair value in the financial statements. As of
December 31, 1997, the carrying value of the Company's short-term investments
approximated the current fair value. Therefore no adjustment has been recorded
as a separate component of equity as of December 31, 1997. Realized gains and
losses to date have not been material. The cost of securities sold is based on
specific identification.
At December 31, 1997 and 1996, the Company's debt securities consisted of
$8.4 million and $10.7 million of US Government Agency obligations and $36.2
million and $32.9 million of domestic corporation debt issues, all of which
mature within one year. At December 31, 1997 and 1996, $4.1 million and $5.4
million, respectively, of debt securities were included in cash equivalents.
At December 31, 1997, no debt securities held by the Company were classified
as "held-to-maturity". At December 31, 1996, $8.5 million of U.S. Government
Agency obligations were classified as "held-to-maturity" and presented at
their amortized cost. At December 31, 1996, $5.5 million of "held-to-maturity"
debt securities were included in cash equivalents. All of the Company's short-
term investments mature within twelve months.
Property and Equipment
Office and computer equipment are recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the respective assets
(generally two to five years). Equipment under capital lease
41
<PAGE>
ASPECT DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
obligations is recorded at cost and amortized on a straight-line basis over
the shorter of its estimated life or the term of the lease (generally three
years). Accumulated depreciation of assets under capital leases was
approximately, $1.8 million and $1.3 million at December 31, 1997 and 1996,
respectively. Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Office and computer equipment.............................. $12,152 $ 5,140
Computer equipment under capital lease obligations......... 2,295 2,295
------- -------
14,447 7,435
Accumulated depreciation and amortization.................. (5,676) (3,134)
------- -------
Property and equipment, net................................ $ 8,771 $ 4,301
======= =======
</TABLE>
On January 1, 1996 the Company adopted Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." SFAS 121 requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future undiscounted cash flows attributable to such
assets. The effect of adopting this statement was immaterial to the Company's
consolidated financial position or operating results.
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent
to the establishment of technological feasibility. Based on the Company's
product development process, technological feasibility is established upon
completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready
for general release have been insignificant. Through December 31, 1997, all
research and development costs have been expensed.
Reclassification
The Company has reclassified certain prior year balances to conform with
current year's presentation.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
and displaying comprehensive income and its components in a full set of
general-purpose financial statements and is required to be adopted by the
Company beginning in fiscal 1998. Additionally, the Fiancial Accounting
Standards Board issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes standards for the way
that public business enterprises report information in annual statements and
interim financial reports regarding operating segments, products and services,
geographic areas and major customers. SFAS No. 131 will be effective for the
Company for fiscal 1998 and will apply to both annual and interim financial
reporting. The Company is evaluating the potential impact of these accounting
pronouncements on required disclosures, but believes that SFAS No. 130 and
SFAS No. 131 will not have a material impact on the financial condition or
results of operations of the Company.
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," which
provides guidance on applying generally accepted accounting
42
<PAGE>
ASPECT DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
principles in recognizing revenue on software transactions and is effective
for the Company's transactions entered into subsequent to December 31, 1997.
Based upon the Company's reading and interpretation of SOP 97-2, the Company
does not believe that the implementation of the statement will have a material
adverse effect on expected revenues or earnings. However, detailed
implementation guidelines for this standard have not yet been issued. Once
issued, such detailed guidance could lead to unanticipated changes in the
Company's reported revenues and earnings. In the event implementation guidance
is contrary to the Company's revenue accounting practices, the Company
believes it can change its current business practices to comply with this
guidance and avoid any material adverse effect on reported revenues and
earnings. However, there can be no assurance this will be the case.
2. BUSINESS COMBINATION
On November 25, 1997, the Company acquired all of the outstanding shares of
CADIS, Inc. ("CADIS"), a privately held Delaware corporation which develops,
markets, and supports component and supplier management software, by issuing
approximately 1,411,000 shares of the Company's common stock. The acquisition
was accounted for as a pooling-of-interests and the accompanying consolidated
financial statements of Aspect for prior periods have been restated to include
the operating results of CADIS. In connection with the transaction, the
Company incurred approximately $4.3 million in merger related expenses,
including $0.9 million in consulting fees to financial advisors, $0.7 million
for legal and other professional fees, $0.7 million for personnel severance
and outplacement expenses and $0.6 million for facilities consolidation
expense. Of the merger expenses, a total of approximately $2.9 million was
accrued at December 31, 1997.
There were no materially significant intercompany transactions between the
the Company and CADIS prior to the merger and there were no significant
accounting reclassifications required to conform the financial reporting of
the two companies.
The following information shows revenue and net income of the separate
companies during the periods preceding the combination (in thousands):
<TABLE>
<CAPTION>
UNAUDITED
TEN MONTHS
ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Revenue:
Aspect.................................. $36,170 $24,235 $13,693
CADIS................................... 4,564 6,223 1,870
------- ------- -------
$40,734 $30,458 $15,563
======= ======= =======
Net income (loss):
Aspect.................................. $ 6,614 $ 3,009 $ 681
CADIS................................... (6,725) (2,124) (3,226)
------- ------- -------
$ (111) $ 885 $(2,545)
======= ======= =======
</TABLE>
3. LEASE OBLIGATIONS
The Company leases eight office facilities under noncancelable operating
leases which expire at various dates through September 2004. The Company also
rents certain property and equipment under operating leases. Rental expense
for all operating leases was $2,377,942, $933,193 and $727,499 for 1997, 1996
and 1995, respectively. See Note 10.
43
<PAGE>
ASPECT DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under operating and capital lease obligations
which have initial or remaining noncancelable lease terms in excess of one
year as of December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Year ending December 31,
1998........................................................ $ 1,859 $361
1999........................................................ 1,565 11
2000........................................................ 1,519 --
2001........................................................ 1,288 --
2002........................................................ 948 --
Thereafter.................................................... 3,496 --
------- ----
Total minimum lease payments.................................. $10,675 372
=======
Less amount representing interest............................. 15
----
Present value of net minimum lease payments................... 357
Less current portion.......................................... 346
----
Non-current portion........................................... $ 11
====
</TABLE>
4. STOCKHOLDERS' EQUITY
CADIS was authorized to issue a total of 1,985,705 shares of Junior
Mandatorily Redeemable Preferred stock ("Junior Preferred"), all of which had
been issued as of December 31, 1996. The holders of Junior Preferred were
entitled to liquidation preferences of $1.00 per share and were not entitled
to dividends. The Junior Preferred was mandatorily redeemable at $1.00 per
share on each of July 31, 2000, 2001, and 2002. All of the outstanding Junior
Preferred was converted to common stock of the Company at the time of the
acquisition of CADIS.
CONVERTIBLE PREFERRED STOCK
Each aggregate share of Series A, B and C preferred stock outstanding was
automatically converted into one share of common stock upon the initial public
offering of the Company's common stock on May 24, 1996 (a total of 3,687,117
shares). In 1996, the Company's Certificate of Incorporation was amended to
authorize the issuance of 2,000,000 shares of undesignated preferred stock and
20,000,000 shares of common stock. The Board did not authorize any additional
shares in 1997.
COMMON STOCK SUBJECT TO REPURCHASE
The Company has previously issued shares of common stock which are subject
to the Company's right to repurchase at the original issuance price upon the
occurrence of certain events, as defined in the agreement relating to the
sales of such stock. At December 31, 1996 and December 31, 1997, approximately
351,042 and 138,542 shares, respectively, were subject to repurchase. In the
event that a stockholder negotiates to sell all or part of the stock to a
third party, the Company has a right of first refusal to repurchase that stock
at the negotiated price.
44
<PAGE>
ASPECT DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK OPTIONS
Amended and Restated 1992 Stock Option Plan. In 1996, the Company adopted
its Amended and Restated 1992 Stock Option Plan (the "Plan"), which authorizes
the board of directors to grant incentive stock options or nonqualified stock
options to purchase up to 3,930,000 shares of common stock to employees,
officers, directors and consultants of the Company. The Plan allows for the
grant of incentive stock options to employees and the grant of nonstatutory
stock options to eligible participants.
The option price shall be at least 100% and 85% of the fair value on the
date of the grant for incentive stock options and nonqualified stock options,
respectively, except for options granted to a person owning greater than 10%
of the total voting power of the Company, for which the exercise price of the
options must not be less than 110% of the fair market value at the time of
grant. Options generally become exercisable upon grant subject to repurchase
rights in favor of the Company until vested. At December 31, 1996 and December
31, 1997, a total of 47,872 and 11,470 shares of common stock, respectively,
previously exercised under the plan were subject to repurchase. Shares
generally vest over a period of four years, with 1/8 of the shares subject to
option vesting at the end of the six months after commencement of employment,
and the remainder vesting ratably over the next 42 months. Options may be
granted with different vesting terms. Options are exercisable for a term of
ten years after the date of grant except those options granted to a person
owning greater than 10% of the total vesting power of stock of the Company,
which are exercisable for a term of five years after the date of grant. The
options are not transferrable.
In the event of a sale or merger of the Company, the board may arrange with
the acquiring corporation for such corporation either to assume the Company's
rights and obligations under the outstanding options or to substitute new
options for the acquiring corporation's stock for such outstanding options.
Options that are neither assumed nor substituted by the acquiring corporation,
nor exercised as of the date of the sale or merger, terminate and cease to be
outstanding as of the date of the transaction.
On November 25, 1997, in connection with the merger of the Company and CADIS
described in Note 2, the Company substituted options covering 117,842 shares
of common stock for options granted under the CADIS option plan and assumed
the rights and obligations of CADIS with respect to the outstanding options.
The options are generally exercisable only when vested, and have similar
vesting terms as options granted under the Aspect Plan.
1996 Outside Directors Stock Option Plan. In 1996, the Company adopted its
1996 Outside Directors Stock Option Plan (the "Directors Plan") and reserved
for issuance a total of 100,000 shares of common stock. The Directors Plan
provides for the automatic grant of nonstatutory stock options to directors of
the Company who are not employees of the Company or any parent or subsidiary
corporation of the Company ("Outside Directors"). Under the Directors Plan,
each Outside Director who had not previously been granted an option under a
stock option plan of the Company was granted automatically on the effective
date of the IPO an option to purchase 5,000 shares of common stock. Each new
Outside Director elected after the date of the IPO is granted automatically on
the date of election an option to purchase 15,000 shares of common stock. Such
options will become vested in three annual installments on the anniversary of
the date of grant. In addition, each Outside Director previously granted an
option under the Directors Plan is granted automatically on the date of each
annual meeting of the stockholders after 1996 an option to purchase 5,000
shares of common stock. Each such subsequent option will become vested in full
on the third anniversary of the date of grant. The exercise price of each
option granted under the Directors Plan is equal to the fair market value of
the common stock on the date of grant, and the term of each option is ten
years. Options granted under the Directors plan are nontransferable.
1997 Nonstatutory Stock Option Plan. In 1997, the Company adopted its 1997
Nonstatutory Stock Option Plan (the "1997 Plan"), which authorizes the board
of directors to grant nonqualified stock options to purchase
45
<PAGE>
ASPECT DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
up to 1,200,000 shares of common stock to eligible participants. The option
exercise price shall be at least 85% of the fair market value of the Company's
common stock on the date of grant of the option. The options are not
transferable. The shares issued under the 1997 Plan are subject to the
Company's right to repurchase all shares not vested to the employee under the
1997 Plan at the participant's original cost. Shares vest ratably over a
48-month period.
Information with respect to activity under the plans is as follows (in
thousands except per share and exercise price amounts):
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS WEIGHTED
OPTIONS ------------------------ AVERAGE
AVAILABLE NUMBER OF PRICE EXERCISE
FOR GRANT SHARES PER SHARE PRICE
--------- --------- -------------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1994........ 555 1,913 $0.05 - $ 3.68 $ 0.25
Options Granted................... (584) 584 $0.70 - $ 3.68 $ 0.86
Exercised......................... -- (412) $0.05 - $ 1.84 $ 0.19
Canceled.......................... 178 (178) $0.05 - $ 1.84 $ 0.27
------ ----- -------------- ------
Balance at December 31, 1995........ 149 1,907 $0.05 - $ 3.68 $ 0.45
Additional Shares Authorized...... 1,700 -- -- --
Options Granted................... (1,055) 1,055 $0.70 - $26.75 $10.57
Exercised......................... -- (639) $0.05 - $ 8.10 $ 0.41
Canceled.......................... 108 (108) $0.20 - $ 8.10 $ 1.48
------ ----- -------------- ------
Balance at December 31, 1996........ 902 2,215 $0.05 - $26.75 $ 5.23
Additional Shares Authorized...... 1,200 -- -- --
Options Granted................... (1,671) 1,671 $3.00 - $44.82 $28.77
Exercised......................... -- (693) $0.05 - $33.75 $ 1.75
Canceled.......................... 172 (172) $0.20 - $43.34 $19.07
------ ----- -------------- ------
Balance at December 31, 1997........ 603 3,021 $0.05 - $44.82 $18.35
====== ===== ============== ======
</TABLE>
At December 31, 1997, options to purchase 2,966,728 shares were exercisable
(2,172,218 shares at December 31, 1996).
The Company has recorded, for financial statement purposes, deferred
compensation expense of $0.7 million for the difference between the exercise
price and the deemed fair value of the common stock with respect to certain
options granted in 1995 and 1996. This amount is being amortized over the
vesting period of the individual options, generally four years. Compensation
expense recognized in fiscal 1997, 1996 and 1995 total approximately $168,000,
$138,000 and $14,000, respectively. At December 31, 1997, deferred
compensation totaled $376,000.
1996 Employee Stock Purchase Plan. In 1996, the Company adopted its 1996
Employee Stock Purchase Plan (the "Purchase Plan"). A total of 600,000 shares
of common stock have been reserved for issuance under the Purchase Plan and
181,448 have been issued as of December 31, 1997. The Purchase Plan permits
eligible employees to purchase common stock at a discount, but only through
payroll deductions, during concurrent 24-month offering periods. Each offering
period is divided into four consecutive six-month purchase periods. The price
at which stock is sold under the Purchase Plan is equal to 85% of the fair
market value of the common stock on the first day of the offering period or
the last day of the purchase period, whichever is lower. The initial offering
period commenced approximately two weeks prior to the effective date of the
IPO.
46
<PAGE>
ASPECT DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK WARRANTS
In 1992, warrants to purchase 55,970 shares of Series A Preferred Stock at
an exercise price of $0.67, were issued in connection with equipment lease
arrangements. In 1993, warrants to purchase an additional 8,333 shares of
Series A Preferred Stock at an exercise price of $1.50 and 29,412 shares of
Series C Preferred Stock at an exercise price of $1.85 were issued in
connection with an extension of the equipment lease arrangements. In 1995,
warrants to purchase an additional 14,286 shares of Series C Preferred Stock
at an exercise price of $3.50 per share were issued in connection with the
further extension of the lease line. All outstanding warrants were exercised
in May 1996 in connection with the Company's IPO. As of December 31, 1997,
there were no outstanding warrants.
OPTION ISSUED AS SETTLEMENT
During 1996, the board of directors approved the issuance of 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 an expense of $90,000 in connection with
this grant. A total of 75,000 of these options were exercised in 1996 for
proceeds of $607,000 and the remaining 25,000 options were exercised in
January 1997 for proceeds of $203,000.
STOCK COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123)
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of FAS 123. The fair value
for these options was estimated at the date of grant using the Black-Scholes
option pricing model for 1996 and 1997, with the following weighted-average
assumptions for 1996 and 1997, respectively: risk-free interest rates of 5.64%
and 6.00%; a dividend yield of 0.0%; volatility factors of the expected market
price of the Company's common stock of .75 and .70; and a weighted-average
expected life of the option of 2.0 and 2.5 years beyond each respective
vesting period. The weighted average fair value of options granted during 1996
and 1997 was $4.56 and $13.97, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
47
<PAGE>
ASPECT DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands except for earnings per
share information):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ----- -------
<S> <C> <C> <C>
Pro forma net income (loss)........................... $(13,157) $ 222 $(2,588)
Pro forma earnings (loss) per share (basic)........... $ (0.95) $0.02 $ (0.29)
</TABLE>
Because FAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until 1998.
The following table summarizes information regarding stock options
outstanding at December 31, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- --------------------
WEIGHTED
SHARES AVERAGE WEIGHTED WEIGHTED
OUTSTANDING AT REMAINING AVERAGE AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES 1997 LIFE PRICE EXERCISABLE PRICE
- --------------- -------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.05-$0.70 631,542 6.96 $ 0.52 631,542 $ 0.52
1.23-7.30 505,766 8.16 6.31 476,304 6.40
7.60-21.30 357,837 8.99 16.65 332,619 17.22
21.75-21.75 605,941 9.63 21.75 605,941 21.75
22.38-33.13 734,722 9.57 33.99 734,722 33.99
$40.00-$44.81 185,600 9.84 42.12 185,600 42.12
--------- ---- ------ --------- ------
3,021,408 8.75 $18.35 2,966,728 $18.56
========= ==== ====== ========= ======
</TABLE>
5. NOTES RECEIVABLE FROM STOCKHOLDERS
In 1994, the Company issued 550,000 shares of common stock to an officer at
a purchase price of $0.20 per share in exchange for a full-recourse promissory
note bearing interest at 6.31% per year. Interest is payable annually, and the
principal is due in 2003.
In 1995, the Company issued 300,000 shares of common stock to an officer, at
a purchase price of $0.70 per share in exchange for a full-recourse promissory
note bearing interest at 6.31% per year. Interest is payable annually, and the
principal is due in 2004.
6. INCOME TAXES
The provision for taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1997 1996 1995
------ ----- ----
<S> <C> <C> <C>
Current:
Federal................................................. $1,027 $ 353 $ 36
State................................................... 466 53 1
Foreign................................................. 100 33 113
------ ----- ----
1,593 439 150
Deferred:
Federal................................................. -- (109) --
------ ----- ----
$1,593 $3330 $150
====== ===== ====
</TABLE>
48
<PAGE>
ASPECT DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's effective income tax provision differs from the Federal
statutory rate of 34% due to the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Expected tax provision (benefit) at federal
statutory rate................................... $ (1,114) $ 413 $ (814)
State taxes (net of federal benefit).............. 308 35 51
Net operating losses not currently usable......... 2,598 722 1,097
Non-deductible acquisition costs.................. 519 -- --
Foreign taxes..................................... 100 -- 113
Research credits.................................. (350) -- (278)
Foreign tax credits............................... -- -- (158)
Other............................................. 239 49 139
Prior year net operating losses not benefitted.... (707) (889) --
--------- ------- -------
Provision for income taxes........................ 1,593 $ 330 $ 150
========= ======= =======
Effective tax rate................................ N.M. 27.16% N.M.
</TABLE>
As of December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $37.0 million, of which approximately $23.7
million relate to CADIS preacquistion net operating losses. The Company also
had federal research and development tax credit carryforwards of approximately
$1.7 million. The federal net operating loss and credit carryforwards will
expire between 2007 and 2012 if not utilized.
Due to a change in ownership in 1991, the utilization of approximately $10.0
million of CADIS net operating loss carryforwards incurred prior to that date
are limited in accordance with the ownership change limitations provided by
the Internal Revenue Code of 1986 and similar state provisions. In addition,
due to the change in ownership which resulted from Aspect Development, Inc.'s
acquisition of CADIS, there is an overall annual limitation of approximately
$3.1 million with respect to the entire $23.7 million of CADIS's
preacquisition net operating losses.
The Company's net operating losses and credits may also be subject to an
annual limitation due to the ownership change provisions should the Company
itself experience an ownership change.
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $13,000 $7,000 $5,300
Research credit carryforwards........................ 1,700 1,100 800
Foreign tax credits.................................. 400 300 300
Other timing differences............................. 2,000 800 500
------- ------ ------
Total deferred tax assets.............................. 17,100 9,200 6,900
Valuation allowance.................................... (17,100) (9,200) (6,900)
------- ------ ------
Net deferred tax assets................................ $ -- $ -- $ --
======= ====== ======
</TABLE>
49
<PAGE>
ASPECT DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The valuation allowance increased by $1.1 million during the year ended
December 31, 1995. Approximately $8.7 million of the valuation allowance
relates to net operating losses and other tax attributes acquired in the CADIS
acquisition (see Note 2) which have not been benefited. Approximately $7.7
million of the valuation relates to benefits of stock option deductions which,
if recognized, will be allocated directly to shareholder's equity.
7. JOINT VENTURE
The Company entered into a Limited Liability Company ("LLC") Agreement with
CMP Media Inc. ("CMP") dated April 4, 1997. The LLC was established to provide
news, promotional materials, literature, product data, reference material,
application information tutorials, seminars, product and software
demonstrations and other services through the Internet and corporate intranets
to the electronic engineering community in North America. Currently, the
ownership of the LLC is shared equally between the Company and CMP, each
contributing $1.0 million to establish the LLC. In fiscal 1997, the Company's
share of losses in the joint venture amounted to $0.6 million. This amount was
charged to Interest and other expense.
8. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company develops, markets and supports enterprise client/server software
and reference data products that enable manufacturers to improve product
development and business processes through component and supplier management.
The Company operates in a single industry segment.
The Company's foreign operations consist of sales, marketing, and support
activities in subsidiaries and distributors throughout the world and
development and support activities in India. The Company's export sales were
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net Revenues from unaffiliated customers:
Europe.................................................. $ 976 $2,398 $2,189
Asia.................................................... 1,046 229 748
------ ------ ------
Total export sales.................................... $2,022 $2,627 $2,937
====== ====== ======
</TABLE>
50
<PAGE>
ASPECT DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Operating income generated by the Company and their corresponding
identifiable assets classified by major geographic area were as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net Revenues from unaffiliated customers:
North America....................................... $41,431 $24,282 $12,626
Europe.............................................. 7,452 5,947 2,189
Other international operations...................... 1,046 229 748
------- ------- -------
Total net revenues.............................. $49,929 $30,458 $15,563
======= ======= =======
Income (loss) from operations:
North America....................................... $(9,328) $(4,520) $(4,811)
Europe.............................................. 3,520 4,789 1,823
Other international operations...................... 129 (650) 408
------- ------- -------
Loss from operations ............................... $(5,679) $ (381) $(2,580)
======= ======= =======
Identifiable assets:
North America....................................... $74,144 $68,896 $13,396
Europe.............................................. 5,340 3,425 587
Other international operations...................... 2,236 952 176
------- ------- -------
Total identifiable assets....................... $81,720 $73,273 $14,159
======= ======= =======
</TABLE>
9. 401(K) PLAN
Under the Company's 401(k) Plan, an employee may defer and invest up to 20%
of his or her compensation, subject to an annual limitation. As of December
31, 1997, the Company had not elected to make any matching contributions under
the Plan.
10. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT
In early 1998, the Company signed three new leases commencing between
February and April 1998, for new office facilities. Future minimum lease
payments under the lease are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASE
---------
<S> <C>
Year ending December 31,
1998............................................................. $ 400
1999............................................................. 460
2000............................................................. 464
2001............................................................. 290
2002............................................................. 41
------
Total minimum lease payments....................................... $1,655
======
</TABLE>
Additionally, in February 1998, the Company executed a three-year sublease
agreement which commences in April 1998. Under this agreement, the Company
will receive annual rental income of approximately $0.5 million.
51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
Certain information required by Part III is incorporated by reference to the
Company's definitive proxy statement to be filed in connection with its 1998
Annual Meeting of Stockholders (the "1998 Proxy Statement"), which the Company
intends to file not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company who are elected by and
serve at the discretion of the Board of Directors, and their ages as of
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ------------------------------------------
<C> <C> <S>
Dr. Romesh Wadhwani........... 50 Chairman of the Board and Chief Executive
Officer
Joseph A. Prang............... 42 President, Chief Operating Officer and
Director
David S. Dury................. 49 Vice President and Chief Financial Officer
James C. Althoff.............. 44 Executive Vice President and Chief
Technical Officer
Philip G. Nutburn............. 48 Vice President, European Operations
David Horne................... 45 Vice President, Marketing
Craig Palmer.................. 37 Vice President, Strategic Sourcing Group
Kenneth B. Belanger........... 42 Vice President, Content Business
Development
William Zierolf............... 39 Vice President and General Manager,
Knowledge Services
Patrick Quirk................. 41 Vice President, Americas and Asia/Pacific
Sales
Steven Goldby................. 57 Director
Dennis G. Sisco............... 51 Director
Mark A. Stevens............... 38 Director
</TABLE>
Dr. Wadhwani founded the Company in 1990 and has served as Chairman of the
Board of Directors and Chief Executive Officer of the Company since January
1991. From January 1982 to March 1989, Dr. Wadhwani served as Chief Executive
Officer of Cimflex Teknowledge, Corp. ("Cimflex"), a provider of factory
automation products and systems. Dr. Wadhwani continued to serve as Chairman
of the Board of Cimflex until July 1990. From 1973 to 1981, Dr. Wadhwani was
Chief Executive Officer of Compuguard Corporation, a provider of building
automation systems. Dr. Wadhwani received his M.S. and Ph.D. in Electrical
Engineering from Carnegie-Mellon University.
Mr. Prang joined the Company as President and Chief Operating Officer in May
1994. Mr. Prang has also served as a Director of the Company since October
1995. Prior to joining the Company from January 1986 to May 1994, he served in
numerous capacities at Cadence Design Systems, Inc. ("Cadence"), an electronic
design automation software developer, including Vice President of Marketing,
Vice President and General Manager of System Design Division and President of
Systems Division. From June 1979 to January 1986, Mr. Prang served as Vice
President of GenRad, Inc. ("GenRad"), a company specializing in simulation and
test systems. Mr. Prang holds a B.S. in engineering technology and an M.S.M.
from Purdue University. Mr. Prang is also a director of EPIC Design
Technology, Inc., an electronic design automation software developer.
Mr. Dury joined the Company in April 1996 as Vice President and Chief
Financial Officer. Prior to joining the Company, Mr. Dury served as Chief
Financial Officer of NetFrame Systems, Inc., a network server manufacturer,
beginning in March 1992. From August 1991 to February 1992, he served as
Senior Vice President and Chief Financial Officer of Maxtor Corporation, a
disk drive manufacturer. From December 1989 to August 1991, he served as
Executive Vice President and Chief Financial Officer of Boole & Babbage, a
software
52
<PAGE>
developer. Previously, Mr. Dury was employed by Priam Corporation from
February 1983 to February 1989, serving first as Vice President and Chief
Financial Officer, and then as President and Chief Operating Officer. Mr. Dury
had several financial and operating management positions at Intel corporation
from 1979 to 1983. Mr. Dury holds a B.A. in psychology from Duke University
and an M.B.A. from Cornell University.
Mr. Althoff joined the Company as Vice President, Software Operations in
December 1991 and was appointed Senior Vice President and Chief Technical
Officer in January 1997. Prior to joining the Company, from October 1981 to
December 1991, Mr. Althoff served as Vice President of Engineering and General
Manager of the Japan Business Unit of VLSI Technology/Compass Design &
Automation, as ASIC developer. Mr. Althoff holds a B.S. in mathematics from
Florida State University and an M.S. in computer science from California
Institute of Technology.
Mr. Nutburn joined the Company as Director of European Operations in
November 1992. In January 1997, he was appointed as Vice President, European
Operations. Prior to joining the Company, Mr. Nutburn worked as a consultant
to the Company beginning in July 1992. Prior to that time, he served as
director of worldwide sales for the electronics design automation division of
GenRad from June 1991 to June 1992. Prior to that time Mr. Nutburn held
various management positions at Silicon Valley Research, Inc. (formerly,
Silvar-Lisco) and a division of Schlumberger Technologies, Inc. Mr. Nutburn
holds a B.S. in electrical engineering from the University of Northumberland.
Mr. Horne joined the Company in September 1996 as Vice President of
Marketing. Before joining Aspect, Mr. Horne was Vice President of Marketing
for Concentra Corporation from July 1994 to September 1996. From September
1982 to June 1994 he held a variety of sales and marketing management
positions at Computervision Corporation, most recently Director of Worldwide
Marketing operations. Mr. Horne holds a B.S. form the University of
Massachusetts and an M.B.A. from Northeastern University.
Mr. Palmer joined the Company as Vice President of Marketing in September
1994. In September 1996 he became Vice President, Online Services. In January
1998 he became Vice President, Strategic Sourcing Group. From February 1989 to
September 1994, Mr. Palmer worked at Cadence, most recently as Director of
Marketing from January 1993 to August 1994. Mr. Palmer also worked at Hewlett-
Packard Company from February 1982 to February 1989, where he held several
marketing management positions. Mr. Palmer holds a B.S. in electrical
engineering from the University of Wisconsin.
Mr. Belanger joined the Company as Vice President, Data Operations in March
1992. Prior to joining the Company, Mr. Belanger served as Director of
Development at ExpertViews, Inc., a component information systems provider,
from September 1989 to October 1991. Mr. Belanger holds a B.S. in engineering
technology from the University of Massachusetts.
Mr. Zierolf joined the Company as Vice President and General Manager,
Knowledge Services in March, 1997. Prior to joining the Company, from October
1994 to March 1997 Mr. Zierolf served as President, Chief Executive Officer
and Director of Teltech Resource Network, Inc., an information services and
software provider. From February 1982 to October 1994 he was Vice President of
Venture Development for Dun and Bradstreet. Mr. Zierolf holds a B.S. Degree in
Business Administration and Marketing and a B.S. Degree in Communication Arts
from Wittenberg University in Springfield, OH.
Mr. Quirk joined the Company in May 1997 as Vice President of Americas and
Asia/Pacific Sales. Prior to joining the Company from July 1995 to May 1997,
he served as Vice President-Worldwide Sales at Connect, Inc., an electronic
commerce software company. From June 1993 to July 1995, Mr. Quirk served as
Vice President-Americas at Avalon Software, Inc., an enterprise resource
planning software company. From April 1989 to May 1993, he served as Group
Sales Manager and National Account Manager at Oracle Corporation. From January
1983 to April 1989, Mr. Quirk held various sales management positions at
Control Data Corporation. Mr. Quirk holds a B.S. in industrial engineering
from the University of Wisconsin-Madison.
53
<PAGE>
Mr. Goldby was appointed to the Company's Board of Directors in March 1993.
Mr. Goldby is the Chief Executive Officer of MDL Information Systems, Inc., an
enterprise software company, where he has been employed since January 1982.
Mr. Sisco was appointed to the Company's Board of Directors in September
1994. Mr. Sisco has been a Partner in Behrman Capital, a private equity
investment firm, since January 1998. Mr. Sisco was an Executive Vice President
at Cognizant Corporation, an information services company, from February 1995
until February 1997. Prior to that time, beginning in July 1993, Mr. Sisco was
a Senior Vice President at the Dun & Bradstreet Corporation. Mr. Sisco was
also the President of Cognizant Enterprises, a venture capital firm, a
capacity in which he has served from December 1988 until February 1997. Mr.
Sisco also serves as a director of TSI Software International, Inc., a
software products firm, Oasis Healthcare Systems, a software firm specializing
in clinical information systems, and Gartner Group, Inc., a market research
firm.
Mr. Stevens was appointed to the Company's Board of Directors in March 1993.
Mr. Stevens has been a General Partner of Sequoia Capital, a venture capital
firm, since March 1993. Prior to that time, beginning in July 1989, Mr.
Stevens was an associate at Sequoia Capital. Mr. Stevens is a director of
several privately held companies. Mr. Stevens holds a B.S. in electrical
engineering, a B.A. in economics and an M.S. in computer engineering from the
University of Southern California and an M.B.A. from the Harvard Business
School.
The information required by this item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to information set forth in the 1998 Proxy Statement under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is incorporated by reference to
the information set forth in the 1998 Proxy Statement under the caption
"Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the information set forth in the
1998 Proxy Statement under the caption "Principal Stockholders and Share
Ownership by Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is
incorporated by reference to the information set forth in the 1998 Proxy
Statement under the caption "Certain Transactions."
54
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements and Financial Statement Schedules -- See Index
to Consolidated Financial Statements at Item 8 on Page 33 of this
Report.
2. Exhibits. The exhibits listed on the accompanying Exhibit Index are
filed as part of, or are incorporated by reference into, this
report.
(b)Reports on form 8-K during the quarter ended December 31, 1997:
On December 10, 1997, the Company filed a Report on Form 8-K,
pursuant to Item 2 thereof, reporting that it had acquired CADIS
pursuant to the Agreement and Plan of Reorganization dated November 18,
1997 among the Company, CADIS and a wholly-owned subsidiary of the
Company.
55
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- --------------------------------------------------------------------
<C> <S>
3.1(1) Restated Certificate of Incorporation.
3.2(1) Form of Restated Certificate of Incorporation to be filed with the
Delaware Secretary of State following the closing of this offering.
3.3(1) By-Laws.
4.1(1) Restated Rights Agreement dated December 3, 1993.
*10.1(1) Amended and Restated 1992 Stock Option Plan and forms of agreements
thereunder.
*10.2(1) 1996 Employee Stock Purchase Plan.
*10.3(1) 1996 Outside Directors Stock Option Plan and forms of agreement
thereunder.
10.4(1) Sublease Agreement between the Company and Insignia Solutions, Inc.
dated December 9, 1995.
10.5(1) Agreement of Lease between the Company and Mareld Company, Inc.,
dated June 2, 1994.
10.6(1) Agreement of Lease between Aspect Development India and M.S.
Janardhan Corporation, dated September 18, 1995.
10.7(1) Agreement of Lease between Aspect-DCM Pvt. Ltd. and the co-owners of
Leo Shopping Complex, dated February 10, 1994.
10.8(1) Master Lease Agreement between the Company and Comdisco, Inc., dated
July 2, 1992.
10.9(1) Business Loan Agreement between the Company and Silicon Valley Bank,
dated November 14, 1995.
10.10(2) Agreement and Plan of Reorganization dated November 18, 1997 among
Aspect Development, Inc., Hawaii Acquisition Corporation and CADIS,
Inc.
10.11(3) Amendment to Agreement and Plan of Reorganization dated November 21,
1997 among Aspect Development, Inc., Hawaii Acquisition Corporation
and CADIS, Inc.
21.1 List of Subsidiaries. (SEE PAGE 57)
23.1 Consent of Ernst & Young LLP, Independent Auditors. (SEE PAGE 58)
23.2 Consent of Arthur Andersen LLP, Independent Auditors. (SEE PAGE 59)
27.1 Financial Data Schedule.
</TABLE>
- --------
* Consitutes a management contract or compensatory plan required to be filed
pursuant to Item 13(a) of Form 10-KSB.
(1) Incorporated by reference to identically numbered exhibit to the
Registrant's Registration Statement on Form SB-2 (file no. 333-3840-LA)
filed on April 19, 1996
(2) Incorporated by reference to Exhibit 2.1 to Registrant's Form 8-K filed
December 10, 1997
(3) Incorporated by reference to Exhibit 2.2 to Registrant's Form 8-K filed
December 10, 1997
56
<PAGE>
EXHIBIT 21.1
ASPECT DEVELOPMENT, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OR COUNTRY OF
SUBSIDIARY INCORPORATION
---------- ------------------------
<S> <C>
Aspect Development Europe Limited..................... United Kingdom
Aspect Development India Private Limited.............. India
CADIS, Inc............................................ Delaware
Aspect Development K.K................................ Japan
</TABLE>
57
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-36117 and Form S-8 No. 333-43139) pertaining to the 1996
Employee Stock Purchase Plan, the 1997 Nonstatutory Stock Option Plan and the
options granted under the CADIS, Inc. 1991 Stock Option Plan and assumed by
Aspect Development, Inc. of our report dated January 26, 1998, with respect to
the consolidated financial statements of Aspect Development, Inc. included in
the Annual Report (Form 10-KSB) for the year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 31, 1998
58
<PAGE>
EXHIBIT 23.2
CONSENT OF ARTHUR ANDERSEN LLP, INDEPENDENT AUDITORS
As independent public accountants, we hereby consent to the use of our
report dated January 26, 1998 included in Aspect Development, Inc.'s Form 10-
KSB for the year ended December 31, 1997 which is incorporated by reference
into Form S-8 (file no. 333-36117) and Form S-8 (file no. 333-43139).
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
March 31, 1998
59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this 30th day
of March, 1998
Aspect Development, Inc.
/s/ Romesh Wadhwani
By___________________________________
ROMESH WADHWANI CHIARMAN OF THE
BOARD OF DIRECTORS AND CHIEF
EXECUTIVE OFFICER (PRINCIPAL
EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated:
SIGNATURES TITLE DATE
/s/ Romesh Wadhwani Chairman of the March 30, 1997
- ------------------------------------- Board of Directors
ROMESH WADHWANI and ChiefExecutive
Officer (Principal
Executive Officer)
/s/ Joseph Prang President, Chief March 30, 1997
- ------------------------------------- Operating Officer
JOSEPH PRANG and Director
/s/ David S. Dury Vice President and March 30, 1997
- ------------------------------------- Chief Financial
DAVID S. DURY Officer(Principal
Financial and
Accounting Officer)
/s/ Mark A. Stevens Director March 30, 1997
- -------------------------------------
MARK A. STEVENS
/s/ Dennis Sisco Director March 30, 1997
- -------------------------------------
DENNIS SISCO
/s/ Steven Goldby Director March 30, 1997
- -------------------------------------
STEVEN GOLDBY
60
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1997 AND 1996 AND THE RELATED
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS THEN ENDED AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 14,550 16,683
<SECURITIES> 40,506 41,148
<RECEIVABLES> 13,366 9,493
<ALLOWANCES> 295 250
<INVENTORY> 0 0
<CURRENT-ASSETS> 71,656 68,602
<PP&E> 14,447 7,435
<DEPRECIATION> 5,676 3,134
<TOTAL-ASSETS> 81,720 73,273
<CURRENT-LIABILITIES> 23,135 12,162
<BONDS> 0 0
0 1,986
0 0
<COMMON> 81,627 76,729
<OTHER-SE> (23,053) (17,983)
<TOTAL-LIABILITY-AND-EQUITY> 81,720 73,273
<SALES> 49,929 30,458
<TOTAL-REVENUES> 49,929 30,458
<CGS> 346 612
<TOTAL-COSTS> 8,049 4,507
<OTHER-EXPENSES> 47,559 26,332
<LOSS-PROVISION> 52 281
<INTEREST-EXPENSE> 53 119
<INCOME-PRETAX> (3,278) 1,215
<INCOME-TAX> 1,593 330
<INCOME-CONTINUING> (4,871) 885
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,871) 885
<EPS-PRIMARY> (0.35) .07
<EPS-DILUTED> (0.35) .06
</TABLE>
