<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-20749
ASPECT DEVELOPMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1622857
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 Charleston Road
Mountain View, California 94043
(Address of principal executive offices, including zip code)
(650) 428-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock as of July 30,
1999 was 28,560,535.
<PAGE>
ASPECT DEVELOPMENT, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
as of June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
for the three months and six months ended
June 30, 1999 and June 30, 1998 4
Condensed Consolidated Statements of Cash Flows
for the six months ended
June 30, 1999 and June 30, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matter to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
<TABLE>
<CAPTION>
Aspect Development, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
June 30, December 31,
1999 1998
------------- --------------
Current assets: (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 20,570 $ 7,877
Short-term investments 49,982 73,596
Accounts receivable, net 16,223 19,509
Prepaid expenses and other current assets 3,218 4,397
------------- --------------
Total current assets 89,993 105,379
Property and equipment, net 8,756 9,121
Other assets, net 1,331 282
------------- --------------
Total assets $ 100,080 $ 114,782
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,573 $ 2,483
Accrued bonuses and commissions 5,169 5,233
Income taxes payable 2,274 2,946
Other accrued liabilities 5,520 5,766
Deferred revenue 12,434 9,497
Capital lease obligations-current portion -- 17
------------- --------------
Total current liabilities 27,970 25,942
Stockholders' equity:
Common stock 77,508 95,068
Deferred compensation (126) (210)
Accumulated components of comprehensive income 107 12
Accumulated deficit (5,379) (6,031)
------------- --------------
Total stockholders' equity 72,110 88,840
------------- --------------
Total liabilities and stockholders' equity $ 100,080 $ 114,782
============= ==============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
Aspect Development, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------------------ -----------------------------------
1999 1998 1999 1998
----------------- ------------------ ----------------- -----------------
Revenues
<S> <C> <C> <C> <C>
Licenses $ 11,058 $ 11,408 $ 15,990 $ 21,617
Subscription and maintenance 5,890 4,552 11,295 8,571
Service and other 4,192 4,447 8,230 7,894
----------------- ------------------ ----------------- -----------------
Total revenues 21,140 20,407 35,515 38,082
----------------- ------------------ ----------------- -----------------
Cost of revenues
Licenses 164 255 325 322
Subscription and maintenance 1,237 991 2,289 1,676
Service and other 2,301 1,733 4,067 3,443
----------------- ------------------ ----------------- -----------------
Total cost of revenues 3,702 2,979 6,681 5,441
----------------- ------------------ ----------------- -----------------
Gross profit 17,438 17,428 28,834 32,641
Operating expenses:
Research and development 5,017 3,881 9,637 7,454
Sales and marketing 9,731 8,131 17,714 15,685
General and administrative 2,553 1,827 4,714 3,479
----------------- ------------------ ----------------- -----------------
Total operating expenses 17,301 13,839 32,065 26,618
----------------- ------------------ ----------------- -----------------
Operating income (loss) 137 3,589 (3,231) 6,023
Interest and other income, net 281 685 4,087 (1) 1,190
----------------- ------------------ ----------------- -----------------
Income before income taxes 418 4,274 856 7,213
Provision for income taxes 92 939 204 1,589
----------------- ------------------ ----------------- -----------------
Net income $ 326 $ 3,335 $ 652 $ 5,624
================= ================== ================= =================
Basic earnings per share $ 0.01 $ 0.11 $ 0.02 $ 0.19
================= ================== ================= =================
Diluted earnings per share $ 0.01 $ 0.10 $ 0.02 $ 0.17
================= ================== ================= =================
Shares used in computing
basic earnings per share 28,810 29,856 29,886 29,486
================= ================== ================= =================
Shares used in computing
diluted earnings per share 30,909 33,164 32,188 32,852
================= ================== ================= =================
</TABLE>
(1) Includes $3 million gain from sale of partial interest in joint venture.
See accompanying notes to Condensed Consolidated Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
Aspect Development, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six months ended June 30,
1999 1998
-------------- --------------
Cash flows from operating activities
<S> <C> <C>
Net income $ 652 $ 5,624
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,455 2,251
Loss in joint ventures (554) (297)
Changes in assets and liabilities:
Accounts receivable 3,286 (2,881)
Prepaid expenses and other current assets (400) (605)
Accounts payable 90 55
Accrued bonuses and commissions (64) 1,467
Accrued merger costs --- (2,310)
Income taxes payable (672) 1,220
Other accrued liabilities (6) 1,742
Deferred revenue 2,937 (2,559)
Third-party royalties and fees 86 283
-------------- --------------
Net cash provided by operating activities 6,810 3,990
-------------- --------------
Cash flows from investing activities
Purchases of property and equipment (1,064) (2,626)
Purchases of short-term investments (100,279) (60,249)
Maturities of short-term investments 123,839 46,306
Employee note receivable 220 151
Other assets 511 281
-------------- --------------
Net cash provided by (used in) investing activities 23,227 (16,137)
-------------- --------------
Cash flows from financing activities
Principal payments on capital lease obligations (17) (194)
Stockholders note receivable --- 110
Buy back of common stock (20,636) ---
Sale of common stock 3,160 5,152
-------------- --------------
Net cash provided by (used in) financing activities (17,493) 5,068
-------------- --------------
Net increase (decrease) in cash and cash equivalents 12,544 (7,079)
Exchange rate impact on cash 149 (411)
Cash and cash equivalents at beginning of period 7,877 14,550
-------------- --------------
Cash and cash equivalents at end of period $ 20,570 $ 7,060
============== ==============
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ --- $ 11
============== ==============
Income taxes paid $ 1,247 $ 16
============== ==============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
5
<PAGE>
ASPECT DEVELOPMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed consolidated financial statements included herein
have been prepared by Aspect Development, Inc. ("Aspect" or "the Company"). In
the opinion of management, such financial statements include all normal
recurring adjustments and accruals which are necessary to fairly state the
Company's consolidated financial position, results of operations and cash flows
for the periods presented. These financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto as included in the Company's Form 10-K for the fiscal year ended
December 31, 1998. The consolidated results of operations for the quarter and
six months ended June 30, 1999 are not necessarily indicative of the results to
be expected for any subsequent interim or annual period.
The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. Investments in joint ventures in
which the Company has a 50% or less ownership interest are accounted for by the
equity method. Under such method, the Company's share of net earnings or losses
is included in interest and other income, net, in the condensed consolidated
statements of operations.
Assets and liabilities of the Company and its wholly-owned foreign
subsidiaries are translated from the local currency to United States dollars at
period-end exchange rates. Income and expense items are translated on a monthly
basis at the average rates of exchange prevailing during the month. The
adjustment resulting from translating the assets and liabilities of the Company
and its foreign subsidiaries is reflected in accumulated components of
comprehensive income within stockholders' equity. Foreign currency transaction
gains and losses are included in the results of operations and were immaterial
for all periods presented.
2. 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 has occurred, and if vendor specific
objective evidence exists to allocate the fee from the arrangement between
delivered and undelivered elements, and collection of the resulting receivables
is deemed probable. Product returns and allowances (which were not significant
through June 30, 1999) are estimated and provided for at the time of sale.
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 one year.
Service and other revenues are comprised of data services, process
consulting and training fees. Revenues from these items are recognized upon
completion of the work performed.
6
<PAGE>
3. Comprehensive Income
Comprehensive income, net of related tax, for the quarter and six months
ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
(in thousands)
Net income $ 326 $3,335 $ 652 $5,624
Unrealized loss on investments (54) - (54) -
Foreign currency translation adjustment 28 (293) 149 (411)
--------------- -------------- --------------- --------------
Comprehensive income $ 300 $3,042 $ 747 $5,213
=============== ============== =============== ==============
</TABLE>
4. Earnings Per Share
Basic earnings per share is calculated using the weighted-average number
of common shares outstanding during the period. Diluted earnings per share is
computed on the basis of the weighted-average number of common shares
outstanding plus the dilutive effect of outstanding stock options and the
employee stock purchase plan using the "treasury stock" method.
The following is a reconciliation of the weighted-average common shares
used to calculate basic earnings per share to the weighted-average common and
potential common shares used to calculate diluted earnings per share for the
three and six months ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Diluted:
Shares used in computing basic earnings per share 28,810 29,856 29,886 29,486
Common stock equivalents (treasury stock method) 2,099 3,308 2,302 3,366
-------------- -------------- -------------- --------------
Shares used in computing diluted earnings per share 30,909 33,164 32,188 32,852
============== ============== ============== ==============
</TABLE>
7
<PAGE>
5. ChipCenter LLC (formerly EDTN) Joint Venture
The Company entered into a limited liability company joint venture
agreement (the "joint venture") with CMP Media Inc. ("CMP"), dated April 4,
1997. The joint venture, ChipCenter LLC (formerly EDTN), 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 electronic systems designers and purchasing managers. Initially, the
ownership of the joint venture was shared equally between the Company and CMP.
In March 1999, both the Company and CMP sold approximately one-third
of their respective interests in the joint venture to a third party. In
connection with this sale, the Company recorded a $3 million gain in interest
and other income, net.
In the three months ended June 30, 1999 and 1998, the Company's share of
losses in the joint venture totaled $426,000 and $138,000, respectively. The
Company's share of losses for the six months ended June 30, 1999 and 1998
totaled $554,000 and $297,000, respectively. This amount was charged to
interest and other income, net.
8
<PAGE>
6. Industry Segment Information
The Company is organized based upon the nature of the products and
services it offers. Under this organizational structure, the Company operates in
three fundamental business segments: licenses, subscriptions and maintenance,
and service. The information in the following tables is derived directly from
the Company's internal financial reporting used for corporate management
purposes. The Company evaluates its segments' performance based on several
factors, including revenue, gross profit, and net income before taxes.
Unallocated expenses include corporate and other costs not allocated to business
segments for management reporting purposes.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
----------------- ---------------- ----------------- ----------------
Net revenues from unaffiliated customers
(in thousands):
<S> <C> <C> <C> <C>
Licenses $ 11,058 $ 11,408 $ 15,990 $ 21,617
Subscriptions and maintenance 5,890 4,552 11,295 8,571
Service 4,192 4,447 8,230 7,894
----------------- ---------------- ----------------- ----------------
Total revenues $ 21,140 $ 20,407 $ 35,515 $ 38,082
================= ================ ================= ================
Income before income taxes (in thousands):
Licenses $ 10,894 $ 11,153 $ 15,665 $ 21,295
Subscriptions and maintenance 4,653 3,561 9,006 6,895
Service 1,891 2,714 4,163 4,451
----------------- ---------------- ----------------- ----------------
Gross profit $ 17,438 $ 17,428 $ 28,834 $ 32,641
================= ================ ================= ================
Unallocated expense $ 17,301 $ 13,839 $ 32,065 $ 26,618
Interest and other income, net 281 685 4,087 1,190
----------------- ---------------- ----------------- ----------------
Income before income taxes $ 418 $ 4,274 $ 856 $ 7,213
================= ================ ================= ================
</TABLE>
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This report contains forward-looking statements. These statements
relate to future events or Aspect's future financial performance. In some case,
forward-looking statements can be identified by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of such terms and other
comparable terminology. These statements reflect only management's current
expectations. Actual events or results may differ materially from any forward-
looking statements. Factors that should cause or contribute to such differences
are discussed below and under the caption "Risk Factors." Aspect does not
undertake any obligations to update any forward-looking statements contained in
this report to reflect any future events or developments.
RESULTS OF OPERATIONS
Revenues
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
and web-enabled software products. Subscription and maintenance revenues are
comprised principally of annual subscription and maintenance fees for the
Company's products, including its Aspect eXplore decision support software and
its family of reference content databases. 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
American Institute of Certified Public Accountants (the "AICPA") Statement of
Position ("SOP") 97-2 on Software Revenue Recognition. License revenues are
recognized as revenue after execution of a license agreement or receipt of a
definitive purchase order, and shipment of the product has occurred, and if
vendor specific objective evidence exists to allocate the fee from the
arrangement between delivered and undelivered elements, and collection of the
resulting receivables is deemed probable. For arrangements involving multiple
products and services, the entire arrangement is allocated among the elements
based on each element's relative value. Product returns and sales allowances
(which were not significant through June 30, 1999) 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 12 months.
Service revenues from training and consulting activities 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.
U.S. and international sales accounted for approximately 88% and 12% of
the Company's total revenue for the three months ended June 30, 1999,
respectively, compared to 83% and 17% for the three months ended June 30, 1998,
respectively. U.S. and international sales accounted for approximately 87% and
13% of the Company's total revenues for the six months ended June 30, 1999,
respectively, compared to 82% and 18% for the six months ended June 30, 1998,
respectively.
10
<PAGE>
License Revenues. License revenues for the three months ended June 30, 1999
was $11,058,000 compared to $11,408,000 for the three months ended June 30,
1998, and was $15,990,000 for the six months ended June 30, 1999 compared to
$21,617,000 for the six months ended June 30, 1998. This significant decrease in
license revenue was primarily due to unexpected delays in the signing of certain
major contracts which have subsequently been closed. Recently there was a trend
toward manufacturers buying larger dollar value enterprise-wide solutions from
Aspect, leading to complex and sometimes unpredictable internal approval cycles.
Aspect is now focusing on significantly adding to its sales force, and building
the sales pipeline of average and middle size prospective contracts, to avoid
reliance in the future on a few large contracts in any given quarter.
Subscription and Maintenance Revenues. Subscription and maintenance
revenues increased from $4,552,000 for the three months ended June 30, 1998 to
$5,890,000 for the three months ended June 30, 1999, and increased from
$8,571,000 for the six months ended June 30, 1998 to $11,295,000 for the six
months ended June 30, 1999. This increase was due primarily to renewals of
subscription and maintenance agreements from the increased installed base of
customers.
Service and Other Revenues. Service and other revenues for the three
months ended June 30, 1999 was $4,192,000 compared to $4,447,000 for the three
months ended June 30, 1998, and increased from $7,894,000 for the six months
ended June 30, 1998 to $8,230,000 for the six months ended June 30, 1999. This
increase was due primarily to an increase in the number and size of consulting
contracts in 1999.
Cost of Revenues
Cost of Licenses. Cost of licenses consist primarily of license fees and
royalties paid to third-party vendors, primarily Oracle, and shipping expenses.
Cost of licenses for the three months ended June 30, 1999 was $164,000 compared
to $255,000 for the three months ended June 30, 1998, representing 1.5% and 2.2%
of license revenues for the three months ended June 30, 1999 and 1998,
respectively. Cost of licenses for the six months ended June 30, 1999 was
$325,000 compared to $322,000 for the three months ended June 30, 1998,
representing 2.0% and 1.5% of license revenues for the six months ended June 30,
1999 and 1998 respectively.
Cost of Subscription and Maintenance Revenues. Cost of subscription and
maintenance revenues consist primarily of personnel-related costs incurred in
providing centralized telephone support and related technical support to
customers. Cost of subscription and maintenance revenues increased from $991,000
for the three months ended June 30, 1998 to $1,237,000 for the three months
ended June 30, 1999, representing 21.8% and 21.0% of subscription and
maintenance revenues for the three months ended June 30, 1998 and 1999,
respectively. Cost of subscription and maintenance revenues increased from
$1,676,000 for the six months ended June 30, 1998 to $2,289,000 for the six
months ended June 30, 1999, representing 19.6% and 20.2% of subscription and
maintenance revenues for the six months ended June 30, 1998 and 1999,
respectively. The increase in absolute dollars and as a percentage of related
revenues in 1999 is primarily due to the Company's high level of interest in
continued customer support and the resulting increase in facilities and
employees for this segment.
Cost of Service and Other Revenues. Cost of service and other
revenues consist primarily of personnel-related costs incurred in providing
consulting services, development services and training to customers. Cost of
service and other revenues increased from $1,733,000 for the three months ended
June 30, 1998 to $2,301,000 for the three months ended June 30, 1999,
representing 39.0% and 54.9% of service and other revenues for the three months
ended June 30, 1998 and 1999, respectively. Cost of service and other revenues
increased from $3,443,000 for the six months ended June 30, 1998 to $4,067,000
for the six months ended June 30, 1999, representing 43.6% and 49.4% of service
and other revenues for the six months ended June 30, 1998 and 1999,
respectively. The increase in absolute dollars is due primarily to an increase
in the number and size of consulting contracts.
11
<PAGE>
Operating Expenses
Research and Development. Research and development expenses consist
primarily of engineering personnel costs. Research and development expenses
increased from $3,881,000 for the three months ended June 30, 1998 to $5,017,000
for the three months ended June 30, 1999, representing 19.0% and 23.7% of total
revenues for the three months ended June 30, 1998 and 1999, respectively.
Research and development expenses increased from $7,454,000 for the six months
ended June 30, 1998 to $9,637,000 for the six months ended June 30, 1999,
representing 19.6% and 27.1% of total revenues for the six months ended June 30,
1998 and 1999, respectively. The increase in research and development expenses
as a percent of total revenues was due to a combination of increased development
staffing and lower total revenues. The increase in research and development
expenses in absolute dollars was due to increased development staffing. The
Company expects research and development expenses to increase in absolute
dollars while remaining approximately level or decreasing as a percent of total
revenues.
Sales and Marketing. Sales and marketing expenses include expenditures for
salaries, commissions, advertising, travel, trade shows, public relations and
other selling and marketing-related expenses. Sales and marketing expenses
increased from $8,131,000 for the three months ended June 30, 1998 to $9,731,000
for the three months ended June 30, 1999, representing 39.8% and 46.0% of total
revenues for the three months ended June 30, 1998 and 1999, respectively. Sales
and marketing expenses increased from $15,685,000 for the six months ended June
30, 1998 to $17,714,000 for the six months ended June 30, 1999, representing
41.2% and 49.9% of total revenues for the six months ended June 30, 1998 and
1999, respectively. The increase in sales and marketing expenses in absolute
dollars was 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
increase in cost as a percent of total revenues was due to the Company's lower
total revenues. The Company believes that such expenses will increase in
absolute dollars 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, legal and accounting expenses and other professional services.
General and administrative expenses increased from $1,827,000 for the three
months ended June 30, 1998 to $2,553,000 for the three months ended June 30,
1999, representing 9.0% and 12.1% of total revenues for the three months ended
June 30, 1998 and 1999, respectively. General and administrative expenses
increased from $3,479,000 for the six months ended June 30, 1998 to $4,714,000
for the six months ended June 30, 1999, representing 9.1% and 13.3% of total
revenues for the six months ended June 30, 1998 and 1999, respectively. The
increase in absolute dollars of general and administrative expenses was
primarily the result of increased staffing and associated expenses necessary to
manage and support the Company's growth. The increase in cost as a percent of
total revenues was due to the expense increase in absolute dollars and to the
Company's lower total revenues. The Company expects general and administrative
expenses to increase in absolute dollars while remaining approximately level or
decreasing as a percent of total revenues.
12
<PAGE>
Interest and Other Income, net
Interest and other income, net, represents interest income earned on the
Company's cash, cash equivalents and short-term investments, foreign exchange
gains and losses, the Company's share of losses of the ChipCenter joint venture
and a one-time gain of approximately $3 million from the sale of a partial
interest in the ChipCenter joint venture. Interest and other income, net
decreased from $685,000 for the three months ended June 30, 1998 to $281,000 for
the three months ended June 30, 1999, representing 3.4% and 1.3% of total
revenues for the three months ended June 30, 1998 and 1999, respectively. The
decrease is due to the repurchase of the Company's common stock, and larger
losses realized from the ChipCenter joint venture. Interest and other income,
net increased from $1,190,000 for the six months ended June 30, 1998 to
$4,087,000 for the six months ended June 30, 1999, representing 3.1% and 11.5%
of total revenues for the six months ended June 30, 1998 and 1999, respectively.
The increase was primarily due to the one-time gain of $3 million from the sale
of a partial interest in the Company's ChipCenter joint venture.
Provision for Income Taxes
The Company's effective tax rate was 22% for the three and six months
ended June 30, 1999. The Company's provision for income taxes decreased from
$939,000 for the three months ended June 30, 1998 to $92,000 for the three
months ended June 30, 1999. The income tax provision decreased from $1,589,000
for the six months ended June 30, 1998 to $204,000 for the six months ended June
30, 1999. The decrease in the provision in 1999 is primarily due to decreased
income generated by the Company and the Company's ability to partially utilize
net operating loss carryforwards and credit carryforwards generated in the prior
years. The Company's provision for income taxes and effective tax rate may vary
in future periods based upon a variety of factors, including the geographic mix
of income.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had approximately $70.6 million in cash,
cash equivalents and short-term investments representing 70.5% of total assets.
The Company has invested the Company's cash in excess of current operating
requirements in investment grade securities. The investments have variable and
fixed interest rates and primarily short-term maturities. In accordance with
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities"
such investments are classified as "available for sale."
Net cash provided by operating activities was $6.8 million and $3.9
million for the six months ended June 30, 1999 and 1998, respectively. For the
six months ended June 30, 1999, cash generated by operations was primarily due
to a decrease in accounts receivable of $3.3 million and an increase in deferred
revenue of $2.9 million. For the six months ended June 30, 1998, cash generated
by operations was primarily due to net income of $5.6 million, an increase in
accrued bonuses and commissions of $1.5 million and an increase in accrued
liabilities of $1.7 million, offset by an increase in accounts receivable of
$2.9 million, a decrease in deferred revenue of $2.6 million, and a decrease in
accrued merger costs of $2.3 million.
Net cash provided by investing activities was $23.2 million for the six
months ended June 30, 1999, which was primarily due to maturities of short-term
investments and partially offset by the investment in financial instruments
classified as short-term investments. Net cash used in investing activities was
$16.1 million for the six months ended June 30, 1998, which was primarily due to
investments in financial instruments classified as short-term investments
partially offset by maturities of short-term investments.
Net cash used in financing activities was $17.5 million for the six months
ended June 30, 1999, which was primarily due to the repurchase of the Company's
common stock totaling $20.6 million, offset by net proceeds received by the
Company upon the exercise of stock options by its employees of $3.2 million. Net
cash provided by financing activities was $5.1 million for the six months ended
June 30, 1998, which was primarily due to net proceeds received by the Company
upon the exercise of stock options by its employees.
The Company believes that its current cash and cash equivalent balances,
short-term investment balances, and the cash flows generated from operations, if
any, will be sufficient to meet its working capital and capital expenditure
requirements for at least the next 12 months. In addition, the Company from time
to time evaluates potential acquisitions of businesses, products and
technologies and may in the future require additional equity or debt financing
to consummate such potential acquisitions. There can be no assurance that such
financing will be available on acceptable terms, if at all.
13
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
implementation of which has recently been delayed. Readers are referred to the
"Recent Accounting Pronouncements" section of the Company's Form 10-K for the
fiscal year ended December 31, 1998.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position (SOP) 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2,
`Software Revenue Recognition,'" which defers for one year the application of
provisions in SOP 97-2 which limit what is considered vendor-specific objective
evidence of the fair value of the various elements in a multiple element
arrangement. All other provisions of SOP 97-2 remain in effect. This SOP was
effective as of June 30, 1998. In December 1998, the AICPA issued SOP 98-9,
"Modification of SOP 97-2, `Software Revenue Recognition,' With Respect to
Certain Transactions," which amends paragraphs 11 and 12 of SOP 97-2, Software
Revenue Recognition, to require recognition of revenue using the "residual value
method" under certain conditions. Effective December 15, 1998, SOP 98-9 amends
SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, `Software
Revenue Recognition,'" to extend the deferral of the application of certain
passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or
before March 15, 1999. All other provisions of this SOP are effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
Company does not anticipate that these statements will have a material adverse
impact on its statement of operations.
IMPACT OF THE YEAR 2000
Like many other companies, Aspect is subject to risks from the Year 2000
("Y2K") computer issue. The Company has a Y2K internal task force which has been
determining the impact of the Y2K issues related to the Company's products,
third-party databases embedded in the Company's products, internal computer and
information systems, office equipment, customers' internal management systems,
and third-party suppliers. The Company has retained a consultant to evaluate
internal systems compliance with Y2K. The amount budgeted for this expense is
$98,000. The Company has tested its products and has determined that all of the
Company's supported products are Y2K compliant, with the exception of certain
older versions of software for which upgrades are available. The Company has
recently completed the process of obtaining questionnaires or certificates of
compliance from significant third-party vendors as to their Y2K compliance. If
any of these vendors are determined to be non-compliant, the internal task force
will develop plans to correct problems once they are identified.
The costs to address the Y2K compliance issues to date have been minimal
and have been financed through operating cash flow. The Company has not
determined the total estimated cost of the Y2K compliance program. The estimate
of costs will be determined as the Company continues its assessments and
additional information is known. These costs will not include internal resource
costs or the costs of software and systems that are being replaced or upgraded
in the normal course of business. There can be no assurance that these costs
will not be greater than expected, or that corrective action will be successful
or completed in the requisite timeframe. See "Risk Factors." The Company will
continue to expend appropriate resources to address this issue on a timely
basis.
The Company believes that Y2K issues may affect the purchasing patterns of
customers and potential customers in a variety of ways. Many companies are
expending significant resources to correct, patch or replace their current
software systems to achieve Y2K compliance. These expenditures may result in
reduced funds available to purchase products such as those offered by the
Company. Any of the foregoing could result in a material adverse effect on the
Company's business, operating results and financial condition.
The Company believes that it will complete its Y2K compliance work prior
to December 31, 1999. Contingency plans will be developed if it appears the
Company, its key customers or its key suppliers will not be Y2K compliant, and
such noncompliance is expected to have a material adverse impact on the
Company's operations.
14
<PAGE>
RISK FACTORS
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks. These risks should be read in
conjunction with the "Risk Factors" section included in the Company's Form 10-K
for the fiscal year ended December 31, 1998.
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 June 30. 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 licensing of the Company's decision support 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 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. 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.
15
<PAGE>
The Company currently derives substantially all of its revenues from the
licensing of its eXplore decision support software and family of reference
content 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 software or the reference content 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 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.
To implement its business plans, the Company may make further acquisitions
in the future, which will require significant financial and management resources
both at the time of the transaction and during the process of integrating the
newly-acquired business into the Company's operations. The Company's operating
results could be adversely affected if it is unable to successfully integrate
such new companies into its operations. There can be no assurance that any
acquired products, technologies or businesses will contribute at anticipated
levels to the Company's sales or earnings, or that sales and earnings from
combined businesses will not be adversely affected by the integration process.
Certain acquisitions or strategic transactions may be subject to approval by the
other party's board or stockholders, domestic or foreign governmental agencies
or other third parties. Accordingly, there is a risk that important
acquisitions or transactions could fail to be concluded as planned. Future
acquisitions by the Company could also result in issuances of equity securities
or the rights associated with the equity securities, which could potentially
dilute earnings per share. In addition, future acquisitions could result in the
incurrence of additional debt, taxes, contingent liabilities, amortization
expenses related to goodwill and other intangible assets and expenses incurred
to align the accounting policies and practices of the acquired companies with
those of the Company. These factors could adversely affect the Company's future
operating results, financial position and cash flows. As some of the Company's
competitors have pursued a strategy of growth through acquisition, there is a
risk that future acquisitions could be more expensive due to competition among
bidders for target companies.
16
<PAGE>
Historically, a relatively small number of customers have 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 Component and
Supplier Management ("CSM") solutions, it will be necessary to develop, maintain
and enhance close associations with other enterprise data management vendors
such as database, hardware, data, Enterprise Resource Planning ("ERP"), Product
Data Management ("PDM"), Advanced Planning & Scheduling, Computer Aided Design
("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 current 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, Y2K compliance 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 350 employees as of
June 30, 1999. 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.
17
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The Company's revenues originating outside the U.S. for the quarter ended
June 30, 1999 was 12% of total revenues. Revenues generated from the European
region for the quarter ended June 30, 1999 was 8.8% of total revenues.
International sales are made primarily by the Company's foreign sales
subsidiaries in the local countries and are typically denominated in U.S.
dollars. These subsidiaries incur most of their expenses in the local currency.
The Company's international business is subject to risks typical of an
international business, including, but not limited to: different economic
conditions; changes in political climate; differing tax structures; other
regulations and restrictions; and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors. The effect of foreign exchange rate fluctuations on
the Company for the quarter ended June 30, 1999 was not material.
The Company invests its cash in a variety of financial instruments,
including bank time deposits, taxable and tax-advantaged variable rate and fixed
rate obligations of corporations, municipalities, and local, state and national
governmental entities and agencies. Cash balances in foreign currencies overseas
are operating balances and are invested in short-term time deposits of the local
operating bank.
Interest income on the Company's investments is carried in "Interest and
other income, net." The Company accounts for its investments in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." All of the cash equivalents and short-term investments are treated
as available-for-sale under SFAS No. 115.
Investment in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part of these factors, the Company's future investment income
may fall short of expectations due to unfavorable changes in interest rates or
the Company may suffer losses in principal if forced to sell securities which
have seen a decline in market value due to changes in interest rates. The
Company's investment securities are held for purposes other than trading.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The following are the results of matters which were submitted to a vote of
security holders at the Company's Annual Meeting of Stockholders held on July
29, 1999 in Menlo Park, California:
Proposal 1 - Election of Directors
<TABLE>
<CAPTION>
Number of Votes Number of Votes Number of Votes
Name For Against Abstaining
- --------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Romesh Wadhwani 26,130,940 --- 1,793,586
Robert L Evans 26,130,940 --- 1,793,586
Steven Goldby 26,130,940 --- 1,793,586
Dennis G. Sisco 26,130,940 --- 1,793,586
</TABLE>
Proposal 2 - To approve an amendment to the Company's 1996 Employee Stock
Purchase Plan to increase the aggregate number of shares of common stock
authorized for issuance thereunder by 200,000 shares: 15,463,977 votes in favor,
1,282,856 votes opposed, 66,762 votes abstaining, and 11,110,931 broker non-
votes.
Proposal 3 - To approve an amendment to the Company's 1992 Employee Stock Option
Plan to increase the aggregate number of shares authorized for issuance
thereunder by 2,000,000 shares, and to modify certain eligibility criteria:
11,142,698 votes in favor, 5,595,095 votes opposed, 75,802 votes abstaining, and
11,110,931 broker non-votes.
Proposal 4 - To ratify the selection of Arthur Andersen, LLP as independent
auditors of the Company for its fiscal year ending December 31, 1999: 27,828,638
votes in favor, 63,927 votes opposed, and 31,961 votes abstaining.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None.
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 13, 1999 /s/ David S. Dury
------------------------------------
David S. Dury
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
20
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 20,570
<SECURITIES> 49,982
<RECEIVABLES> 16,223
<ALLOWANCES> 457
<INVENTORY> 0
<CURRENT-ASSETS> 89,993
<PP&E> 21,037
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0
0
<COMMON> 77,508
<OTHER-SE> (5,395)
<TOTAL-LIABILITY-AND-EQUITY> 100,080
<SALES> 35,515
<TOTAL-REVENUES> 35,515
<CGS> 6,681
<TOTAL-COSTS> 6,681
<OTHER-EXPENSES> 32,015
<LOSS-PROVISION> 50
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<INCOME-CONTINUING> 652
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