<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 September 30, 2000
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 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 51,246,030 at October 31, 2000.
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ASPECT COMMUNICATIONS CORPORATION
INDEX
Description Page Number
----------- -----------
Cover Page 1
Index 2
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the
Three and Nine Month Periods Ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
Nine Month Periods Ended September 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 10
Item 3: Qualitative and Quantitative Disclosures About Financial
Market Risk 19
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K 19
Signature 20
2
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ASPECT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2000 1999
-------- --------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 62,495 $ 84,826
Short-term investments 125,986 167,840
Marketable equity securities 22,885 86,139
Accounts receivable, net 118,708 77,138
Inventories 22,319 16,636
Other current assets 44,199 17,475
-------- --------
Total current assets 396,592 450,054
Property and equipment, net 100,713 79,397
Intangible assets, net 149,057 98,711
Other assets 16,870 8,050
-------- --------
Total assets $663,232 $636,212
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,706 $ 14,525
Accrued compensation and related benefits 25,769 25,866
Other accrued liabilities 47,701 59,437
Deferred revenue 43,463 36,964
-------- --------
Total current liabilities 155,639 136,792
Deferred taxes 8,303 5,114
Convertible subordinated debentures 170,505 163,107
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:
51,187,109 and 49,462,303 at September 30, 2000 and
December 31, 1999, respectively 207,513 155,277
Deferred compensation (2,796) --
Accumulated other comprehensive income 9,477 48,328
Retained earnings 114,591 127,594
-------- --------
Total shareholders' equity 328,785 331,199
-------- --------
Total liabilities and shareholders' equity $663,232 $636,212
-------- --------
See Notes to Condensed Consolidated Financial Statements.
3
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ASPECT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data - unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
Product $ 82,510 $ 75,537 $242,451 $191,299
Services 62,962 54,405 189,673 150,914
-------- -------- -------- --------
Total net revenues 145,472 129,942 432,124 342,213
-------- -------- -------- --------
Cost of revenues:
Cost of product revenues 30,500 25,897 87,506 65,681
Cost of services revenues 40,843 38,049 122,416 110,200
-------- -------- -------- --------
Total cost of revenues 71,343 63,946 209,922 175,881
-------- -------- -------- --------
Gross margin 74,129 65,996 222,202 166,332
Operating expenses:
Research and development 27,901 21,911 80,726 63,328
Selling, general and administrative 61,211 49,044 168,146 144,173
Purchased in-process technology -- -- 5,018 --
-------- -------- -------- --------
Total operating expenses 89,112 70,955 253,890 207,501
-------- -------- -------- --------
Loss from operations (14,983) (4,959) (31,688) (41,169)
Interest and other income 10,277 2,191 25,213 6,575
Interest and other expense (2,725) (2,515) (7,729) (7,473)
-------- -------- -------- --------
7,552 (324) 17,484 (898)
-------- -------- -------- --------
Loss before income taxes (7,431) (5,283) (14,204) (42,067)
Benefit for income taxes 1,844 1,585 1,201 12,620
-------- -------- -------- --------
Net loss $ (5,587) $ (3,698) $(13,003) $(29,447)
-------- -------- -------- --------
Basic and diluted net loss per share $ (0.11) $ (0.08) $ (0.25) $ (0.61)
Weighted average shares outstanding 51,538 47,790 51,164 48,193
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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ASPECT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands--unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (13,003) $ (29,447)
Reconciliation of net loss to cash provided by
operating activities:
Depreciation 25,572 17,238
Amortization of intangible assets and stock-based compensation 21,568 15,370
Purchased in-process technology 5,018 --
Interest expense on debentures 7,398 6,973
Deferred taxes (28,490) (4,184)
Changes in assets and liabilities; net of effects
from company acquired in 2000:
Accounts receivable (45,477) 42,298
Inventories (5,958) (1,308)
Other current assets and other assets 3,386 (27,141)
Accounts payable 23,911 7,882
Accrued compensation and related benefits (514) 3,535
Other accrued liabilities 12,772 20,368
Deferred revenue 7,226 8,806
--------- --------
Cash provided by operating activities 13,409 60,390
Cash flows from investing activities:
Short-term investment purchases (234,986) (93,132)
Short-term investment sales and maturities 278,790 85,801
Property and equipment purchases (48,851) (21,704)
Purchase of company, net of cash acquired (49,942) ---
--------- --------
Cash used in investing activities (54,989) (29,035)
Cash flows from financing activities:
Other common stock transactions, net 38,376 11,092
Repurchase of common stock (20,854) (21,709)
Payments on notes payable (1,676) (1,583)
--------- --------
Cash provided by (used in) financing activities 15,846 (12,200)
Effect of exchange rate changes on cash and cash equivalents 3,403 2,459
--------- --------
Increase (decrease) in cash and cash equivalents (22,331) 21,614
Cash and cash equivalents:
Beginning of period 84,826 67,071
--------- --------
End of period $ 62,495 $ 88,685
--------- --------
Noncash investing activities:
Stock options issued in connection with the acquisition of
PakNetX Corporation 10,422 ---
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED
Basis of Presentation
The consolidated financial statements include the accounts of Aspect
Communications Corporation ("Aspect" or the "Company") and all of 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 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 nine months ended September 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 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.
In July 2000, the Company paid a $5 million milestone payment related to the
February 2000 PakNetX acquisition. This amount is included in goodwill and is
being amortized over the anticipated remaining life of the intangible asset. The
Company anticipates making the final $5 million milestone payment before
December 2000.
The total purchase price and final allocation among the tangible and intangible
assets and liabilities acquired including purchased in-process technology and
the $5 million milestone payment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Amortization
period
Total purchase price: Purchase price allocation: (years)
<S> <C> <C> <C> <C>
Total cash consideration $49,948 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 29,018 7
In-process technology 5,018 Expensed
Tangible liabilities (1,790)
Deferred tax liabilities (12,878)
--------
$62,220 $ 62,220
------- --------
</TABLE>
As noted above, Aspect recorded a one-time charge of approximately $5 million in
the first quarter of 2000 for purchased in-
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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 therefore the successful
development was uncertain. As of September 30, 2000, some components of this
technology have been incorporated into Aspect products, while the remaining
components are expected to reach technological feasibility in fiscal year 2001.
Failure to successfully complete the remaining components 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 the Company expected to result from
development efforts; (ii) an estimate of the percentage completion of the
project; and (iii) a discount rate of approximately 25%. As of September 30,
2000, technological feasibility had not been reached and no significant
departures from the assumptions included in the valuation analysis have
occurred.
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):
September 30, December 31,
2000 1999
---- ----
Raw materials $14,141 $ 9,816
Work in progress 4,524 3,529
Finished goods 3,654 3,291
------- -------
Total $22,319 $16,636
------- -------
Comprehensive Income (Loss)
Comprehensive income (loss) is calculated as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss $ (5,587) $ (3,698) $(13,003) $(29,447)
Unrealized gain (loss) on investments, net (21,651) 15,627 (38,006) 15,739
Accumulated translation adjustments, net (606) (27) (845) (1,055)
-------- ------- -------- --------
Total comprehensive income (loss) $(27,844) $11,902 $(51,854) $(14,763)
-------- ------- -------- --------
</TABLE>
Interest and Other Income
Interest and other income of $10.3 million in the third quarter of 2000 included
a pre-tax gain of approximately $7.7 million from the sale of appreciated
marketable equity securities. Interest and other income of $25.2 million for the
first nine months of 2000 included a pre-tax gain of approximately $17.1 million
from the sale of appreciated marketable equity securities.
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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 nine months ended September 30 are calculated as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (5,587) $ (3,698) $(13,003) $(29,447)
Weighted average shares outstanding 51,644 47,790 51,199 48,193
Restricted common stock (106) --- (35) ---
-------- -------- -------- --------
Shares used in calculation, basic and
diluted 51,538 47,790 51,164 48,193
======== ======== ======== ========
Basic and diluted net loss per share $ (0.11) $ (0.08) $ (0.25) $ (0.61)
</TABLE>
The Company had approximately 2.0 million and 3.6 million common stock options
outstanding for the three and nine months ended September 30, 2000,
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. Similarly, the Company had 1.2
million and 760,000 common stock options outstanding that were excluded from the
computation of diluted earnings per share for the three and nine months ended
September 30, 1999, respectively. As of September 30, 2000, the Company has 4.3
million shares of common stock issuable upon conversion of the convertible
debentures. Additionally, the Company had 160,000 shares of restricted common
stock outstanding at September 30, 2000. The weighted average of these shares
were not included in the calculation of diluted earnings per share for any of
the periods presented, because this inclusion would have been anti-dilutive.
New Accounting Pronouncements
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.
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.
Capitalization of Interest Cost
The Company began capitalizing interest costs in relation to the construction of
a new building during the third quarter of 2000. As of September 30, 2000,
the Company has capitalized $0.1 million out of total interest expense of $7.7
million.
Share Repurchase Program
In August 2000, the Company's Board of Directors approved a stock repurchase
program to acquire up to five million shares of its common stock. The Company
repurchased 1.0 million shares during the quarter at an average
8
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price of $20.85 per share. All shares repurchased have been retired.
Restricted Stock Issuance
In July 2000, the Company's Board of Directors amended the 1996 Employee Stock
Option Plan and granted 165,000 shares of restricted stock to specific
employees. If an employee terminates before the third anniversary of the grant
date, that employee's restricted common shares is subject to forfeiture. As of
September 30, 2000, 5,000 shares were forfeited. The Company recorded a deferred
compensation charge of approximately $3.0 million and will amortize the amount
over three years.
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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 of
Financial Condition and Results of Operations 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. Such
forward looking statements include, but are not limited to, the Company's
ability to integrate multimedia over IP technology into its software and
strengthen its eCRM market position; the Company's anticipated margins and
expenses; and the Company's continued expansion in Europe. 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.
In July 2000, the Company paid a $5 million milestone payment related to the
February 2000 PakNetX acquisition. This amount is included in goodwill and is
being amortized over the anticipated remaining life of the intangible asset. The
Company anticipates making the final $5 million milestone payment before
December 2000.
The total purchase price and final allocation among the tangible and intangible
assets and liabilities acquired (including purchased in-process technology and
the $5 million milestone payment) are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Amortization
Total purchase price: Purchase price allocation: period (years)
<S> <C> <C> <C> <C>
Total cash consideration $49,948 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 29,018 7
In-process technology 5,018 Expensed
Tangible liabilities (1,790)
Deferred tax liabilities (12,878)
--------
$62,220 $ 62,220
------- --------
</TABLE>
10
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As noted above, Aspect recorded a one-time charge of approximately $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 therefore successful development was uncertain. As of September
30, 2000, some components of this technology have been incorporated into Aspect
products, while the remaining components are expected to reach technological
feasibility in fiscal year 2001. Failure to successfully complete the remaining
components 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
development efforts; (ii) an estimate of the percentage completion of the
project; and (iii) a discount rate of approximately 25%. As of September 30,
2000, technological feasibility had not been reached and no significant
departures from the assumptions included in the valuation analysis had occurred.
Results of Operations
During 1999, the Company 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 voice applications and
equipment market indicated that the Company would be unable to sustain our
historical growth rates in that market alone. The Company 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 to enable the Company to 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 third quarter of 2000 increased 12% to $145.5 million from
$129.9 million for the third quarter of 1999. Net revenues for the first nine
months of 2000 increased 26% to $432.1 million from $342.2 million for the first
nine months of 1999. International net revenues, as a percentage of total net
revenues over the periods presented were approximately 28% in both the third
quarter and in the first nine months of 2000.
Product revenues for the third quarter of 2000 increased 9% to $82.5 million
from $75.5 million for the third quarter of 1999. Product revenues for the first
nine months of 2000 increased 27% to $242.5 million from $191.3 million for the
first nine months of 1999. The increases across the periods presented relate
primarily to our business model transformation and continuous growth in license
revenues in the North America regions and government contracts.
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Gross margin on product revenues was 63% in the third quarter of 2000, and 66%
in the third quarter of 1999. Gross margin on product revenues was 64% in the
first nine months of 2000, and 66% in the first nine months of 1999. The
decrease in gross margin primarily relates to the decrease on the gross margin
of platform products due to lower overall platform revenues, higher costs
associated with repackaging of traditional products and repricing. On a forward-
looking basis, the Company anticipates that product margins will fluctuate from
period to period due to fluctuations in mix of product revenues.
Services revenues for the third quarter of 2000 increased 16% to $63.0 million
from $54.4 million in the third quarter of 1999. Services revenues for the first
nine months of 2000 increased 26% to $189.7 million from $150.9 million for the
first nine months of 1999. Growth in services revenues resulted primarily from
increases in maintenance revenues as a result of the growth in our installed
base. 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 35% in the third quarter of 2000, and 30%
in the third quarter of 1999. Gross margin on services revenues was 36% in the
first nine months of 2000, and 27% in the first nine months of 1999. The
increase in services margins is primarily due to growth in services revenues
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, the Company anticipates 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 third quarter of 2000 increased
27% to $27.9 million from $21.9 million in the third quarter of 1999. R&D
expenses in the first nine months of 2000 (excluding the one-time in-process
technology charge) increased 28% to $80.7 million from $63.3 million in the
first nine 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 the impact of amortization costs associated with purchased,
developed, and core technology intangible assets, and increases in outside
services and overall salaries. As a percentage of net revenues, R&D expenses
were 19% and 17% in the third quarter of 2000 and 1999, respectively. As a
percentage of net revenues, R&D expenses were 19% for the first nine months of
2000 and 1999. Excluding amortization of intangible assets and stock-based
compensation, R&D expenses were $25.2 million in the third quarter of 2000, and
$20.9 million in the third quarter of 1999. Excluding amortization of intangible
assets and stock-based compensation, R&D expenses were $73.6 million in the
first nine months of 2000, and $60.2 million in the first nine months of 1999.
The Company continues 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.
Selling, general and administrative (SG&A) expenses in the third quarter of 2000
increased 25% to $61.2 million from $49.0 million in the third quarter of 1999.
SG&A expenses in the first nine months of 2000 increased 17% to $168.1 million
from $144.2 million in the first nine months of 1999. The increases primarily
resulted from increases in sales recruiting, training and salary, as the Company
continues its efforts to grow and train our new and existing sales force.
Additionally, the increase in SG&A resulted from additional amortization
expenses related to the purchase of intangible assets as a result of the
acquisition of PakNetX. SG&A expenses as a percentage of net revenues were 42%
in the third quarter of 2000 and 38% in the third quarter of 1999. SG&A expenses
as a percentage of net revenues were 39% in the first nine months of 2000 and
42% in the first nine months of 1999. Excluding amortization of intangible
assets, SG&A expenses were $57.4 million in the third quarter of 2000 and $46.2
million in the third quarter of 1999. Excluding amortization of intangible
assets, SG&A expenses were $157.3 million in the first nine months of 2000 and
$135.6 million in the first nine months of 1999. The Company anticipates, 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.
12
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Net interest and other income (expense) were $7.6 million of net income in the
third quarter of 2000, compared to $0.3 million of net interest expense in the
third quarter of 1999. The increase resulted primarily from a pre-tax gain of
approximately $7.7 million on the sale of appreciated marketable equity
securities, which is partially offset by interest expense on the convertible
debentures of $2.4 million. Net interest and other income (expense) were $17.5
million of net income in the first nine months of 2000, compared to a net
interest expense of $0.9 million in the first nine months of 1999. The increase
resulted primarily from a pre-tax gain of approximately $17.1 million on the
sale of appreciated marketable equity securities, which is partially offset by
interest expense on the convertible debentures of $7.3 million.
The Company's effective tax rate, excluding the effect of purchased in-process
technology related to acquisitions, for the three and nine months ended
September 30, 2000 was 24.8% and 8.5% compared with 30% 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 September 30, 2000, the principal source of liquidity consisted of cash, cash
equivalents, short-term investments, and marketable equity securities totaling
$211.4 million, which represented 32% of total assets. The primary sources of
cash during the first nine months of 2000 were net sales of short-term
investments of $43.8 million, proceeds from the issuance of common stock under
various stock plans of $38.4 million, and $13.4 million from operating
activities. The primary uses of cash during the first nine months of 2000 were
$49.9 million paid to acquire PakNetX, $48.7 million for the purchase of
property and equipment, and $20.9 million for repurchases of our common stock.
The Company currently anticipates higher spending levels for property and
equipment throughout 2000, primarily related to expansion of our facilities.
As of September 30, 2000, the fair market value of the Company's marketable
equity securities was $23 million. These securities are available for sale at
Aspect's discretion and are subject to market prices, which have historically
fluctuated significantly. At September 30, 2000, outstanding borrowings totaled
$171 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
The Company operates in a rapidly changing environment that involves a number of
risks, some of which are beyond our control. Cautionary statements in this
document should be read, 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: The Company is shifting our focus
from supplying telecommunications equipment to becoming a provider of customer
relationship portals and associated software applications. Historically, the
Company has 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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. 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. One 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
the Company does 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. The Company operates in a rapidly changing high-
technology industry that exhibits significant stock market volatility. Should
the price of our securities decline rapidly, the Company 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;
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. 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, uncertainty as
to general economic conditions and the availability or announcement of
alternative technologies. For example, if general economic conditions weaken,
and the business of our customers does not achieve anticipated levels, our
customers may delay purchasing our products.
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.
The Company 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. The Company 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.
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 distribution
functionality;
. Providers of wireless application products;
. Participants in the front-office and back-office enterprise software
applications/integration market;
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. 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., and BEA Systems, Inc. The Company expects to encounter
significant competition from these and other sources.
Acquisitions and Investments May Be Difficult and Disruptive: The Company has
made a number of acquisitions and has made minority equity investments in other
companies. These acquisitions and investments can be costly and disruptive, and
the Company may be unable to successfully integrate a new business or technology
into our business. The Company 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
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including, in particular, acquired original equipment manufacturer and
value-added reseller relationships.
Acquisitions or investments the Company makes 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.
The Company May Be Involved in Litigation: The Company 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 the Company is periodically notified
of such claims by third parties. In the past, the Company has 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
the Company periodically negotiates 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 the Company negotiates license agreements with a third party,
future disputes with such parties are possible. If the Company is unable to
resolve an intellectual property dispute through a license, settlement, or
successful litigation, the Company could be subject to damage assessments and be
prevented from making, using, or selling certain products or services.
In the future, the Company 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 the Company takes 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: The Company markets
our products and services worldwide and anticipates 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.
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If the Company fails to successfully enter certain major international markets,
our competitive position could be impaired and the Company may be unable to
compete on a global scale.
The Company May Experience Difficulty Managing Our Growth: Growth may place a
significant strain on our operational and financial systems. The Company is
upgrading these systems and may experience substantial disruption and incur
significant expenses and write-offs during these transitions. The Company must
carefully manage accounts receivables to limit credit risk. The Company 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.
The Company May Experience Difficulty Expanding Our Distribution Channels: The
Company has 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. The Company may not be successful in expanding these
distribution channels.
The Company Is Dependent on Key Personnel: The Company depends 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 the Company
has recently experienced increased levels of turnover among such personnel. The
Company has 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, the
Company has replaced a large number of our sales people and is currently
increasing the size of our sales force. New personnel require extensive training
and initially are less productive than those with greater experience. Any
delays or difficulties the Company encounters in recruiting, training, or
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, the Company could experience a significant business
interruption.
The Company Is Dependent on Third Parties: The Company subcontracts substantial
elements of our manufacturing to third parties. The Company depends 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 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, the Company may be unable to meet development or delivery
commitments.
Our Debt and Debt Service Obligations Are Significant: The Company 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 September 30, 2000. As a result of this sale, the Company
has substantially increased our principal and interest obligations. The degree
to which the Company is 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.
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The Company will Experience Significant Amortization Charges and Face the Risk
of Future Non-Recurring Charges in the Event of Impairment: In connection with
our previous acquisitions accounted for under the purchase method of accounting,
the Company has and will continue to experience significant charges related to
the amortization of purchased technology and goodwill. In addition, the Company
will be required to take a related non-recurring charge to earnings if the
Company determine, in future periods, that this purchased technology and
goodwill is impaired.
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 nine months ended
September 30, 2000.
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 10.3 1998 Director's Stock Option Plan, as amended to date
Exhibit 10.4a 1996 Employee Stock Option Plan, as amended to date
Exhibit 27 Financial Data Schedule
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30, 2000.
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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
(Registrant)
Date: November 14, 2000 By /s/ Beatriz Infante
----------------------
Beatriz Infante
President, Chief Executive Officer and
Interim Chief
Financial and Accounting Officer
(Principal Financial and Accounting Officer)
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