<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 1997
or
[ ] 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: 0-18391
ASPECT TELECOMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
California 94-2974062
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1730 Fox Drive, San Jose, California 95131-2312
-----------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number: (408) 325-2200
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, $.01 par
value, was 49,792,491 at October 31, 1997.
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ASPECT TELECOMMUNICATIONS CORPORATION
INDEX
<TABLE>
<CAPTION>
Description Page Number
----------- -----------
<S> <C>
Cover Page 1
Index 2
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of September
30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Income for the
Three and Nine Month Periods Ended September 30,
1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the
Nine Month Periods Ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II: Other Information
Item 1: Legal Proceedings 13
Item 2: Changes in Securities 14
Item 6: Exhibits and Reports on Form 8-K 14
Signature 15
</TABLE>
2
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ASPECT TELECOMMUNICATIONS CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1997 1996
------------- ------------
(unaudited) **
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 97,759 $ 47,996
Short-term investments 50,197 67,801
Accounts receivable, net 72,089 53,211
Inventories 10,367 15,485
Other current assets 11,657 14,731
--------- ---------
Total current assets 242,069 199,224
Property and equipment, net 58,197 51,348
Intangible assets, net 26,181 28,888
Other assets 3,389 3,633
--------- ---------
Total assets $ 329,836 $ 283,093
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,421 $ 10,027
Accrued compensation and related benefits 13,187 8,896
Other accrued liabilities 29,550 20,741
Customer deposits and deferred revenue 14,150 19,481
--------- ---------
Total current liabilities 67,308 59,145
Note payable 4,500 4,500
Shareholders' equity:
Preferred stock, $.01 par value:
2,000,000 shares authorized, none outstanding in 1997 and 1996 - -
Common stock, $.01 par value:
100,000,000 shares authorized, shares outstanding:
49,670,912 in 1997 and 48,806,580 in 1996 138,701 128,186
Net unrealized gain on available-for-sale securities 1,508 2,534
Accumulated translation adjustments (1,765) (45)
Retained earnings 119,584 88,773
--------- ---------
Total shareholders' equity 258,028 219,448
--------- ---------
Total liabilities and shareholders' equity $ 329,836 $ 283,093
========= =========
** Derived from audited financial statements.
</TABLE>
See accompanying notes.
3
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ASPECT TELECOMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited - in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
Product $ 68,558 $ 60,071 $202,042 $165,572
Customer support 30,634 20,153 82,309 54,582
-------- -------- -------- --------
Total net revenues 99,192 80,224 284,351 220,154
Cost of revenues:
Cost of product revenues 21,531 20,213 65,214 54,847
Cost of customer support revenues 21,451 14,873 58,349 39,612
-------- -------- -------- --------
Total cost of revenues 42,982 35,086 123,563 94,459
-------- -------- -------- --------
Gross margin 56,210 45,138 160,788 125,695
Operating expenses:
Research and development 11,452 8,930 33,964 24,595
Selling, general and administrative 27,003 21,260 75,207 58,882
Purchased in-process technology 4,910 - 4,910 -
-------- -------- -------- --------
Total operating expenses 43,365 30,190 114,081 83,477
-------- -------- -------- --------
Income from operations 12,845 14,948 46,707 42,218
Interest and other income, net 1,625 482 6,466 1,033
-------- -------- -------- --------
Income before income taxes 14,470 15,430 53,173 43,251
Provision for income taxes 7,461 5,740 22,362 16,062
-------- -------- -------- --------
Net income $ 7,009 $ 9,690 $ 30,811 $ 27,189
======== ======== ======== ========
Primary earnings per share:
Net income per share (a) $ 0.13 $ 0.21 $ 0.59 $ 0.59
======== ======== ======== ========
Shares used in per share computations (a) 52,233 46,588 52,221 46,432
======== ======== ======== ========
Fully diluted earnings per share:
Net income per share (a) $ 0.13 $ 0.19 $ 0.59 $ 0.54
======== ======== ======== ========
Shares used in per share computations (a) 52,452 52,846 52,251 52,692
======== ======== ======== ========
(a) Share and per share data for all periods presented reflect a two-for-one
stock split effective January 28, 1997.
</TABLE>
See accompanying notes.
4
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ASPECT TELECOMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited - in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 30,811 $ 27,189
Reconciliation of net income to cash provided by
operating activities:
Depreciation and amortization 14,245 10,644
Purchased in-process technology 4,910 -
Gain on the sale of equity securities (2,070) -
Changes in assets and liabilities, net of effects
from company acquired in 1997:
Accounts Receivable (19,871) (6,692)
Inventories 4,856 (4,502)
Other current assets and other assets 3,766 (1,882)
Accounts payable 376 (1,489)
Accrued compensation and related benefits 4,330 1,412
Other accrued liabilities 9,924 9,182
Customer deposits and deferred revenue (5,121) 3,553
-------- --------
Cash provided by operating activities 46,156 37,415
Cash flows from financing activities:
Common stock transactions 5,906 5,376
-------- --------
Cash provided by financing activities 5,906 5,376
Cash flows from investing activities:
Short-term investment purchases (35,836) (75,457)
Short-term investment sales and maturities 53,656 70,313
Property and equipment purchases (19,423) (27,370)
Purchase of company, net of cash acquired (278) -
-------- --------
Cash used in investing activities (1,881) (32,514)
Effect of exchange rate changes on cash and
cash equivalents (418) (321)
-------- --------
Increase in cash and cash equivalents 49,763 9,956
Cash and cash equivalents:
Beginning of period 47,996 22,102
-------- --------
End of period $ 97,759 $ 32,058
======== ========
Supplemental disclosure of noncash investing activities:
Common stock issued in connection with the acquisition of
Commerce Soft Inc. $ 4,610 -
</TABLE>
See accompanying notes.
5
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ASPECT TELECOMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The consolidated financial statements include the accounts of Aspect
Telecommunications Corporation and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. For further information, refer
to the consolidated financial statements and notes thereto included in the
Company's 1996 Annual Report to Shareholders.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Business Combination
On September 2, 1997, the Company acquired Commerce Soft Inc. (Commerce Soft), a
developer of customer interaction technology. In connection with the
acquisition, the Company issued approximately 177,000 shares of common stock for
all the outstanding stock of Commerce Soft and assumed outstanding Commerce Soft
stock options, which were converted to options to purchase approximately 21,000
shares of the Company's common stock. The transaction was accounted for as a
purchase which resulted in a one-time charge of $4.9 million in the third
quarter ending September 30, 1997 related to in-process technology. The
remaining portion of the purchase price that exceeded the net assets of Commerce
Soft was recorded as an intangible asset and is being amortized over a period of
two years. The results of operations of Commerce Soft are included in the
accompanying financial statements since the date of acquisition. The historical
operations of Commerce Soft are not material to the Company's consolidated
operations and financial position, and therefore pro forma summaries are not
presented.
Per Share Information
Per share information for the periods presented is computed using the weighted
average number of common and common equivalent shares outstanding. For primary
earnings per share calculations, common equivalent shares consist of the
incremental shares issuable upon the assumed exercise of dilutive stock options
using the treasury stock method.
The fully diluted earnings per share calculations for both the three and nine
month periods ended September 30, 1997 are computed in a manner similar to the
primary earnings per share calculations. For the fully diluted earnings per
share calculations for both the three and nine month periods ended September 30,
1996, common equivalent shares also include the dilutive effect of incremental
shares issuable upon the conversion of the 5% convertible subordinated
debentures, and net income is adjusted for the interest expense, net of income
taxes, related to the debentures. On October 15, 1996, the Company converted all
$55 million of its convertible subordinated debentures into approximately 5.7
million shares of the Company's common stock.
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ASPECT TELECOMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Inventories
Inventories, valued at the lower of cost (first-in, first-out) or market,
consist of:
<TABLE>
<CAPTION>
(in thousands)
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Raw materials $ 5,237 $ 7,058
Work-in-progress 2,344 3,081
Finished goods 2,786 5,346
------- -------
Total $10,367 $15,485
======= =======
</TABLE>
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The
Company is required to adopt SFAS 128 in the fourth quarter of fiscal 1997 and
will restate at that time earnings per share (EPS) data for prior periods to
conform with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
If SFAS 128 had been in effect during the three month periods ended September
30, 1997 and 1996, basic EPS would have been $0.14 and $0.23, respectively. If
the pronouncement had been in effect during the nine month periods ended
September 30, 1997 and 1996, basic EPS would have been $0.63 and $0.64,
respectively. Diluted EPS under SFAS 128 would have been approximately the same
as the fully diluted EPS currently reported for all periods presented.
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from nonowner sources, and No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas, and major customers. Adoption of these statements will not
impact the Company's consolidated financial position, results of operations or
cash flows. Both statements are effective for fiscal years beginning after
December 15, 1997, with earlier application permitted.
Contingencies
On March 5, 1997, Lucent Technologies Inc. ("Lucent") filed a lawsuit in the
United States District Court for the Eastern District of Pennsylvania alleging
that the Company infringes four of Lucent's U.S. patents (the "Lucent Patents").
In its complaint, Lucent is seeking to enjoin the Company from allegedly
continuing to infringe the Lucent Patents and is seeking an unspecified amount
of compensatory damages, treble damages for alleged willful infringement, and
interest, expenses and attorneys' fees. On May 2, 1997, the Company filed an
answer in response to the Lucent complaint, asserting that the Lucent Patents
are invalid and denying the alleged patent infringement. The Company believes
that it has meritorious defenses to the asserted claims and intends to defend
the litigation vigorously. Although the Company
7
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ASPECT TELECOMMUNICATONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
does not believe that any of its products infringe any valid claims of the
Lucent Patents, the outcome of litigation is inherently unpredictable, and there
can be no assurance that the results of these proceedings will be favorable to
the Company or that they will not have a material adverse effect on the
Company's business, operating results or financial condition. Regardless of the
ultimate outcome, the Lucent litigation could result in substantial expense to
the Company and significant diversion of effort by the Company's technical and
managerial personnel. If the court determines that the Company infringes the
Lucent Patents and that the Lucent Patents are valid and enforceable, it could
issue an injunction prohibiting the Company from making, using or selling
certain products and it could assess significant damages against the Company.
Accordingly, an adverse determination in the proceeding could subject the
Company to significant liabilities and require the Company to seek a license
from Lucent. Although intellectual property disputes are often settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial, and there can be no assurance that a license from Lucent, if
required, would be available to the Company on acceptable terms or at all. Jury
selection for the trial of this lawsuit is scheduled to begin on April 13, 1998.
8
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ASPECT TELECOMMUNICATIONS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in Part I
- -- Item 1 of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis in the
Company's 1996 Annual Report to Shareholders.
Aspect Telecommunications Corporation (the Company) is a global provider of
comprehensive business solutions for companies with mission-critical call
centers that exist to generate revenue, service customers, and handle inquiries.
The Company's products include automatic call distributors, interactive response
systems, call center management information and reporting tools, call center
planning and forecasting packages, and computer-telephony integration tools and
software. The Company also provides services vital to call center environments,
including business applications consulting, systems integration, and training.
In 1996, the Company completed two acquisitions: Envoy Holdings Limited (Envoy)
on September 30, 1996, and Prospect Software, Inc. (Prospect) on October 21,
1996. Envoy provides call center and telebusiness solutions designed to improve
customer service through consulting services, software, and systems integration.
Prospect is a provider of application development tools for building
connectivity to a variety of call center systems and network-based computer
applications. Both acquisitions were accounted for as pooling of interests and
all financial results for 1996 reflect the acquisitions. As the historical
operations of Envoy and Prospect were not significant to any year presented, the
Company's financial statements for years prior to 1996 were not restated and the
financial effects of results of operations for both acquired companies for years
prior to 1996 were accounted for as increases to retained earnings in 1996.
On September 2, 1997, the Company acquired Commerce Soft Inc. (Commerce Soft), a
developer of customer interaction technology. In connection with the
acquisition, the Company issued approximately 177,000 shares of common stock for
all the outstanding stock of Commerce Soft and assumed outstanding Commerce Soft
stock options, which were converted to options to purchase approximately 21,000
shares of the Company's common stock. The transaction was accounted for as a
purchase which resulted in a one-time charge of $4.9 million in the third
quarter ending September 30, 1997 related to in-process technology. The
remaining portion of the purchase price that exceeded the net assets of Commerce
Soft was recorded as an intangible asset and is being amortized over a period of
two years. The results of operations of Commerce Soft are included in the
accompanying financial statements since the date of acquisition.
On December 20, 1996, the Company announced that its Board of Directors approved
a two-for-one stock split effective January 28, 1997, for shareholders of record
as of January 6, 1997. All share and per share amounts in this Form 10-Q reflect
the stock split.
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Specifically, the Company
wishes to alert readers that, except for the historical information contained
herein, the following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including without limitation, statements
regarding the Company's expectations, beliefs, intentions or future strategies,
which are dependent on certain risks and uncertainties that may cause actual
results to differ materially from those expressed in these or any other
forward-looking statements made by or on behalf of the Company. These risks and
uncertainties include variability and uncertainty of revenues and operating
results; volatility of stock price; product concentration, technological change,
and new products;
9
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ASPECT TELECOMMUNICATIONS CORPORATION
competition; intellectual property/litigation; management of growth; dependence
on key personnel; limited sources of component supply; licenses from third
parties; geographic concentration; acquisitions and investments; international
operations; regulatory requirements; and expansion of distribution channels. For
a more detailed description of these risks and uncertainties, see the section
titled "Management's Discussion and Analysis - Risk Factors" in the Company's
1996 Annual Report to Shareholders.
RESULTS OF OPERATIONS
Net Revenues
Total net revenues for the third quarter of 1997 were $99 million, representing
an increase of 24% compared with total net revenues of $80 million for the same
period of 1996. Total net revenues for the first nine months of 1997 were $284
million, up 29% compared with the same period in 1996.
Product revenues for the third quarter of 1997 were $69 million, up 14% compared
with product revenues of $60 million for the same period of 1996. For the first
nine months of 1997, product revenues grew 22% to $202 million, up from $166
million in the same period in 1996. The increases in product revenues for both
periods were primarily attributable to increased demand for new systems and
add-ons. Growth in product revenues for the third quarter and first nine months
of 1997, compared with the same periods of 1996, was significantly higher in
international markets than in North America. Average selling price on new
systems remained relatively unchanged across the periods.
Customer support revenues for the third quarter of 1997 were $31 million, a $10
million or 52% increase from the third quarter of 1996. For the first nine
months of 1997, customer support revenues were $82 million, up 51% compared with
the same period of 1996. The increases in customer support revenues for both
periods resulted primarily from increases in maintenance revenue as a result of
the growth in the Company's installed base. Customer support revenues include
charges for providing contractually agreed-upon ongoing system service and
maintenance, which typically commence twelve months from the date a system is
first installed; charges to install products at customer sites; consulting and
systems integration revenue; and other support services provided to the
Company's customers. Contract support revenues are largely dependent on
renewable customer support contracts and will be primarily affected by the
general growth in the installed base. Installation revenue is generally
associated with certain product revenue, although no installation revenue is
ordinarily received for product sales to the Company's distributors. In 1996,
the Company established the Aspect Consulting and Systems Integration (C&SI)
business unit. C&SI revenues are dependent on the Company's ability to obtain
contracts for suitable projects and successfully complete these projects. Since
many of the costs associated with providing customer support do not vary
proportionately with customer support revenues, quarterly fluctuations in
customer support revenues can have a significant impact on the related gross
margin.
Gross Margin on Product Revenues
Product gross margin increased to 69% for the third quarter of 1997 from 66% for
the same period of 1996. For the first nine months of 1997, product gross
margins were 68%, up from 67% for the same period of 1996. The strengthening in
product gross margin in both periods reflects increases in add-on margins, among
other factors. On a forward-looking basis, the Company expects that the
following factors, among others, could have a material impact on product gross
margins: the mix of products sold; the channel of distribution; the portion of
systems revenues related to accounts purchasing multiple systems; the mix and
level of third-party product included as part of systems integration projects;
and the results of newly acquired subsidiaries and newly established business
units.
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ASPECT TELECOMMUNICATIONS CORPORATION
Gross Margin on Customer Support Revenues
Customer support gross margin increased to 30% for the third quarter of 1997
from 26% for the same period of 1996. For the first nine months of 1997,
customer support gross margin increased to 29% from 27% for the same period of
1996. The increases in customer support gross margin for both periods were
primarily attributable to growth in maintenance revenues at a rate significantly
greater than related costs. On a forward-looking basis, the Company anticipates
that customer support margins will vary from quarter to quarter due to
fluctuations in customer support revenues, since many of the costs associated
with providing customer support do not vary proportionately with customer
support revenues, the expansion of its customer support infrastructure, and the
Company's ability to build a successful C&SI business unit.
Research and Development Expenses
Research and development ("R&D") expenses were $11 million for the third quarter
of 1997, representing an increase of 28% when compared with R&D expenses of $9
million for the same period of 1996. For the first nine months of 1997, R&D
expenses were $34 million, up 38% from the same period of 1996. R&D increases
for both periods were primarily attributable to increased personnel and labor
costs, as well as, other infrastructure costs. As a percentage of net revenues,
R&D spending was 12% for both the third quarter and first nine months of 1997
compared to 11% for the same periods of 1996. The Company continues to believe
that significant investment in R&D is required to remain competitive and
anticipates, on a forward-looking basis, that such expenses will increase in
terms of absolute dollars for 1997 as a whole, when compared to 1996, although
such expenses as a percentage of net revenues may fluctuate on a quarterly
basis.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $27 million for the
third quarter of 1997, representing an increase of 27% when compared with SG&A
expenses of $21 million for the same period of 1996. For the first nine months
of 1997, SG&A expenses were $75 million, up 28% from the same period of 1996.
The increases in SG&A for both periods were primarily related to increased
personnel, infrastructure, and legal costs. As a percentage of net revenues,
SG&A was 27% for the third quarter of 1997 and 26% for the first nine months of
1997 compared with 27% for both periods in 1996. The Company anticipates, on a
forward-looking basis, that SG&A expenses will increase in terms of absolute
dollars for 1997 as a whole, when compared to 1996, although such expenses as a
percentage of net revenues may fluctuate on a quarterly basis. In addition, on a
forward-looking basis, legal expenses are expected to increase in future periods
due to the Lucent Technologies Inc. litigation (see Part II, Item 1. Legal
Proceedings).
Net Interest and Other Income
Net interest and other income increased to $1.6 million for the third quarter of
1997 from $0.5 million for the same period of 1996. Net interest and other
income increased to $6.5 million for the first nine months of 1997 from $1.0
million for the same period of 1996. Included in other income for the nine
months of 1997 is approximately $2 million from a gain on the sale of
appreciated equity securities. The increases in interest and other income during
1997 were due primarily to such gain on the sale of equity securities, higher
interest earning balances, and the conversion of the Company's $55 million of
convertible subordinated debentures in October 1996. Interest expense on the
convertible subordinated debentures for the three month and nine month periods
ended September 30, 1996 was $0.7 million and $2.2 million, respectively.
11
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ASPECT TELECOMMUNICATIONS CORPORATION
Income Taxes
The Company's effective income tax rate was 51.6% and 42.1%, respectively, for
the three month and nine month periods ending September 30, 1997. These rates
reflect the tax effect of the non-deductible, non-recurring charge for purchased
in-process technology associated with the acquisition of Commerce Soft.
Exclusive of this non-recurring charge, the Company's effective tax rate for
both the three month and the nine month periods ending September 30, 1997 was
38.5%, up from 37.2% and 37.1%, respectively, for the comparable periods in
1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company's principal source of liquidity consisted
of cash, cash equivalents, and short-term investments totaling $148 million,
which represented 45% of total assets. The primary sources of cash for the first
nine months of 1997 consisted of cash provided by operating activities of $46
million, net of a $20 million increase in accounts receivable, net sales and
maturities of short-term investments of $18 million, and proceeds from the
issuance of common stock under various stock plans of $6 million. The primary
uses of cash for the nine month period of 1997 was for property and equipment
purchases of approximately $19 million.
As of September 30, 1997, the Company's outstanding borrowings consisted of a
$4.5 million note payable incurred in connection with the acquisition of TCS in
October 1995.
The Company believes, on a forward-looking basis, that its cash, cash
equivalents, and short-term investments and anticipated cash flow from
operations will be sufficient to meet the Company's presently anticipated cash
requirements during at least the next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The
Company is required to adopt SFAS 128 in the fourth quarter of fiscal 1997 and
will restate at that time earnings per share (EPS) data for prior periods to
conform with SFAS 128. Earlier application is not permitted. The requirements of
SFAS 128 and the pro forma effect of adopting SFAS 128 are disclosed in the
Notes to Condensed Consolidated Financial Statements.
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from nonowner sources, and No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas, and major customers. Adoption of these statements will not
impact the Company's consolidated financial position, results of operations or
cash flows. Both statements are effective for fiscal years beginning after
December 15, 1997, with earlier application permitted.
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ASPECT TELECOMMUNICATIONS CORPORATION
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The segment of the telecommunications market that includes the Company's
products has been characterized by extensive litigation regarding patents and
other intellectual property rights. As is common in the telecommunications
industry, the Company has been in the past and may in the future be notified of
claims that its products or services are subject to patents or other proprietary
rights of third parties. Although the Company attempts to ensure that its
products and processes do not infringe such third-party patents or proprietary
rights, there can be no assurance that infringement or invalidity claims (or
claims for indemnification resulting from infringement claims) will not be
asserted or prosecuted against the Company. Periodically, the Company negotiates
with third parties to establish patent license or cross-license agreements.
There can be no assurance that such negotiations will result in the Company
obtaining a license on satisfactory terms or at all. Moreover, license
agreements with third parties may not include all intellectual property rights
that may be issued to or owned by the licensors, and thus future disputes with
these companies are possible. In the event an intellectual property dispute is
not settled through a license, litigation could ensue. Any litigation or
interference proceedings that may be declared by the United States Patent and
Trademark Office to determine the priority of inventions, could result in
substantial expense to the Company and significant diversion of effort by the
Company's technical and management personnel. An adverse determination in such
litigation or proceeding, including without limitation the Lucent litigation
discussed below, could prevent the Company from making, using or selling certain
of its products, and subject the Company to damage assessments, all of which
could have a material adverse effect on the Company's business, operating
results or financial condition.
On March 5, 1997, Lucent Technologies Inc. ("Lucent") filed a lawsuit in the
United States District Court for the Eastern District of Pennsylvania alleging
that the Company infringes four of Lucent's U.S. patents (the "Lucent Patents").
In its complaint, Lucent is seeking to enjoin the Company from allegedly
continuing to infringe the Lucent Patents and is seeking an unspecified amount
of compensatory damages, treble damages for alleged willful infringement, and
interest, expenses and attorneys' fees. On May 2, 1997, the Company filed an
answer in response to the Lucent complaint, asserting that the Lucent Patents
are invalid and denying the alleged patent infringement. The Company believes
that it has meritorious defenses to the asserted claims and intends to defend
the litigation vigorously. Although the Company does not believe that any of its
products infringe any valid claims of the Lucent Patents, the outcome of
litigation is inherently unpredictable, and there can be no assurance that the
results of these proceedings will be favorable to the Company or that they will
not have a material adverse effect on the Company's business, operating results
or financial condition. Regardless of the ultimate outcome, the Lucent
litigation could result in substantial expense to the Company and significant
diversion of effort by the Company's technical and management personnel. If the
court determines that the Company infringes the Lucent Patents and that the
Lucent Patents are valid and enforceable, it could issue an injunction
prohibiting the Company from making, using or selling certain products and it
could assess significant damages against the Company. Accordingly, an adverse
determination in the proceeding could subject the Company to significant
liabilities and require the Company to seek a license from Lucent. Although
intellectual property disputes are often settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial, and
there can be no assurance that a license from Lucent, if required, would be
available to the Company on acceptable terms or at all. Jury selection for the
trial of this lawsuit is scheduled to begin on April 13, 1998.
In the future, the Company could become involved in other types of litigation,
such as shareholder lawsuits for alleged violations of securities laws, claims
asserted by current or former employees, and product liability claims. An
adverse outcome in such litigation could have a material adverse effect on the
13
<PAGE> 14
ASPECT TELECOMMUNICATIONS CORPORATION
Company's business, operating results or financial condition. Regardless of
merit, source, or outcome of the litigation, it could result in substantial cost
to and diversion of effort by the Company.
ITEM 2. CHANGES IN SECURITIES
On September 2, 1997, the Company acquired Commerce Soft Inc. (Commerce Soft).
In connection with the acquisition, Aspect issued 177,309 shares of the
Company's common stock to the shareholders of Commerce Soft following the merger
of a wholly-owned subsidiary of the Company with and into Commerce Soft.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act of 1933, as amended (the Act), in reliance on Section
4(2) of the Act as transactions by an issuer not involving a public offering.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were attached to the share certificates issued in such transactions. All
recipients had adequate access to information about the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 11.1 Statement re: Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
B. REPORTS ON FORM 8-K
Reports on Form 8-K filed during the quarter ended September 30, 1997:
Form 8-K dated July 18, 1997:
Item 5. Other Events - Announcement of earnings and results of
operations for the quarter ended June 30, 1997.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits - Aspect Telecommunications Corporation Press Release dated
July 16, 1997.
14
<PAGE> 15
ASPECT TELECOMMUNICATIONS CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ASPECT TELECOMMUNICATIONS CORPORATION
(Registrant)
Date: November 13, 1997
By
/s/ ERIC J. KELLER
---------------------------------------
Eric J. Keller
Vice President, Finance and Chief
Financial Officer (Duly Authorized
and Principal Financial and Accounting
Officer)
15
<PAGE> 16
EXHIBIT INDEX
Exhibit Description
- ------- ------------
11.1 Statement re: Computation of Earnings Per Share
27 Financial Data Schedule
<PAGE> 1
ASPECT TELECOMMUNICATIONS CORPORATION
EXHIBIT 11.1:
Statement re: Computation of Earnings Per Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
------- -------- ------- ---------
<S> <C> <C> <C> <C>
Primary:
Weighted average common shares
outstanding during the period 49,434 42,883 49,131 42,674
Common share equivalents:
Dilutive effect of stock options 2,799 3,705 3,090 3,758
------- ------- ------- -------
Total 52,233 46,588 52,221 46,432
======= ======= ======= =======
Net income $ 7,009 $ 9,690 $30,811 $27,189
======= ======= ======= =======
Primary earnings per share $ 0.13 $ 0.21 $ 0.59 $ 0.59
======= ======= ======= =======
</TABLE>
<PAGE> 2
ASPECT TELECOMMUNICATIONS CORPORATION
EXHIBIT 11.1 (CONTINUED):
Statement re: Computation of Earnings Per Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
------- -------- -------- -------
<S> <C> <C> <C> <C>
Fully Diluted:
Weighted average common shares
outstanding during the period 49,434 42,883 49,131 42,674
Common share equivalents:
Dilutive effect of stock options 3,018 4,304 3,120 4,359
Weighted average shares issuable
upon assumed conversion of debt - 5,659 - 5,659
------- ------- ------- -------
Total 52,452 52,846 52,251 52,692
======= ======= ======= =======
Net income $ 7,009 $ 9,690 $30,811 $27,189
Interest expense during the period on
convertible subordinated debentures,
net of tax - 461 - 1,383
------- ------- ------- -------
Net income adjusted for
fully diluted calculations $ 7,009 $10,151 $30,811 $28,572
======= ======= ======= =======
Fully diluted earnings per share $ 0.13 $ 0.19 $ 0.59 $ 0.54
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
(A) THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME
INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDING SEPTEMBER 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 97,759
<SECURITIES> 50,197
<RECEIVABLES> 73,749
<ALLOWANCES> 1,660
<INVENTORY> 10,367
<CURRENT-ASSETS> 242,069
<PP&E> 114,893
<DEPRECIATION> 56,696
<TOTAL-ASSETS> 329,836
<CURRENT-LIABILITIES> 67,308
<BONDS> 4,500
0
0
<COMMON> 138,701
<OTHER-SE> 119,327
<TOTAL-LIABILITY-AND-EQUITY> 329,836
<SALES> 202,042
<TOTAL-REVENUES> 284,351
<CGS> 65,215
<TOTAL-COSTS> 123,563
<OTHER-EXPENSES> 114,081
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199
<INCOME-PRETAX> 53,173
<INCOME-TAX> 22,362
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,811
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
</TABLE>
