<PAGE>
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 June 30, 2000
or
o 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 COMMUNICATIONS 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.)
1310 Ridder Park Drive, San Jose, California 95131-2313
(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 51,723,147 at July 31, 2000.
<PAGE>
ASPECT COMMUNICATIONS CORPORATION
INDEX
<TABLE>
<CAPTION>
Description Page Number
----------- -----------
<S> <C> <C>
Cover Page 1
Index 2
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the
Three and Six Month Periods Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
Six Month Periods Ended June 30, 2000, and 1999 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: Qualitative and Quantitative Disclosures About Financial
Market Risk 16
Item 4: Submission of Matters to a Vote of Security Holders 17
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K 17
Signature 18
</TABLE>
<PAGE>
ASPECT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 80,277 $ 84,826
Short-term investments 149,189 167,840
Marketable equity securities 59,774 86,139
Accounts receivable, net 97,640 77,138
Inventories 20,032 16,636
Other current assets 29,108 17,475
--------- ---------
Total current assets 436,020 450,054
Property and equipment, net 92,474 79,397
Intangible assets, net 151,527 98,711
Other assets 16,864 8,050
--------- ---------
Total assets $696,885 $636,212
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,920 $ 14,525
Accrued compensation and related benefits 26,732 25,866
Other accrued liabilities 39,220 59,437
Deferred revenue 47,895 36,964
--------- ---------
Total current liabilities 145,767 136,792
Deferred taxes 12,185 5,114
Convertible subordinated debentures 168,001 163,107
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value: 2,000,000 shares
authorized, none outstanding -- --
Common stock, $.01 par value: 100,000,000 shares
authorized, shares outstanding:
51,673,160 and 49,462,303 at June 30, 2000 and
December 31, 1999, respectively 219,026 155,277
Accumulated other comprehensive income 31,726 48,328
Retained earnings 120,180 127,594
--------- ---------
Total shareholders' equity 370,932 331,199
--------- ---------
Total liabilities and shareholders' equity $696,885 $636,212
--------- ---------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
ASPECT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data - unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net revenues:
Product $ 73,580 $ 64,566 $ 159,941 $ 115,762
Services 64,821 47,620 126,711 96,509
---------- --------- ---------- ----------
Total net revenues 138,401 112,186 286,652 212,271
---------- --------- ---------- ----------
Cost of revenues:
Cost of product revenues 27,282 22,044 57,006 39,784
Cost of services revenues 40,358 36,498 81,573 72,151
---------- --------- ---------- ----------
Total cost of revenues 67,640 58,542 138,579 111,935
---------- --------- ---------- ----------
Gross margin 70,761 53,644 148,073 100,336
Operating expenses:
Research and development 26,604 21,916 52,825 41,417
Selling, general and administrative 56,011 49,186 106,935 95,129
Purchased in-process technology -- -- 5,018 --
---------- --------- ---------- ----------
Total operating expenses 82,615 71,102 164,778 136,546
---------- --------- ---------- ----------
Loss from operations (11,854) (17,458) (16,705) (36,210)
Interest and other income 8,221 2,142 14,936 4,385
Interest expense (2,408) (2,497) (5,004) (4,959)
---------- --------- ---------- ----------
Loss before income taxes (6,041) (17,813) (6,773) (36,784)
Benefit (provision) for income taxes 1,414 5,343 (643) 11,035
---------- --------- ---------- ----------
Net loss $ (4,627) $ (12,470) $ (7,416) $ (25,749)
---------- --------- ---------- ----------
Basic and diluted loss per share $ (0.09) $ (0.26) $ (0.15) $ (0.53)
Weighted average shares outstanding 51,413 47,634 50,977 48,395
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
ASPECT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands--unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
2000 1999
------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,416) $ (25,749)
Reconciliation of net loss to cash provided by
operating activities:
Depreciation 16,451 10,556
Amortization of intangible assets 13,766 10,256
Purchased in-process technology 5,018 --
Noncash interest expense on debentures 4,894 4,613
Deferred taxes (22,987) (3,099)
Changes in assets and liabilities; net of effects
from company acquired in 2000:
Accounts receivable (22,299) 38,192
Inventories (3,545) (330)
Other current assets and other assets 18,799 (8,120)
Accounts payable 17,026 1,518
Accrued compensation and related benefits 324 2,021
Other accrued liabilities (10,047) (2,463)
Deferred revenue 11,482 11,066
------------ ------------
Cash provided by operating activities 21,466 38,461
Cash flows from investing activities:
Short-term investment purchases (195,428) (56,542)
Short-term investment sales and maturities 214,633 52,583
Property and equipment purchases (30,624) (12,305)
Purchase of company, net of cash acquired (44,942) --
------------ ------------
Cash used in investing activities (56,361) (16,264)
Cash flows from financing activities:
Other common stock transactions--net 30,158 4,444
Repurchase of common stock -- (21,709)
Payments on notes payable (1,676) (1,574)
------------ ------------
Cash provided by (used in) financing activities 28,482 (18,839)
Effect of exchange rate changes on cash and cash equivalents 1,864 580
------------- ------------
Increase (decrease) in cash and cash equivalents (4,549) 3,938
Cash and cash equivalents:
Beginning of period 84,826 67,071
------------ ------------
End of period $ 80,277 $ 71,009
------------ ------------
Noncash investing and financing activities:
Stock options issued in connection with the acquisition of
PakNetX Corporation $ 10,422 --
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED
Basis of Presentation
The consolidated financial statements include the accounts of Aspect
Communications Corporation (Aspect or the Company) and its subsidiaries, all of
which are wholly-owned. 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 annual 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 six months ended June 30, 2000 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's 1999 "Annual
Financial Report to Shareholders" attached as an appendix to the Proxy Statement
for the 2000 Annual Meeting of Shareholders.
Business Combinations
On February 18, 2000, the Company acquired privately held PakNetX Corporation
(PakNetX), an eBusiness software provider based in Salem, New Hampshire. The
transaction will enable Aspect to integrate multimedia-over-IP technology into
its flagship customer relationship portal software and strengthen the Company's
eCRM market position. The transaction was accounted for as a purchase and
resulted in a one-time charge of approximately $5 million related to in-process
technology in the quarter ended March 31, 2000. The Company paid approximately
$45 million in cash for all of the outstanding common and preferred shares and
warrants of PakNetX. The Company is also obligated to make up to $10 million in
future payments contingent on the achievement of certain milestones. Such
payments will be capitalized as part of the purchase price when the milestones
are attained. In addition, Aspect assumed the existing PakNetX stock option plan
and converted PakNetX stock options into options to purchase approximately
160,000 shares of Aspect Common Stock with a fair value of approximately $10
million, plus transaction costs of approximately $2 million. The historical
operations of PakNetX are not material to the financial position or results of
operations of the Company.
The total purchase price and final allocation among the tangible and intangible
assets and liabilities acquired (including purchased in-process technology) is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Amortization
period
Total purchase price: Purchase price allocation: (years)
<S> <C> <C> <C> <C>
Total cash consideration $44,948 Tangible assets $301
Value of options assumed 10,422 Intangible assets:
Transaction costs 1,850 Developed and core technology 41,466 7
Assembled workforce 567 4
Testing tools 518 4
Goodwill 24,018 7
In-process technology 5,018 Expensed
Tangible liabilities (1,790)
Deferred tax liabilities (12,878)
------- -------
$57,220 $57,220
------- -------
</TABLE>
As noted above, Aspect recorded a one-time charge of $5 million in the first
quarter of 2000 for purchased in-process technology that had not reached
technological feasibility and had no alternative future use. The purchased in-
process technology related to the development of Version 4.0 of PakNetX's
integrated contact center solution that had not reached technological
feasibility and for which the successful development was therefore uncertain.
Management expects that this product will be completed and will become available
for sale in fiscal 2000 after integration into Aspect's product line. Aspect
will begin to benefit from the acquired research and development related to this
product upon shipment. Failure to reach successful completion of this project
could result in impairment of the associated capitalized intangible assets and
could require the Company to accelerate the time period over which the
intangibles are being amortized, which could have a material adverse effect on
the Company's business, financial condition, results of operations or cash
flows.
Significant assumptions used to determine the value of in-process technology
included: (i) projected net cash flows that were expected to result from the
development effort; (ii) an estimate of percentage complete for the project; and
(iii) a discount rate of approximately 25%. As of June 30, 2000, technological
feasibility had not been reached and no significant departures from the
assumptions included in the valuation analysis have occurred.
<PAGE>
Reclassifications
Certain prior-year amounts have been reclassified to conform to the current-year
presentation.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist of (in thousands):
June 30, December 31,
2000 1999
------------ ------------
Raw materials $13,034 $9,816
Work in progress 3,364 3,529
Finished goods 3,634 3,291
------- -------
Total $20,032 $16,636
------- -------
Comprehensive Income (Loss)
Comprehensive loss is calculated as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (4,627) $(12,470) $ (7,416) $(25,749)
Unrealized gain (loss) on investments, net (4,590) 459 (16,355) 112
Accumulated translation adjustments, net 219 (217) (247) (1,028)
-------- -------- --------- --------
Total comprehensive loss $ (8,998) $(12,228) $ (24,018) $(26,665)
-------- -------- --------- --------
</TABLE>
Interest and Other Income
Interest and other income of $8.2 million in the second quarter of 2000 included
a pre-tax gain of approximately $5.7 million on the sale of appreciated
marketable equity securities. Interest and other income of $14.9 million for the
first six months of 2000 included a pre-tax gain of approximately $9.4 million
on the sale of appreciated marketable equity securities.
Contingencies
The Company is from time to time involved in litigation or claims that arise in
the normal course of business. The Company does not expect that any current
litigation or claims will have a material adverse effect on the Company's
business, operating results, or financial condition.
Per Share Information
Basic loss per share is computed using the weighted average number of common
shares outstanding during the period. Diluted loss per share further includes
the dilutive impact of stock options. Basic and diluted loss per share for the
three and six months ended June 30 are calculated as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(4,627) $(12,470) $(7,416) $(25,749)
Weighted average shares outstanding 51,413 47,634 50,977 48,395
Basic and diluted loss per share $(0.09) $(0.26) $(0.15) $(0.53)
</TABLE>
At June 30, 2000 and 1999, the Company had 10.5 million and 11.9 million common
stock options outstanding, respectively, which could potentially dilute basic
earnings per share in the future. These options were excluded from the
computation of diluted earnings per share because inclusion of these shares
would have had an anti-dilutive effect, as the Company had a net loss for these
periods. Additionally, as of June 30, 2000 and 1999, there were 4.3 million
shares of common stock issuable upon conversion of debentures. The weighted
average of these shares were not included in the calculation of diluted earnings
per share for any of the periods
<PAGE>
presented, because this inclusion would have been anti-dilutive.
New Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
requires that all derivatives be carried at fair value and provides for hedging
accounting when certain conditions are met. This statement, issued in June 1998,
is effective for all fiscal quarters of fiscal years beginning after June 15,
2000. The Company does not believe adoption of this statement will have a
material impact on the Company's financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101
"Revenue Recognition in Financial Statements," which summarizes certain of the
SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company believes that its
revenue recognition policy complies with the provisions of SAB No. 101.
Subsequent Event
In July 2000, the Company paid $5 million in milestone payments related to the
February 2000 PakNetX acquisition. This amount will be included in goodwill and
will be amortized over the remaining life of the intangible asset. The Company
anticipates making an additional $5 million milestone payment by the end of
2000.
<PAGE>
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 1999 Annual Financial Report to Shareholders attached as an appendix
to Aspect's 2000 Proxy Statement.
Except for historical information contained herein, the matters discussed in
this report are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended; Section 21E of the Securities and
Exchange Act of 1934, as amended; and the Private Securities Litigation Reform
Act of 1995; and are made under the safe-harbor provisions thereof. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Specific
factors that may cause actual results to differ include: the significant
percentage of Aspect's quarterly sales consummated in the last few days of the
quarter making financial predictions especially difficult and raising a
substantial risk of variance in actual results, as well as other risks that are
discussed under the caption "Business Environment and Risk Factors". Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. Aspect undertakes no
obligation to publicly release any revision to these forward-looking statements
that may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Background and Acquisitions
On February 18, 2000, the Company acquired privately held PakNetX Corporation
(PakNetX), an eBusiness software provider based in Salem, New Hampshire. The
transaction will enable Aspect to integrate multimedia-over-IP technology into
its flagship customer relationship portal software and strengthen the Company's
eCRM market position. The transaction was accounted for as a purchase and
resulted in a one-time charge of approximately $5 million related to in-process
technology in the quarter ended March 31, 2000. The Company paid approximately
$45 million in cash for all of the outstanding common and preferred shares and
warrants of PakNetX. The Company is also obligated to make up to $10 million in
future payments contingent on the achievement of certain milestones. Such
payments will be capitalized as part of the purchase price when the milestones
are attained. In addition, Aspect assumed the existing PakNetX stock option plan
and converted PakNetX stock options into options to purchase approximately
160,000 shares of Aspect Common Stock with a fair value of approximately $10
million, plus transaction costs of approximately $2 million. The historical
operations of PakNetX are not material to the financial position or results of
operations of the Company.
The total purchase price and final allocation among the tangible and intangible
assets and liabilities acquired (including purchased in-process technology) is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Amortization period
Total purchase price: Purchase price allocation: (years)
<S> <C> <C> <C>
Total cash consideration $44,948 Tangible assets $ 301
Value of options assumed 10,422 Intangible assets:
Transaction costs 1,850 Developed and core technology 41,466 7
Assembled workforce 567 4
Testing tools 518 4
Goodwill 24,018 7
In-process technology 5,018 Expensed
Tangible liabilities (1,790)
Deferred tax liabilities (12,878)
------- --------
$57,220 $ 57,220
------- --------
</TABLE>
As noted above, Aspect recorded a one-time charge of $5 million in the first
quarter of 2000 for purchased in-process technology that had not reached
technological feasibility and had no alternative future use. The purchased
in-process technology related to the development of Version 4.0 of PakNetX's
integrated contact center solution that had not reached technological
feasibility and for which the successful development was therefore uncertain.
Management expects that this product will be completed and will become available
for sale in fiscal 2000 after integration into Aspect's product line. Aspect
will begin to benefit from the acquired research and development related to this
product upon shipment. Failure to reach successful completion of this project
could result in impairment of the associated capitalized intangible assets and
could require the Company to accelerate the time period over which the
intangibles are being amortized, which could have a material adverse effect on
the Company's business, financial condition, results of operations or cash
flows.
Significant assumptions used to determine the value of in-process technology
included: (i) projected net cash flows that were expected to result from the
development effort; (ii) an estimate of percentage complete for the project; and
(iii) a discount rate of approximately
<PAGE>
25%. As of June 30, 2000, technological feasibility had not been reached and no
significant departures from the assumptions included in the valuation analysis
had occurred.
In July 2000, the Company paid $5 million in milestone payments related to the
February 2000 PakNetX acquisition. This amount will be included in goodwill and
will be amortized over the remaining life of the intangible asset. The Company
anticipates making an additional $5 million milestone payment by the end of
2000.
Results of Operations
During 1999, we initiated a transformation of our business from a
telecommunications equipment supplier to a provider of customer relationship
portals and associated software applications. The primary motive for the
transformation was that forecasts for the traditional market for voice
applications and equipment indicated that we could no longer sustain our
historical growth rates in that market alone. We needed to
define and execute a market strategy that would fuel our next stage of growth.
This transformation included repackaging and repricing our products and
services, development and launch of new software-based products and services,
transforming our internal processes and systems so that we could operate within
a software-centric business model, establishing key systems integration and
technology partnerships, changes in our senior management team, and retention of
key employees.
In September 1999, the Company changed its name from Aspect Telecommunications
Corporation to Aspect Communications Corporation to reflect the transformation
of its business from a telecommunications equipment supplier to a provider of
customer relationship portals and associated software applications.
Net revenues for the second quarter of 2000 increased 23% to $138.4 million from
$112.2 million for the second quarter of 1999. Net revenues for the first six
months of 2000 increased 35% to $286.7 million from $212.3 million for the first
six months of 1999. International net revenues, as a percentage of total net
revenues over the periods presented, continued to be approximately 33% in the
second quarter and in the first six months of 2000.
Product revenues for the second quarter of 2000 increased 14% to $73.6 million
from $64.6 million for the second quarter of 1999. Product revenues for the
first six months of 2000 increased 38% to $159.9 million from $115.8 million for
the first six months of 1999. The increases across the periods presented relates
primarily to the business model transformation previously described. Changes in
average selling prices for our products across the periods presented are not
meaningful due to the change in our business model.
Gross margin on product revenues was 63% in the second quarter of 2000, and 66%
in the second quarter of 1999. Gross margin on product revenues was 64% in the
first six months of 2000, and 66% in the first six months of 1999. The decrease
in product margins across the periods presented primarily reflects the change in
product mix and the repricing and repackaging of Aspect's traditional product
offerings. On a forward-looking basis, we anticipate that product margins will
fluctuate from period to period due to fluctuations in mix of product revenues.
Services revenues for the second quarter of 2000 increased 36% to $64.8 million
from $47.6 million in the second quarter of 1999. Services revenues for the
first six months of 2000 increased 31% to $126.7 million from $96.5 million for
the first six months of 1999. Growth in services revenues resulted primarily
from increases in maintenance revenues as a result of the growth in our
installed base during Q1 and Q2 2000. Services revenues include fees for
providing contractually agreed-upon system service, installation of products,
systems integration revenues, and other support services.
Gross margin on services revenues was 38% in the second quarter of 2000, and 23%
in the second quarter of 1999. Gross margin on services revenues was 36% in the
first six months of 2000, and 25% in the first six months of 1999. The increase
in services margins reflects services revenues growing while the costs
associated with providing the related services, in particular, costs associated
with consulting and systems integration services, are stabilizing. On a
forward-looking basis, we anticipate that services margins will fluctuate from
period to period due to fluctuations in services revenues (since many of the
costs of providing services do not vary proportionately with related revenues)
and ongoing efforts to expand services infrastructure.
Research and development (R&D) expenses in the second quarter of 2000 increased
21% to $26.6 million from $21.9 million in the second quarter of 1999. R&D
expenses in the first six months of 2000 (excluding the one-time in-process
technology charge) increased 28% to $52.8 million from $41.4 million in the
first six months of 1999. R&D expenditures reflect our ongoing efforts to remain
competitive through both new product development and expanded capabilities for
existing products. The increases across the periods presented primarily reflect
increased staffing, associated transformation and infrastructure costs, and the
impact of amortization costs associated with purchased, developed, and core
technology intangible assets. As a percentage of net revenues, R&D expenses were
19% and 20% in the second quarter of 2000 and 1999, respectively. As a
percentage of net revenues, R&D expenses were 18% and 20% for the first six
months of 2000 and 1999, respectively. Excluding amortization of intangible
assets, R&D expenses were $24.1 million in the second quarter of 2000, and $20.9
million in the second quarter of 1999. Excluding amortization of intangible
assets, R&D expenses were $48.5 million in the first six months of 2000, and
$39.3 million in the first six months of 1999. We continue to believe that a
significant investment in R&D is required to remain competitive, and anticipate,
on a forward-looking basis, that such expenses in 2000 will increase in absolute
dollars, although such expenses as a percentage of net revenues may fluctuate
between periods.
<PAGE>
Selling, general and administrative (SG&A) expenses in the second quarter of
2000 increased 14% to $56.0 million from $49.2 million in the second quarter of
1999. SG&A expenses in the first six months of 2000 increased 12% to $106.9
million from $95.1 million in the first six months of 1999. The increases
primarily resulted from additional amortization expenses related to the purchase
of intangible assets as a result of the acquisition of PakNetX, increased
staffing, and other costs related to the expansion of our business. SG&A
expenses as a percentage of net revenues were 40% in the second quarter of 2000
and 44% in the second quarter of 1999. SG&A expenses as a percentage of net
revenues were 37% in the first six months of 2000 and 45% in the first six
months of 1999. Excluding amortization of intangible assets, SG&A expenses were
$52.3 million in the second quarter of 2000 and $46.3 million in the second
quarter of 1999. Excluding amortization of intangible assets, SG&A expenses were
$100.0 million in the first six months of 2000 and $89.4 million in the first
six months of 1999. We anticipate, on a forward-looking basis, that SG&A
expenses will continue to increase in absolute dollars for 2000, when compared
with 1999, although such expenses as a percentage of net revenues may fluctuate
between periods.
Purchased in-process technology represents a non-recurring charge of $5 million
in the first quarter of 2000, or $0.10 per diluted share, related to the
acquisition of PakNetX.
Net interest and other income and expense were a net income of $5.8 million in
the second quarter of 2000, compared to $355,000 of net interest expense in
the second quarter of 1999. The increase resulted primarily from a pre-tax gain
of approximately $5.7 million on the sale of appreciated marketable equity
securities, as well as an increase in interest income due to a rise in interest
rates and amount of funds invested. Net interest and other income and expense
were a net income of $9.9 million for the first six months of 2000, compared to
a net expense of $574,000 in the first six months of 1999. The increase resulted
primarily from a pre-tax gain of approximately $9.4 million on the sale of
appreciated marketable equity securities.
The Company's effective tax rate, excluding the effect of purchased in-process
technology related to acquisitions, for the three and six months ended June 30,
2000 was 23.4% and (36.6%) compared with 30.0% for the same periods of 1999.
Current year and 1999 effective tax rates reflect the non-deductibility of
goodwill amortization. Fluctuations in the tax rate are primarily attributable
to the amount of such goodwill amortization relative to income/loss before tax
expense.
Liquidity and Capital Resources
At June 30, 2000, the principal source of liquidity consisted of cash, cash
equivalents, short-term investments, and marketable equity securities totaling
$289 million, which represented 42% of total assets. The primary sources of cash
during the first six months of 2000 were $21.5 million from operating
activities, net short-term sales of short-term investments of $19.2 million,
and proceeds from the issuance of common stock under various stock plans of
$30.2 million. The primary uses of cash during the first six months of 2000
were $44.9 million cash paid to acquire PakNetX, and $30.6 million for the
purchase of property and equipment. We currently anticipate higher spending
levels for property and equipment throughout 2000, primarily related to
expansion of our facilities.
As of June 30, 2000, the fair market value of the Company's marketable equity
securities was $60 million. These securities are available for sale at Aspect's
discretion and are subject to market prices, which have historically fluctuated
significantly. At June 30, 2000, outstanding borrowings totaled $168 million.
On a forward-looking basis, cash, cash equivalents, short-term investments,
marketable equity securities, and anticipated cash flow from operations will be
sufficient to meet presently anticipated cash requirements during at least the
next twelve months.
Business Environment and Risk Factors
We operate in a rapidly changing environment that involves a number of risks,
some of which are beyond our control. You should read the cautionary statements
in this document, wherever they appear, as applying to all related
forward-looking statements. Our actual results may differ materially from our
projections due to, among other things, the occurrence of the risks set forth
below.
Our Company's Business Focus is Changing. We are shifting our focus from
supplying telecommunications equipment to becoming a provider of customer
relationship portals and associated software applications. Historically, we have
supplied the hardware, software, and associated support services for
implementing call center solutions. Our shift to an enterprise software business
model has required and will continue to require substantial change, potentially
resulting in some disruption, including the following:
. Changes in management and technical personnel;
. Modifications to the pricing and positioning of our products, which
could impact revenues and operating results;
. Expanded or differing competition resulting from entry into the
enterprise software market;
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. More revenues being recognized over longer periods under software
revenue recognition rules; and
. An increased reliance on systems integrators to develop, deploy,
and/or manage our applications.
Our inability to successfully continue this transition in a timely manner could
materially affect our business, operating results, or financial condition.
The Prices of Our Common Stock and Convertible Subordinated Debentures Are
Volatile. The price of our common stock and our convertible subordinated
debentures may be subject to significant volatility. You cannot consider our
past financial performance as a reliable indicator of performance for any future
period, and should not use historical data to predict future results or trends.
For any given quarter, a shortfall in our operating results from the levels
expected by securities analysts or others could immediately and adversely affect
the price of the convertible subordinated debentures and our common stock. If we
do not learn of such shortfalls until late in a fiscal quarter, there could be
an even more immediate and adverse effect on the price of the convertible
subordinated debentures and our common stock. In addition, this volatility could
be exacerbated by the relatively low trading volume of our common stock and
debentures. We operate in a rapidly changing high-technology industry that
exhibits significant stock market volatility. Should the price of our securities
decline rapidly, we may become subject to class action securities litigation.
Our Revenues and Operating Results Are Uncertain and May Fluctuate. Our revenues
may fluctuate significantly from period to period. There are many reasons for
this variability, including the following:
. The shift in our focus from supplying telecommunications equipment to
becoming a provider of customer relationship portals and associated
software applications;
. Reduced demand for some of our products and services;
. A limited number of large orders accounting for a significant portion
of product revenues in any particular quarter;
. The timing of consulting projects and completion of project
milestones;
. The size and timing of individual software license transactions;
. Dependence on new customers for a significant percentage of product
revenues;
. The ability of our sales force to achieve quarterly revenue
objectives;
. Fluctuations in the results of existing operations, recently acquired
subsidiaries, or distributors of our products or services;
. Seasonality and mix of products and services and channels of
distribution;
. Our ability to sell support agreements and support renewal agreements
for our products;
. Our ability to develop and market new products and control costs;
and/or
. Changes in market growth rates for different products and services.
In addition, our products typically represent substantial capital commitments by
customers, involving a potentially long sales cycle. As a result, customer
purchase decisions may be significantly affected by a variety of factors
including trends in capital spending for telecommunications or enterprise
software for customer relationship portals, market competition, and the
availability or announcement of alternative technologies.
Our Revenues Are Dependent on a Small Number of Products. Historically, sales
and installations of a small number of our products accounted for a substantial
portion of net revenues. Demand for our products could be adversely affected by
failure to meet customer specifications and problems with system performance,
system availability, installation or service delivery commitments, or market
acceptance.
Technology is Rapidly Changing. The market for our products and services is
subject to rapid technological change and new product introductions. Current
competitors or new market entrants may develop new, proprietary products with
features that could adversely affect the competitive position of our products.
We may not successfully anticipate market demand for new products or services,
or introduce them in timely manner.
The Internet presents unique risks and challenges, and the increased commercial
use of the Internet could require both substantial modification and
customization of our current products, business models, and the introduction of
new products. We may not be able to compete effectively in the Internet-related
products and services market. In addition, Aspect's products must readily
integrate with major third-party telephony, front-office, and back-office
systems. Any changes to these third-party systems could require us to redesign
our portal product, and any such redesign might not be possible on a timely
basis or achieve market acceptance.
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Our Market Is Intensely Competitive. The market for our products is intensely
competitive, and competition is likely to intensify as companies in our
industry consolidate to offer integrated solutions.
Our competitors include the following:
. Providers of call and contact center systems;
. Providers of PBX systems;
. Providers of voice-over-IP technologies;
. Companies offering computer-telephony integration (CTI)
applications;
. Providers of Internet collaboration and personalization products;
. Systems integrators;
. Telephone operating companies that market automatic call distributor
functionality;
. Providers of wireless application products;
. Participants in the front-office and back-office enterprise software
applications/integration market;
. Companies with technologies that independently balance calls across
multiple call centers enterprise wide;
. Companies offering blending technology for multiple channels of
communication including voice, voice-over-IP, e-mail, and the Web;
. Providers of interactive voice response systems; and/or
. Internet and eBusiness infrastructure and application providers.
As the hardware requirements for our traditional market diminishes, companies
offering alternative or complementary technologies may obtain a significant
position in our market. The anticipated convergence of voice and
data over a single network and the growth of e-mail and the Web as a means of
providing customer services may result in increased competition for us.
Many current and potential competitors, including Cisco Systems, Lucent
Technologies, Inc., Nortel Networks, Rockwell International Corporation,
Alcatel, IBM, Siebel Systems Inc., and Oracle Corporation, have considerably
greater resources, larger customer bases, and a broader international presence
than Aspect. Many current and potential competitors have lower revenues but
considerably larger market capitalization, including Kana Communications,
Inc., E.piphany, Inc., eGain Communications Corporation, BEA Systems, Inc.,
Quintus Corporation, Interactive Intelligence, Inc., and Onyx Software
Corporation. We expect to encounter significant competition from these and
other sources.
Acquisitions and Investments May Be Difficult and Disruptive. We have made a
number of acquisitions and have made minority equity investments in other
companies. These acquisitions and investments can be costly and disruptive, and
we may be unable to successfully integrate a new business or technology into our
business. We may continue to make such acquisitions and investments and there
are a number of risks that future transactions could entail. These risks include
the following:
. Inability to successfully integrate or commercialize acquired
technologies or otherwise realize anticipated synergies or economies
of scale on a timely basis;
. Diversion of management attention;
. Adverse impact on our annual effective tax rate;
. Dilution of existing equity holders;
. Disruption of our ongoing business;
. Inability to assimilate and/or retain key technical and managerial
personnel for both companies;
. Inability to establish and maintain uniform standards, controls,
procedures, and processes;
. Potential legal liability for pre-acquisition activities and permanent
impairment of our equity investments;
. Governmental or competitive responses to the proposed transactions;
and/or
. Impairment of relationships with employees, vendors, and/or customers
including, in particular, acquired original equipment manufacturer and
value-added reseller relationships.
Acquisitions or investments we make may experience significant fluctuations in
market value or may result in significant write-offs, the creation of goodwill,
or the issuance of additional equity or debt securities.
<PAGE>
We May Be Involved in Litigation. We may be involved in litigation for a variety
of matters, including intellectual property infringement, securities law
violations, employee claims, and/or product liability claims. Any claim brought
against us would likely have a financial impact, both because of the effect on
our common stock performance and the disruption, costs, and diversion of
management attention such a claim would cause. In our industry, there has been
extensive litigation regarding patents and other intellectual property rights,
and we are periodically notified of such claims by third parties. In the past,
we have been sued for alleged patent infringement.
Organizations in our industry may intend to use intellectual
property litigation to generate revenues. In the future, claims asserting
infringement of intellectual property rights may be asserted or prosecuted
against us. Although we periodically negotiate with third parties to establish
intellectual property license or cross-license agreements, such as our patent
cross-license agreement with Lucent, such negotiations may not succeed.
Moreover, even if we negotiate license agreements with a third party, future
disputes with such parties are possible. If we are unable to resolve an
intellectual property dispute through a license, settlement, or successful
litigation, we could be subject to damage assessments and be prevented from
making, using, or selling certain products or services.
In the future, we could become involved in other types of litigation, such as
shareholder lawsuits for alleged violations of securities laws, claims by
employees, and product liability claims. Any litigation could result in
substantial cost to us and diversion of our efforts.
Our Intellectual Property May Be Copied, Obtained, or Developed by Third
Parties. Our success depends in part upon our internally developed technology.
Despite the precautions we take to protect our intellectual property,
unauthorized third parties may copy or otherwise obtain and use our technology.
In addition, third parties may develop similar technology independently.
Doing Business Internationally Involves Significant Risk. We market our products
and services worldwide and anticipate entering additional countries in the
future. The financial resources required to enter new international markets may
be substantial, and international operations are subject to additional risks,
including the following:
. The cost and timing of the multiple governmental approvals and product
modifications required by many countries;
. Market acceptance;
. Exchange rate fluctuations;
. Delays in market deregulation;
. Difficulties in staffing and managing foreign subsidiary operations;
and/or
. Global economic climate including potentially negative tax and foreign
and domestic trade legislation, which could result in the creation of
trade barriers such as tariffs, duties, quotas, and other
restrictions.
If we fail to successfully enter certain major international markets, our
competitive position could be impaired and we may be unable to compete on a
global scale.
We May Experience Difficulty Managing Our Growth. Growth may place a significant
strain on our operational and financial systems. We are upgrading these systems
and may experience substantial disruption and incur significant expenses and
write-offs during these transitions. We must carefully manage accounts
receivables to limit credit risk. We must also maintain inventories at levels
consistent with product demand. Inaccurate data (for example, credit histories
or supply/demand forecasts) could quickly result in excessive balances or
insufficient reserves.
We May Experience Difficulty Expanding Our Distribution Channels. We have
historically sold our products and services through our direct sales force and a
limited number of distributors. Changes in customer preferences, the competitive
environment, or other factors may require us to broaden original equipment
manufacturer distribution channels, as well as expand third-party distributor,
systems integrator, electronic, and other alternative distribution channels. We
may not be successful in expanding these distribution channels.
We Are Dependent on Key Personnel. We depend on certain key management and
technical personnel and on our ability to attract and retain highly qualified
personnel in labor markets characterized by high turnover among, high demand
for, and limited supply of, qualified people; and we have recently experienced
increased levels of turnover among such personnel. We have recently undergone
significant changes in senior management and technical personnel and may
experience additional changes as a result of our shift from supplying
telecommunications equipment to becoming a provider of customer relationship
portals and associated software applications. Further, we have replaced a large
number of our sales people and are currently increasing the size of our sales
force. New personnel require extensive training and initially tend to be less
productive than those with greater experience. Any delays or difficulties we
encounter in recruiting, training, or
<PAGE>
retention could impair our ability to sell products and services, may be
disruptive to our operations, and may make retention of highly qualified
personnel increasingly challenging.
Our Operations Are Geographically Concentrated. Significant elements of our
product development, manufacturing, information technology systems, corporate
offices, and support functions are concentrated at a single location in the
Silicon Valley area of California. In the event of a natural disaster, such as
an earthquake or flood, or localized extended outages of critical utilities or
transportation systems, we could experience a significant business interruption.
We Are Dependent on Third Parties. We subcontract substantial elements of our
manufacturing to third parties. We depend on certain critical components in the
production of our products and services. Certain of these components are
obtained only from a single supplier and only in limited quantities. In
addition, some of our major suppliers use proprietary technology and software
code that could require significant redesign of our products in the case of a
change in vendor. Further, suppliers could discontinue
<PAGE>
their products, or modify them in manners incompatible with our current use, or
use manufacturing processes and tools that could not be easily migrated to other
vendors. If any of these vendors experience difficulty meeting our requirements
for components, we may be unable to meet development or delivery commitments.
Our Debt and Debt Service Obligations Are Significant. We incurred $150 million
of principal indebtedness ($490 million principal at maturity) from the sale of
convertible subordinated debentures in August 1998. This debt resulted in a
ratio of long-term debt to total shareholders' equity of approximately 1:2 at
December 31, 1999. As a result of this sale, we have substantially increased our
principal and interest obligations. The degree to which we are leveraged could
materially and adversely affect our ability to obtain additional financing and
could make us more vulnerable to industry downturns and competitive pressures.
Our ability to meet our debt service obligations will depend on our future
performance, which will be subject to financial, business, and other factors
affecting our operations, many of which are beyond our control.
Item 3. Quantitative and Qualitative Disclosures About Financial Market Risk
Reference is made to the information appearing under the caption "Quantitative
and Qualitative Disclosures About Financial Market Risk" of the Registrant's
1999 Annual Financial Report to Shareholders, attached as an appendix to
Aspect's 2000 Proxy Statement, which information is hereby incorporated by
reference. The Company believes there were no material changes in the Company's
exposure to financial market risk during the three or six months ended June 30,
2000.
<PAGE>
Part II: Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On May 4, 2000, the Annual Meeting of Shareholders of Aspect Communications
Corporation was held in San Jose, California.
An election of directors was held with the following individuals being elected
to the Board of Directors of the Company:
James R. Carreker (34,718,553 votes for, 6,245,275 votes withheld)
Debra J. Engel (34,722,727 votes for, 6,241,101 votes withheld)
Norman A. Fogelsong (34,718,388 votes for, 6,245,440 votes withheld)
Christopher B. Paisley (34,459,616 votes for, 6,504,212 votes withheld)
John W. Peth (34,720,609 votes for, 6,243,219 votes withheld)
Other matters voted upon and approved at the meeting, and the number of
affirmations and negative votes cast with respect to each such matters were as
follows:
To approve an amendment of the Company's Bylaws to increase the authorized
number of directors (32,718,661 votes in favor, 212,816 votes opposed, 35,692
votes abstaining).
To approve an amendment to the 1990 Employee Stock Purchase Plan to increase the
number of shares of common stock reserved for issuance thereunder by 2,400,000
shares (39,771,352 votes in favor, 1,121,931 votes opposed, 26,365 votes
abstaining).
To approve the Aspect Incentive Plan (39,278,340 votes in favor, 1,565,784 votes
opposed, 75,224 votes abstaining).
To ratify the appointment of Deliotte & Touche LLP as independent auditors of
the Company for the fiscal year ending December 31, 2000 (40,864,102 votes in
favor, 26,118 votes opposed, 29,428 votes abstaining).
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit Bylaws of the Registrant, as amended to date.
3.3
Exhibit Form of Employment Agreement between the Registrant and certain
10.71 executive officers of the Registrant. (1)
Exhibit Employment Agreement between the Registrant and Gary L. Smith,
10.75 Chief Operating Officer, dated April 6, 2000.
Exhibit 27 Financial Data Schedule
(1) The following executive officers signed the above agreement:
(a) Gary E. Barnett, Senior Vice President eCRM Applications,
dated February 16, 2000.
(b) Rod D. Butters, Senior Vice President Product Strategy and
Portal Platform, dated February 16, 2000.
(C) Frederick H. Harder, Senior Vice President Product
Operations, dated February 16, 2000.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Aspect Communications Corporation
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(Registrant)
Date: August 14, 2000 By /s/ Kevin T. Parker
---------------------
Kevin T. Parker
Chief Financial and Accounting Officer
(Principal Financial and Accounting
Officer)
