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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 SEPTEMBER 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.)
1395 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 November
3, 1999 was 28,903,769
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ASPECT DEVELOPMENT, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
for the three and nine months ended
September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and
1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
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 Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Aspect Development, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1999 1998
------------- ------------
Current assets: (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 30,526 $ 7,877
Short-term investments 41,246 73,596
Accounts receivable, net 20,741 19,509
Prepaid expenses and other current assets 4,625 4,397
------------- ------------
Total current assets 97,138 105,379
Property and equipment, net 9,644 9,121
Other assets, net 1,281 282
------------- -----------
Total assets $ 108,063 $ 114,782
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,956 $ 2,483
Accrued bonuses and commissions 6,542 5,233
Income taxes payable 2,864 2,946
Other accrued liabilities 5,034 5,766
Deferred revenue 15,182 9,497
Capital lease obligations -- 17
-------------- -----------
Total current liabilities 31,578 25,942
Stockholders' equity:
Common stock 79,206 95,068
Deferred compensation (85) (209)
Accumulated components of comprehensive income 56 12
Accumulated deficit (2,692) (6,031)
------------- -----------
Total stockholders' equity 76,485 88,840
------------- -----------
Total liabilities and stockholders' equity $ 108,063 $ 114,782
============= ===========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
3
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Aspect Development, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------------- --------------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues
Licenses $ 14,992 $ 14,472 $ 30,982 $ 36,089
Subscription and maintenance 6,182 4,006 17,477 12,577
Service and other 4,842 4,346 13,072 12,240
--------------- --------------- --------------- ----------------
Total revenues 26,016 22,824 61,531 60,906
--------------- --------------- --------------- ----------------
Cost of revenues
Licenses 362 506 687 828
Subscription and maintenance 1,374 1,048 3,663 2,724
Service and other 2,586 1,475 6,654 4,918
--------------- --------------- --------------- ----------------
Total cost of revenues 4,322 3,029 11,004 8,470
--------------- --------------- --------------- ----------------
Gross profit 21,694 19,795 50,527 52,436
Operating expenses:
Research and development 5,025 4,037 14,661 11,491
Sales and marketing 11,212 8,707 28,927 24,392
General and administrative 2,968 2,076 7,681 5,555
--------------- --------------- --------------- ----------------
Total operating expenses 19,205 14,820 51,269 41,438
--------------- --------------- --------------- ----------------
Operating income (loss) 2,489 4,975 (742) 10,998
Interest and other income, net 950 761 5,037 (1) 1,951
--------------- --------------- --------------- ----------------
Income before income taxes 3,439 5,736 4,295 12,949
Provision for income taxes 752 1,262 957 2,851
--------------- --------------- --------------- ----------------
Net income $ 2,687 $ 4,474 $ 3,338 $ 10,098
=============== =============== =============== ================
Basic earnings per share $ 0.09 $ 0.15 $ 0.11 $ 0.34
=============== =============== =============== ================
Diluted earnings per share $ 0.08 $ 0.13 $ 0.10 $ 0.31
=============== =============== =============== ================
Shares used in computing basic
earnings per share 28,596 30,113 29,450 29,694
=============== =============== =============== ================
Shares used in computing diluted
earnings per share 32,290 33,380 32,216 33,027
=============== =============== =============== ================
</TABLE>
(1) Includes $3 million gain from sale of partial interest in joint
venture.
See accompanying notes to Condensed Consolidated Financial Statements.
4
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Aspect Development, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 3,338 $ 10,098
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation & amortization 2,457 3,629
Loss in joint ventures (54) (384)
Changes in assets and liabilities:
Accounts receivable (1,232) (4,631)
Prepaid expenses and other current assets 395 (168)
Accounts payable (527) 180
Accrued bonuses & commissions 1,309 2,270
Accrued merger costs - (2,767)
Income taxes payable (82) 2,431
Other accrued liabilities (614) 1,867
Deferred revenue 5,685 (2,258)
Third-party royalties & fees (221) 136
----------- ----------
Net cash provided by operating activities 10,454 10,403
----------- ----------
Cash flows from investing activities
Purchases of property and equipment (2,954) (3,708)
Purchases of short-term investments (128,566) (76,933)
Maturities of short-term investments 160,560 65,447
Employee note receivable 305 151
Loan to subsidiary (500) -
Other assets (1,026) 521
----------- ----------
Net cash provided by (used in) investing activities 27,819 (14,522)
----------- ----------
Cash flows from financing activities
Principal payments on capital lease obligations (17) (317)
Stockholders note receivable - 320
Buy back of common stock (20,636) -
Sale of common stock 4,899 8,580
----------- ----------
Net cash provided by (used in) financing activities (15,754) 8,583
----------- ----------
Net increase in cash and cash equivalents 22,519 4,464
Exchange rate impact on cash 130 (460)
Cash and cash equivalents at beginning of period 7,877 14,550
----------- ----------
Cash and cash equivalents at end of period $ 30,526 $ 18,554
=========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 3 $ 14
=========== ==========
Income taxes paid $ 1,562 $ 16
=========== ==========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
5
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ASPECT DEVELOPMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
nine months ended September 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
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 unless the investment is fully
written down and no commitments exist for additional funding.
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, and recognized as
revenue after execution of a license agreement or receipt of a definitive
purchase order, shipment of the product has occurred, 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
September 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 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. These revenues are recognized upon completion of
the work performed.
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3. Comprehensive Income
Comprehensive income, net of related tax, for the quarter and nine
months ended September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
(in thousands)
Net income 2,687 4,474 3,338 10,098
Unrealized loss on investments (32) (86) -
Foreign currency translation adjustment (19) (50) 130 (460)
============= ============ ============ ============
Comprehensive income $ 2,636 $ 4,424 $ 3,382 $ 9,638
============= ============ ============ ============
</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 nine months ended September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Diluted:
Shares used in computing basic earnings per share 28,596 30,113 29,450 29,694
Common stock equivalents (treasury stock method) 3,694 3,267 2,766 3,333
------------ ------------- ------------- ------------
Shares used in computing diluted earnings per share 32,290 33,380 32,216 33,027
============ ============= ============= ============
</TABLE>
7
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5. ChipCenter LLC (formerly EDTN) Joint Venture
The Company entered into a limited liability company joint venture
agreement 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 each 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.
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 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 total
revenues, gross profit, and income before income taxes. Unallocated expenses
include corporate and other costs not allocated to business segments for
management reporting purposes.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers (in thousands):
Licenses $ 14,992 $ 14,472 $ 30,982 $ 36,089
Subscriptions and maintenance 6,182 4,006 17,477 12,577
Service 4,842 4,346 13,072 12,240
--------------- --------------- --------------- ----------------
Total revenues $ 26,016 $ 22,824 $ 61,531 $ 60,906
=============== =============== =============== ================
Income before income taxes (in thousands):
Licenses $ 14,630 $ 13,966 $ 30,295 $ 35,261
Subscriptions and maintenance 4,808 2,958 13,813 9,853
Service 2,256 2,871 6,419 7,322
--------------- --------------- --------------- ----------------
Gross profit $ 21,694 $ 19,795 $ 50,527 $ 52,436
=============== =============== =============== ================
Unallocated expenses $ 19,205 $ 14,820 $ 51,270 $ 41,438
Interest and other income, net 950 761 5,037 1,951
=============== =============== =============== ================
Income before income taxes $ 3,439 $ 5,736 $ 4,295 $ 12,949
=============== =============== =============== ================
</TABLE>
8
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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 cases,
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(R) 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 and 98-9 on Software Revenue Recognition, and related
interpretations. License revenues are recognized as revenue after execution of a
license agreement or receipt of a definitive purchase order, shipment of the
product has occurred, 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 September 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 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 revenues accounted for approximately 91% and 9%
of the Company's total revenues for the three months ended September 30, 1999,
respectively, compared to 93% and 7% for the three months ended September 30,
1998, respectively. U.S. and international sales accounted for approximately 89%
and 11% of the Company's total revenues for both the nine months ended September
30, 1999 and 1998.
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License Revenues. License revenues for the three months ended September
30, 1999 were $14,992,000 compared to $14,472,000 for the three months ended
September 30, 1998, and $30,982,000 for the nine months ended September 30, 1999
compared to $36,089,000 for the nine months ended September 30, 1998. This
decrease in license revenues over the preceding nine months was primarily due to
the recent trend toward manufacturers buying larger dollar value enterprise-wide
solutions from Aspect, leading to complex and sometimes unpredictable internal
approval cycles. Aspect has significantly added to its sales force, and is
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 $4,006,000 for the three months ended September 30, 1998
to $6,182,000 for the three months ended September 30, 1999 and increased from
$12,577,000 for the nine months ended September 30, 1998 to $17,477,000 for the
nine months ended September 30, 1999. These increases were due primarily to
renewals of subscription and maintenance agreements from an increased installed
base of customers.
Service and Other Revenues. Service and other revenues increased from
$4,346,000 for the three months ended September 30, 1998 to $4,842,000 for the
three months ended September 30, 1999 and increased from $12,240,000 for the
nine months ended September 30, 1998 to $13,072,000 for the nine months ended
September 30, 1999. These increases were due primarily to increases in both 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 September 30, 1999 was
$362,000 compared to $506,000 for the three months ended September 30, 1998,
representing 2.4% and 3.5% of license revenues for the three months ended
September 30, 1999 and 1998, respectively. Cost of licenses for the nine months
ended September 30, 1999 was $687,000 compared to $828,000 for the nine months
ended September 30, 1998, representing 2.2% and 2.3% of license revenues for the
nine months ended September 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
$1,048,000 for the three months ended September 30, 1998 to $1,374,000 for the
three months ended September 30, 1999, representing 26.2% and 22.2% of
subscription and maintenance revenues for the three months ended September 30,
1998 and 1999, respectively. Cost of subscription and maintenance revenues
increased from $2,724,000 for the nine months ended September 30, 1998 to
$3,663,000 for the nine months ended September 30, 1999, representing 21.7% and
21.0% of subscription and maintenance revenues for the nine months ended
September 30, 1998 and 1999, respectively. The increases in absolute dollars are
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 $1,475,000 for the three months ended September
30, 1998 to $2,586,000 for the three months ended September 30, 1999,
10
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representing 33.9% and 53.4% of service and other revenues for the three months
ended September 30, 1998 and 1999, respectively. Cost of service and other
revenues increased from $4,918,000 for the nine months ended September 30, 1998
to $6,654,000 for the nine months ended September 30, 1999, representing 40.2%
and 50.9% of service and other revenues for the nine months ended September 30,
1998 and 1999, respectively. The increases in absolute dollars are due primarily
to increases in the number and size of consulting contracts. The increases as a
percent of total revenues were primarily due to an increase in staffing and
associated expenses.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of engineering personnel costs. Research and development expenses
increased from $4,037,000 for the three months ended September 30, 1998 to
$5,025,000 for the three months ended September 30, 1999, representing 17.7% and
19.3% of total revenues for the three months ended September 30, 1998 and 1999,
respectively. Research and development expenses increased from $11,491,000 for
the nine months ended September 30, 1998 to $14,662,000 for the nine months
ended September 30, 1999, representing 18.9% and 23.8% of total revenues for the
nine months ended September 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
increases in research and development expenses in absolute dollars were 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 $8,707,000 for the three months ended September 30, 1998 to
$11,212,000 for the three months ended September 30, 1999, representing 38.2%
and 43.1% of total revenues for the three months ended September 30, 1998 and
1999, respectively. Sales and marketing expenses increased from $24,392,000 for
the nine months ended September 30, 1998 to $28,927,000 for the nine months
ended September 30, 1999, representing 40.1% and 47.0% of total revenues for the
nine months ended September 30, 1998 and 1999, 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 increases in these costs as a
percent of total revenues were due to the Company's lower total revenues. The
Company believes that such expenses will continue to increase in absolute
dollars and may continue to increase as a percentage of total revenues in the
future as the Company expands its sales and marketing staff and enters new
markets worldwide.
11
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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 $2,076,000 for the three
months ended September 30, 1998 to $2,968,000 for the three months ended
September 30, 1999, representing 9.1% and 11.4% of total revenues for the three
months ended September 30, 1998 and 1999, respectively. General and
administrative expenses increased from $5,555,000 for the nine months ended
September 30, 1998 to $7,681,000 for the nine months ended September 30, 1999,
representing 9.1% and 12.5% of total revenues for the nine months ended
September 30, 1998 and 1999, respectively. The increases in absolute dollars
were primarily the result of increased staffing and associated expenses
necessary to manage and support the Company's growth. The increase in these
costs as a percent of total revenues was due to the increase in absolute dollars
and to the Company's lower total revenues. The Company expects general and
administrative expenses to continue to increase in absolute dollars while
remaining approximately level or decreasing as a percent of total revenues.
Interest and Other Income, net
Interest and other income, net, represents interest income earned on
the Company's cash and cash equivalents, short-term investments, and foreign
exchange gains and losses. Also included through the second quarter of 1999 are
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 increased from $761,000
for the three months ended September 30, 1998 to $950,000 for the three months
ended September 30, 1999, representing 3.3% and 3.7% of total revenues for the
three months ended September 30, 1998 and 1999, respectively. The increase for
the three months ended September 30, 1999 resulted primarily from not realizing
its share of losses from the ChipCenter joint venture, as the investment is
fully written down and because no commitments exist for additional funding.
Interest and other income, net increased from $1,951,000 for the nine months
ended September 30, 1998 to $5,037,000 for the nine months ended September 30,
1999, representing 3.2% and 8.2% of total revenues for the nine months ended
September 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, which was recorded in the first quarter of fiscal
1999.
Provision for Income Taxes
The Company's effective tax rate was 22% for the three and nine months
ended September 30, 1999 and 1998. The Company's provision for income taxes
decreased from $1,262,000 for the three months ended September 30, 1998 to
$752,000 for the three months ended September 30, 1999. The income tax provision
decreased from $2,851,000 for the nine months ended September 30, 1998 to
$957,000 for the nine months ended September 30, 1999. The decreases in the
provision in 1999 are primarily due to decreased income generated by the
Company. The effective tax rates for the three and nine months ended September
30, 1999 and 1998 varied from the U.S. statutory rate due primarily to 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.
12
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had approximately $71.8 million
in cash, cash equivalents and short-term investments, representing 66.4% 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 $10.5 million and $10.4
million for the nine months ended September 30, 1999 and 1998, respectively. For
the nine months ended September 30, 1999, cash generated by operations was
primarily due to an increase in deferred revenue of $5.7 million and net
income of $3.3 million. For the nine months ended September 30, 1998, cash
generated by operations was primarily due to net income of $10.1 million, an
increase in accrued bonuses and commissions of $2.3 million, an increase in
other accrued liabilities of $1.9 million and an increase in income taxes
payable of $2.4 million, offset by an increase in accounts receivable of $4.6
million, a decrease in deferred revenue of $2.3 million, and a decrease in
accrued merger costs of $2.8 million.
Net cash provided by investing activities was $27.8 million for the
nine months ended September 30, 1999, which was primarily due to maturities of
short-term investments partially offset by the investment in financial
instruments classified as short-term investments. Net cash used in investing
activities was $14.5 million for the nine months ended September 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 $15.8 million for the nine
months ended September 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
$4.9 million. No shares of the Company's common stock were repurchased during
the quarter. Net cash provided by financing activities was $8.6 million for the
nine months ended September 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.
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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
(which include 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 completed the process of obtaining questionnaires or
certificates of compliance from significant third-party vendors as to their Y2K
compliance. All critical path vendors have indicated they are Y2K compliant.
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
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<PAGE>
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 are being developed in the event
that the Company, its key customers or its key suppliers are not Y2K compliant,
and such noncompliance would have a material adverse impact on the Company's
operations.
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 decision support 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 agreement. 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,
15
<PAGE>
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.
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.
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.
16
<PAGE>
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.
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 Inbound
Supply Chain Management solutions, it will be necessary to develop, maintain and
enhance close associations with other enterprise data management vendors such as
eProcurement, 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.
The Company has operations in Bangalore, India with 368 employees as of
September 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 Risk
The Company's revenues originating outside the U.S. for the quarter
ended September 30, 1999 was 9% of total revenues. Revenues generated from the
European region for the quarter ended September 30, 1999 was 6% 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 September 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
None
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.
Aspect Development, Inc.
November 12, 1999 /s/ David S. Dury
--------------------------------------------
David S. Dury
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
20
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