UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-20749
ASPECT DEVELOPMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1622857
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1395 Charleston Road
Mountain View, California 94043
(Address of principal executive offices, including zip code)
(650) 428-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _________
--------
The number of shares outstanding of the registrant's common stock as of May 8,
2000 was 61,570,989.
ASPECT DEVELOPMENT, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
as of March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
for the three months ended
March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
for the three months ended
March 31, 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. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 22
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Aspect Development, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
March 31, December 31,
2000 1999
-------------- ---------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 69,486 $ 28,872
Short-term investments 26,220 47,332
Accounts receivable, net 33,093 28,709
Prepaid expenses and other current assets 16,504 15,884
-------------- -------------
Total current assets 145,303 120,797
Property and equipment, net 12,436 12,342
Other assets, net 6,038 2,765
-------------- -------------
Total assets $ 163,777 $ 135,904
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,336 $ 3,221
Accrued bonuses and commissions 6,500 7,266
Income taxes payable 6,914 3,863
Other accrued liabilities 12,959 9,191
Deferred revenue 19,625 13,584
-------------- -------------
Total current liabilities 48,334 37,125
Stockholders' equity:
Common stock 110,239 96,929
Deferred compensation (2) (43)
Accumulated components of comprehensive income 36 124
Retained earnings 5,170 1,769
-------------- -------------
Total stockholders' equity 115,443 98,779
-------------- -------------
Total liabilities and stockholders' equity $ 163,777 $ 135,904
============== =============
See accompanying notes to Condensed Consolidated Financial Statements.
Aspect Development, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three months ended
March 31,
--------------------------------
2000 1999
------------- ------------
Revenues
Licenses $ 20,126 $ 4,932
Subscription and maintenance 8,451 5,406
Service and other 6,823 4,038
------------- -------------
Total revenues 35,400 14,376
------------- -------------
Cost of revenues
Licenses 605 162
Subscription and maintenance 1,489 1,051
Service and other 3,705 1,767
------------- -------------
Total cost of revenues 5,799 2,980
------------- -------------
Gross profit 29,601 11,396
Operating expenses:
Research and development 7,299 4,619
Sales and marketing 15,407 7,983
General and administrative 3,918 2,161
------------- -------------
Total operating expenses 26,624 14,763
------------- -------------
Operating income (loss) 2,977 (3,367)
Interest and other income, net 1,384 3,805
------------- -------------
Income before income taxes 4,361 438
Provision for income taxes 960 113
------------- -------------
Net income $ 3,401 $ 325
============= =============
Net income per share-basic $ 0.06 $ 0.01
============= =============
Net income per share-diluted $ 0.04 $ 0.00
============= =============
Number of shares used in computing per share
amounts-basic 60,299 62,038
============= =============
Number of shares used in computing per share
amounts-diluted 76,972 67,052
============= =============
Supplemental diluted earnings per share
excluding Infinite Supply* $ 0.06 $ 0.00
============= =============
* Infinite Supply is a subsidiary created in Q3, 1999.
See accompanying notes to Condensed Consolidated Financial Statements.
Aspect Development, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three months ended March 31,
---------------------------------
2000 1999
------------- -----------
Cash flows from operating activities:
Net income $ 3,401 $ 325
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,547 1,397
Loss in joint ventures - (153)
Compensation expense 41 42
Provision for allowance for doubtful accounts (167) 50
Changes in operating assets and liabilities:
Accounts receivable (4,217) 4,212
Prepaid expenses and other current assets (620) 1,364
Other assets (540) (756)
Accounts payable (885) (429)
Accrued bonuses and commissions (766) (35)
Income taxes payable 3,051 (779)
Other accrued liabilities 3,768 (521)
Deferred revenue 6,041 (235)
------------ ----------
Net cash provided by operating activities 10,654 4,482
------------ ----------
Cash flows from investing activities:
Purchases of property and equipment (1,641) (1,069)
Purchases of short-term investments (19,538) (89,571)
Maturities of short-term investments 40,607 80,222
Purchase of long-term investment (2,733) -
------------ ----------
Net cash provided by (used in) investing activities 16,695 (10,418)
------------ ----------
Cash flows from financing activities:
Principal payments on capital lease obligations - (17)
Sale of common stock 13,310 2,804
------------ ----------
Net cash provided by financing activities 13,310 2,787
------------ ----------
Net increase (decrease) in cash and cash equivalents 40,659 (3,149)
Exchange rate impact on cash (45) 121
Cash and cash equivalents at beginning of period 28,872 7,877
------------ ----------
Cash and cash equivalents at end of period $ 69,486 $ 4,849
============ ==========
Supplemental disclosure of cash flow information
Income taxes paid $ 12 $ 658
============ ==========
See accompanying notes to Condensed Consolidated Financial Statements.
ASPECT DEVELOPMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed consolidated financial statements included herein
have been prepared by Aspect Development, Inc. ("Aspect" or the "Company"). In
the opinion of management, such financial statements include all normal
recurring adjustments and accruals which are necessary to fairly state the
Company's consolidated financial position, results of operations and cash flows
for the periods presented. These financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto as included in the Company's Form 10-K for the fiscal year ended
December 31, 1999. The consolidated results of operations for the quarter ended
March 31, 2000 are not necessarily indicative of the results to be expected for
any subsequent interim or annual period.
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated. Investments in joint ventures are
accounted for by the equity method. Under such method, the Company's share of
net earnings or losses is included in interest and other income, net, in the
condensed consolidated statements of operations unless the investment is fully
written down and no commitments exist for additional funding.
Assets and liabilities of the Company and its wholly-owned foreign
subsidiaries are translated from the local currency to United States dollars at
period-end exchange rates. Income and expense items are translated on a monthly
basis at the average rates of exchange prevailing during the month. The
adjustment resulting from translating the assets and liabilities of the Company
and its foreign subsidiaries is reflected in accumulated components of
comprehensive income within stockholders' equity. Foreign currency transaction
gains and losses are included in the results of operations and were immaterial
for all periods presented.
Certain March 31, 1999 amounts have been reclassified to conform to the
current year presentation.
On February 15, 2000 the Board of Directors authorized a two-for-one stock
split of the Company's common stock, in the form of a 100% stock dividend. The
stock split was effected by distribution to each stockholder of record as of
February 25, 2000 of one share of the Company's common stock for each share of
common stock held, and was paid on March 10, 2000. The financial information
included in the accompanying financial statements give effect to the stock
split.
Recent Developments
In January 2000, the Company announced that it had signed a definitive
agreement to acquire TACTech, Inc. Under the terms of the agreement, TACTech
shareholders will receive 0.6647302 shares of Aspect common stock for each
TACTech share of common stock, for a total purchase price of approximately $16.1
million. The signed definitive agreement will require the approval of
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TACTech's shareholders, expected to be completed in May 2000, and will be
accounted for by Aspect as a purchase.
On March 13, 2000, i2 Technologies, Inc. and the Company announced a
definitive agreement to merge in a stock-for-stock transaction valued at $9.3
billion. Under the terms of the agreement, i2 will acquire all outstanding stock
and options of the Company in exchange for 0.55 shares of common stock of i2 for
each share of Aspect common stock. The merger has been unanimously approved by
the boards of directors of both companies. On May 3, 2000, i2 Technologies, Inc.
and the Company announced that the Federal Trade Commission granted early
termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act. In addition, the SEC notified both companies of a "no review"
decision with respect to the S-4 Registration Statement filed by i2 on April 18,
2000. There are no other regulatory approvals anticipated.
Shareholder approval is required by shareholders of both companies at
shareholder meetings to be held on June 8, 2000. Pending shareholder approval,
the merger is expected to close before June 30, 2000.
2. Revenue Recognition
License revenues are comprised of perpetual license fees, and are
recognized as revenue after execution of a license agreement or receipt of a
definitive purchase order, shipment of the product has occurred, vendor specific
objective evidence exists to allocate the fee from the arrangement between
delivered and undelivered elements, and collection of the resulting receivables
is deemed probable. For arrangements involving multiple products and services,
the entire arrangement is allocated among the elements based on each element's
relative value. Product returns and sales allowances (which were not significant
through March 31, 2000) are estimated and provided for at the time of sale. When
delivery involves significant installation obligations at multiple sites,
revenues are recognized on a per-site basis upon completion of installation.
Revenues from subscription and maintenance agreements are deferred and
recognized on a straight-line basis over the life of the related agreement,
which is typically one year.
Service and other revenues are comprised of data services, process
consulting and training fees. These revenues are recognized upon completion of
the work performed.
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3. Comprehensive Income
Comprehensive income, net of related tax, for the three months ended March
31, 2000 and 1999 is as follows:
Three months ended March 31,
2000 1999
------------- -------------
(In thousands)
Net income $ 3,401 $ 325
Unrealized loss on investments (43) -
Foreign currency translation adjustment (45) 121
------------ -------------
Comprehensive income $ 3,313 $ 446
============ =============
4. Net Income Per Share
Basic net income per share is computed using the weighted average number of
common shares outstanding during the period. Diluted net income per share is
computed using the weighted average number of common shares outstanding plus the
dilutive effect of outstanding stock options and the employee stock purchase
plan using the "treasury stock" method.
The following is a reconciliation of the weighted average common shares
used to calculate basic net income per share to the weighted average common and
common equivalent shares used to calculate diluted net income per share for the
three months ended March 31, 2000 and 1999 (in thousands):
Three months ended March 31,
2000 1999
-------- --------
Diluted:
Weighted average common shares outstanding 60,299 62,038
Common stock equivalents (treasury stock method) 16,673 5,014
-------------- -------------
Total weighted average common and common equivalent
shares outstanding 76,972 67,052
============== ============
5. Joint Venture
The Company entered into a limited liability company joint venture
agreement with CMP Media Inc. ("CMP"), dated April 4, 1997. The joint venture,
ChipCenter LLC (formerly EDTN), was established to provide news, promotional
materials, literature, product data, reference material, application information
tutorials, seminars, product and software demonstrations and other services
through the Internet and corporate intranets to electronic systems designers and
purchasing managers. Initially, the ownership of the joint venture was shared
equally between the Company and CMP.
In March 1999, both the Company and CMP sold approximately one-third of
their respective interests in the joint venture to a third party. In connection
with this sale, the Company recorded a
8
$3 million gain during the quarter, which is recorded in interest and other
income, net. Subsequently in 1999, each of the three partners sold approximately
one-fourth of their respective interests to a fourth party in return for its
cash contribution to the joint venture.
The Company's share of net earnings or losses from the joint venture is
included in interest and other income, net, in the consolidated statements of
operations. During the second quarter of 1999, the interest in the joint venture
was fully written down and no commitments existed for additional funding. As a
result, the Company no longer recognizes net earnings or losses in the
consolidated statements of operations. In the three months ended March 31, 1999,
the Company's share of losses in the joint venture amounted to $128,000.
6. Infinite Supply
Infinite Supply is a wholly-owned subsidiary of Aspect which was founded in
the third quarter of 1999. Infinite Supply's mission is to be a leading global
Commerce Services Provider, providing content and application software services
for B2B portals, marketplaces and trade exchanges.
Revenues for the three months ended March 31, 2000 were $490,000 and the
operating expenses totaled $1,482,000. Infinite Supply had a net loss in the
first quarter of fiscal 2000 of $1,057,000 or $0.01 per diluted share.
7. Industry Segment Information
The Company is organized based upon the nature of the products and services
it offers. Under this organizational structure, the Company operates in three
business segments: licenses, subscriptions and maintenance, and service. The
Company evaluates its segments' performance based on several factors, including
total revenues and gross profit. The Company does not allocate or report
financial operations by segment beyond revenue and cost of revenue, nor does it
allocate long-term assets by business segment. No additional segment information
is reported in this footnote as required segment disclosures are included in the
Consolidated Statements of Operations.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report contains forward-looking statements. These statements relate to
future events or Aspect's future financial performance. In some cases,
forward-looking statements can be identified by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of such terms and other
comparable terminology. These statements reflect only management's current
expectations. Actual events or results may differ materially from any
forward-looking statements. Factors that should cause or contribute to such
differences are discussed below and under the caption "Factors Affecting the
Company's Business, Operating Results and Financial Condition." Aspect does not
undertake any obligations to update any forward- looking statements contained in
this report to reflect any future events or developments.
RESULTS OF OPERATIONS
Revenues
The Company's revenues consist of license revenues, subscription and
maintenance revenues, and service and other revenues. License revenues are
comprised principally of perpetual license fees for the Company's decision
support software products. Subscription and maintenance revenues are comprised
principally of annual subscription and maintenance fees for the Company's
products, including its Aspect eXplore decision support software and its family
of reference content databases. Service and other revenues are comprised
principally of fees for consulting, development and training services performed
by the Company. The Company recognizes revenues in accordance with American
Institute of Certified Public Accountants (the "AICPA") Statement of Position
("SOP") 97-2 on Software Revenue Recognition, and related interpretations.
License revenues are recognized as revenue after execution of a license
agreement or receipt of a definitive purchase order, shipment of the product has
occurred, vendor specific objective evidence exists to allocate the fee from the
arrangement between delivered and undelivered elements, and collection of the
resulting receivables is deemed probable. For arrangements involving multiple
products and services, the entire arrangement is allocated among the elements
based on each element's relative value. Product returns and sales allowances
(which were not significant through March 31, 2000) are estimated and provided
for at the time of sale. When delivery involves significant installation
obligations at multiple sites, revenues are recognized on a per-site basis upon
completion of installation.
Revenues from subscription and maintenance agreements are recognized on a
straight-line basis over the life of the related agreement, which is typically
twelve months.
Service revenues from training and consulting activities are recognized
upon completion of the work to be performed. Development revenues are recognized
in accordance with the terms of the agreements, generally when related costs
have been incurred.
U.S. and international sales accounted for approximately 75% and 25%,
respectively, of the Company's total revenues for both the three months ended
March 31, 2000 and 1999.
10
License Revenues. License revenues increased from $4,932,000 for the three
months ended March 31, 1999 to $20,126,000 for the three months ended March 31,
2000. This significant increase in license revenues was primarily due to
unexpected delays in the signing of certain major contracts in the first quarter
of 1999. During this time, manufacturers were buying larger enterprise-wide
solutions from Aspect, leading to complex and sometimes unpredictable internal
approval cycles. As a result, there were several large prospective contracts
that were expected to close during the first quarter of 1999, but closed in
subsequent quarters in 1999. In addition, there is a growing market acceptance
of the Company's products combined with an increased emphasis on marketing the
Company's products worldwide. Also contributing to the revenue increases were
higher average selling prices of the eXplore decision support software and
family of reference content databases compared to the CIS products.
Subscription and Maintenance Revenues. Subscription and maintenance
revenues increased from $5,406,000 for the three months ended March 31, 1999 to
$8,451,000 for the three months ended March 31, 2000. This increase was due
primarily to the increased acceptance of the Company's family of reference
databases and the increased base of customers entering into subscription and
maintenance contracts.
Service and Other Revenues. Service and other revenues increased from
$4,038,000 for the three months ended March 31, 1999 to $6,823,000 for the three
months ended March 31, 2000. This increase was due primarily to the increased
number and size of consulting contracts, as a result of management's continuing
recognition of the need to offer superior service and support to the Company's
customers in order to enhance the market's acceptance of the Company's products.
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists primarily of
license fees and royalties paid to third-party vendors, primarily Oracle, and
shipping expenses. Cost of license revenues increased from $162,000 for the
three months ended March 31, 1999 to $605,000 for the three months ended March
31, 2000, representing 3.3% and 3.0% of license revenues for the three months
ended March 31, 1999 and 2000, respectively. This increase in absolute dollars
was due primarily to royalties paid for new licensing agreements.
Cost of Subscription and Maintenance Revenues. Cost of subscription and
maintenance revenues consists primarily of license fees, royalties paid to
third-party vendors, personnel-related costs incurred in providing centralized
telephone support and related technical support to customers. Cost of
subscription and maintenance revenues increased from $1,051,000 for the three
months ended March 31, 1999 to $1,489,000 for the three months ended March 31,
2000, representing 19.4% and 17.6% of subscription and maintenance revenues for
the three months ended March 31, 1999 and 2000, respectively. The increase in
absolute dollars is primarily due to the Company's high level of interest in
continued customer support as well as an increase in the installed base of
customers which resulted in an increase in facilities and employee headcount for
this segment.
Cost of Service and Other Revenues. Cost of service and other revenues
consists primarily of personnel-related costs incurred in providing consulting
services, development services and training to customers. Cost of service and
other revenues increased from $1,767,000 for the three months ended March 31,
1999 to $3,705,000 for the three months ended March 31, 2000, representing 43.8%
and 54.3% of service and other revenues for the three months ended March 31,
1999 and
11
2000, respectively. The increase in absolute dollars and as a percentage of
related revenues is due primarily to an increase in the number and size of
consulting contracts, and an increase in employee staff levels and associated
overhead expenses.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of engineering personnel costs. Research and development expenses
increased from $4,619,000 for the three months ended March 31, 1999 to
$7,299,000 for the three months ended March 31, 2000, representing 32.1% and
20.6% of total revenues for the three months ended March 31, 1999 and 2000,
respectively. The increase in research and development expenses in absolute
dollars was due to an increase in the level of professional staff in the
development area and associated overhead expenses. The decrease in research and
development expenses as a percentage of total revenues was due to increased
total revenues in fiscal 2000. The Company expects research and development
expenses to increase in absolute dollars while remaining approximately level or
decreasing as a percent of total revenues.
Sales and Marketing. Sales and marketing expenses include expenditures for
salaries, commissions, advertising, travel, trade shows, public relations and
other selling and marketing-related expenses. Sales and marketing expenses
increased from $7,983,000 for the three months ended March 31, 1999 to
$15,407,000 for the three months ended March 31, 2000, representing 55.5% and
43.5% of total revenues for the three months ended March 31, 1999 and 2000,
respectively. The increase in sales and marketing expenses in absolute dollars
was primarily due to the addition of sales and marketing personnel and increased
marketing activities, including trade shows and promotional expenses and
substantial growth in international sales and marketing channels. The Company
believes that such expenses will increase in dollar amounts and may increase as
a percentage of total revenues in the future as the Company expands its sales
and marketing staff and enters new markets worldwide.
General and Administrative. General and administrative expenses include
personnel costs for administration, finance, human resources and general
management, legal and accounting expenses and other professional services.
General and administrative expenses increased from $2,161,000 for the three
months ended March 31, 1999 to $3,918,000 for the three months ended March 31,
2000, representing 15.0% and 11.1% of total revenues for the three months ended
March 31, 1999 and 2000, respectively. The increase in absolute dollars of
general and administrative expenses was primarily the result of increased
staffing and associated expenses necessary to manage and support the Company's
growth. The decrease in cost as a percent of total revenues was due to the
increase in the Company's total revenues in fiscal 2000. The Company expects
general and administrative expenses to increase in absolute dollars in the
future as the Company expands its staffing to manage and support the Company's
growth.
Interest and Other Income, net
Interest and other income, net, represents interest income earned on the
Company's cash and cash equivalents, short- term investments, and foreign
exchange gains and losses. Also included are the Company's share of losses of
the ChipCenter joint venture and a one-time gain of approximately $3 million
from the sale of a partial interest in the ChipCenter venture in the quarter
ended March 31, 1999. Interest and other income, net decreased from $3,805,000
for the three months ended March 31, 1999 to $1,384,000 for the three months
ended March 31, 2000, representing 26.4% and
12
3.9% of total revenues for the three months ended March 31, 1999 and 2000,
respectively. The decrease from 1999 to 2000 was primarily due to the one-time
gain in the first quarter of 1999 of $3 million from the sale of a partial
interest in the Company's ChipCenter joint venture.
Provision for Income Taxes
The Company's provision for income taxes increased from $113,000 for the
three months ended March 31, 1999 to $960,000 for the three months ended March
31, 2000. The increase in the provision in 2000 is primarily due to increased
income generated by the Company. The effective tax rates for the three months
ended March 31, 2000 and 1999 varied from the U.S. statutory rate due primarily
to the Company's ability to partially utilize net operating loss carryforwards
and credit carryforwards generated in the prior years. The Company's provision
for income taxes and effective tax rate may vary in future periods based upon a
variety of factors, including the geographic mix of income.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had approximately $95.7 million in cash,
cash equivalents and short-term investments, representing 58% of total assets.
The Company has invested cash in excess of current operating requirements in
investment grade securities. The investments have variable and fixed interest
rates and primarily short-term maturities. In accordance with SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities" such
investments are classified as "available for sale."
Net cash provided by operating activities was $10.7 million and $4.5
million for the three months ended March 31, 2000 and 1999, respectively. For
the three months ended March 31, 2000, net cash provided by operating activities
was primarily due to net income of $3.4 million, an increase in income taxes
payable of $3.1 million, an increase in other accrued liabilities of $3.8
million, and an increase in deferred revenue of $6.0 million, partially offset
by an increase in accounts receivable in the amount of $4.2 million. For the
three months ended March 31, 1999, net cash provided by operating activities was
primarily due to net income of $0.3 million and a decrease in accounts
receivable of $4.2 million.
Net cash provided by investing activities was $16.7 million for the three
months ended March 31, 2000, which was primarily due to maturities of short-term
investments, partially offset by the investment in financial instruments
classified as short-term investments. Net cash used in investing activities was
$10.4 million for the three months ended March 31, 1999, which was primarily due
to investments in financial instruments classified as short-term investments
partially offset by maturities of short-term investments.
Net cash provided by financing activities was $13.3 million and $2.8
million for the three months ended March 31, 2000 and 1999, respectively. For
the three months ended March 31, 2000 and 1999, cash provided by financing
activities was primarily due to the net proceeds received by the Company upon
the exercise of stock options by its employees.
The Company believes that its current cash and cash equivalents balances,
short-term investment balances, and the cash flows generated from operations, if
any, will be sufficient to meet its working capital and capital expenditure
requirements for at least the next 12 months. In addition,
13
the Company from time to time evaluates potential acquisitions of businesses,
products and technologies and may in the future require additional equity or
debt financing to consummate such potential acquisitions. There can be no
assurance that such financing will be available on acceptable terms, if at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires companies to
record derivative financial instruments on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The key criterion
for hedge accounting is that the hedging relationship must be highly effective
in achieving offsetting changes in fair value or cash flows. The Company will be
required to adopt SFAS No. 133 in fiscal 2001 in accordance with SFAS No. 137,
which delays the required implementation of SFAS No. 133 for one year. This
statement will not have a material impact on the financial condition or results
of the operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The Company
will adopt SAB 101 as required in the second quarter of 2000. Management does
not expect the adoption of SAB 101 to have a material effect on the financial
position or results of the operations of the Company.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB Opinion No. 25" ("FIN No. 44"). FIN No.
44 addresses the application of APB No. 25 to clarify, among other issues, (a)
the definition of employee for purposes of applying APB No. 25, (b) the
criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN No. 44 is
effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998, or January 12, 2000. To the extent FIN
No. 44 covers events occurring during the period after December 15, 1998, or
January 12, 2000, but before the effective date of July 1, 2000, the effects
of applying the interpretation will be recognized on a prospective basis from
July 1, 2000. The Company is currently evaluating FIN No. 44 and does not
expect that it will have a material effect on its financial position or
results of operations.
14
FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks. These risks should be read in
conjunction with the "Risk Factors" section included in the Company's Form 10-K
for the fiscal year ended December 31, 1999.
The Company announced on March 13, 2000 that it had entered into a merger
agreement with i2 Technologies, Inc., pursuant to which its stockholders will
receive 0.55 shares of i2 common stock for each outstanding share of the
Company's common stock. Since the Company may terminate the agreement only in
very limited circumstances and the exchange ratio is not subject to adjustment,
the Company's stock price will be affected by changes in the i2 stock price.
Accordingly, the Company's stockholders are subject to the risk of downward
adjustments in the Company's stock price as result of adverse developments in
i2's business. Moreover, if for any reason the Company is unable to complete the
merger with i2, the price of the Company's stock may be adversely affected.
The Company's revenues and results of operations could be materially
adversely affected by many factors, some of which are outside the control of the
Company, including, among others, the relatively long sales and implementation
cycles for the Company's products; the size and timing of individual license
transactions; seasonality of revenues; changes in the Company's operating
expenses; changes in the mix of products and services sold; timing of
introduction or enhancement of products by the Company or its competitors;
market acceptance of new products; technological changes in software or database
technology; personnel changes and difficulties in attracting and retaining
qualified sales, marketing, technical and consulting personnel; changes in
customers' budgeting cycles; foreign currency exchange rates; quality control of
products sold; and economic conditions generally and in specific industry
segments.
The Company's business has experienced and is expected to continue to
experience seasonality, in part due to customer buying patterns and the
Company's expense patterns. In recent years, the Company has generally had
stronger demand for its products during the quarter ending December 31 and has
incurred higher personnel costs in the quarters ending March 31 and June 30. The
Company believes that these patterns will continue for the foreseeable future.
Licenses of the Company's decision support software have historically
accounted for the substantial majority of the Company's revenues, and the
Company anticipates that this trend will continue for the foreseeable future.
The Company generally ships its products within a short period of time after
execution of a license agreement. As a result, the Company typically does not
have a material backlog of unfilled license orders, and revenues in any quarter
are substantially dependent on license revenues recognized in that quarter. The
Company's expense levels are based, in part, on its expectations as to future
revenues and to a large extent are fixed in the short term. Accordingly, the
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected shortfall in revenues, and any significant shortfall of demand in
relation to the Company's expectations or any material delay of customer orders
would have an almost immediate material adverse effect on the Company's
business, financial condition or results of operations. As a result, it is
likely that in some future period the Company's results of operations could fail
to meet the expectations of public market analysts or investors. In such event,
or in the event that adverse
15
conditions prevail or are perceived to prevail generally or with respect to the
Company's business, the price of the Company's common stock would likely
decrease significantly.
The licensing of the Company's decision support software and reference data
products generally requires the Company to engage in a sales cycle lasting six
to twelve months or longer, during which the Company typically provides a
significant level of education to prospective customers regarding the use and
benefits of the Company's products. The combination of products sold may also
reach a price level (over a million dollars) that requires approval from senior
management of the buying company, potentially including approval from the CEO.
In addition, the implementation of the Company's standard products typically
involves a significant commitment of resources by its customers over an extended
period of time and is commonly associated with reengineering of product
development and business processes. For these reasons, sales and customer
implementation cycles are subject to delays over which the Company may have
little or no control. Any delay in the sale or customer implementation of a
larger license or a number of smaller licenses would have a material adverse
effect on the Company's business, financial condition or results of operations
and cause the Company's operating results to vary significantly from quarter to
quarter.
The Company currently derives substantially all of its revenues from the
licensing of its decision support software and family of reference content
databases and fees from related services. These products and services are
expected to continue to account for substantially all of the Company's revenues
for the foreseeable future. While the Company believes that to date its
customers have not experienced significant problems with such products, if the
Company's customers were to do so in the future or if they were dissatisfied
with product functionality or performance, the Company's business, financial
condition or results of operations could be materially adversely affected.
There can be no assurance that the Company's products will achieve broader
market acceptance or that the Company will be successful in marketing its
products or enhancements thereto. In the event that the Company's current or
future competitors release new products that have more advanced features, offer
better performance or are more price competitive than the Company's products,
demand for the Company's products would decline. A decline in demand for, or
market acceptance of, the software or the reference content databases as a
result of competition, technological change, evolution of the Internet or other
factors would have a material adverse effect on the Company's business,
financial condition or results of operations.
The Company's has experienced significant growth in the number of its
employees, the scope of its operating and financial systems and the geographic
area of its operations, which has placed a significant strain on the Company's
management. The Company's future results of operations will depend in part on
the ability of its officers and other key employees to continue to implement and
expand its operational, customer support and financial control systems and to
expand, train and manage its employee base. In addition, the Company believes
that its future success will also depend to a significant extent upon its
ability to attract, train and retain highly skilled technical, management,
sales, marketing and consulting personnel. Competition for such personnel is
intense, and the Company expects that such competition will continue for the
foreseeable future. The Company has from time to time experienced difficulty in
locating candidates with appropriate qualifications. There can be no assurance
that the Company will be successful in attracting or retaining such personnel,
and the failure to attract or retain such personnel could have a material
adverse effect on the Company's business, financial condition or results of
operations.
16
To implement its business plans, the Company may make further acquisitions
in the future, which will require significant financial and management resources
both at the time of the transaction and during the process of integrating the
newly-acquired business into the Company's operations. The Company's operating
results could be adversely affected if it is unable to successfully integrate
such new companies into its operations. There can be no assurance that any
acquired products, technologies or businesses will contribute at anticipated
levels to the Company's sales or earnings, or that sales and earnings from
combined businesses will not be adversely affected by the integration process.
Certain acquisitions or strategic transactions may be subject to approval by the
other party's board of directors or stockholders, domestic or foreign
governmental agencies or other third parties. Accordingly, there is a risk that
important acquisitions or transactions could fail to be concluded as planned.
Future acquisitions by the Company could also result in issuances of equity
securities or the rights associated with the equity securities, which could
potentially dilute earnings per share. In addition, future acquisitions could
result in the incurrence of additional debt, taxes, contingent liabilities,
amortization expenses related to goodwill and other intangible assets and
expenses incurred to align the accounting policies and practices of the acquired
companies with those of the Company. These factors could adversely affect the
Company's future operating results, financial position and cash flows as some of
the Company's competitors have pursued a strategy of growth through acquisition,
and there is a risk that future acquisitions could be more expensive due to
competition among bidders for target companies.
Historically, a relatively small number of customers have accounted for a
significant percentage of the Company's total revenues, and the Company expects
that it will continue to experience significant customer concentration for the
foreseeable future. There can be no assurance that such customers or any other
customers will in the future continue to license or purchase products or
services from the Company at levels that equal or exceed those of prior periods,
or at all.
The Company believes that, in order to provide competitive solutions, it
will be necessary to develop, maintain and enhance close associations with other
enterprise data management vendors such as eProcurement, database, hardware,
data, Enterprise Resource Planning ("ERP"), Product Data Management ("PDM"),
Advanced Planning & Scheduling, Computer Aided Design ("CAD"), business-to
business eCommerce, and professional service companies. The Company has
established marketing, selling and consulting relationships with many such
vendors, but there can be no assurance that the Company will be able to maintain
its existing relationships or enter into new relationships with such vendors.
The Company has operations in Bangalore, India with 457 employees as of
March 31, 2000. The Company is dependent to a significant extent upon the
ability of its Indian operations to successfully maintain and upgrade its
reference data products. The Company believes that the success of its Indian
operations will depend in large part upon its ability to attract, train and
retain highly skilled technical and management personnel in India. Competition
for such personnel in
17
India is intense, and there can be no assurance that the Company will be
successful in attracting a sufficient number of qualified personnel. The Company
is directly affected by the political and economic conditions to which India is
subject. In addition, many of the Company's expenses in India are paid in Indian
currency, thereby subjecting the Company to the risk of foreign currency
fluctuations. Any difficulties in coordinating or managing the Indian operations
due to cultural, geographic, communication or other reasons could have a
material adverse effect on the Company's business, financial condition or
results of operations.
18
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The Company's revenues originating outside North America for the quarter
ended March 31, 2000 was 24.5% of total revenues. Revenues generated from the
European region for the quarter ended March 31, 2000 was 13.6% of total
revenues. International sales are made primarily by the Company's foreign sales
subsidiaries in the local countries and are typically denominated in U.S.
dollars. These subsidiaries incur most of their expenses in the local currency.
The Company's international business is subject to risks typical of an
international business, including, but not limited to: different economic
conditions; changes in political climate; differing tax structures; other
regulations and restrictions; and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors. The effect of foreign exchange rate fluctuations on
the Company for the quarter ended March 31, 2000 was not material.
The Company invests its cash in a variety of financial instruments,
including bank time deposits, taxable and tax-advantaged variable rate and fixed
rate obligations of corporations, municipalities, and local, state and national
governmental entities and agencies. Cash balances in foreign currencies overseas
are operating balances and are invested in short-term time deposits of the local
operating bank.
Interest income on the Company's investments is carried in "Interest and
other income, net." The Company accounts for its investments in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." All of the cash equivalents and short-term investments are treated
as available-for-sale under SFAS No. 115.
Investment in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part of these factors, the Company's future investment income
may fall short of expectations due to changes in interest rates or the Company
may suffer losses in principal if forced to sell securities which have seen a
decline in market value due to changes in interest rates. The Company's
investment securities are held for purposes other than trading.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are filed as part of, or
incorporated by reference into, this Report.
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule
99.1 (1) Press Release dated March 13, 2000.
99.2 (1) Amendment to Rights Agreement between Aspect Development,
Inc. and U.S. Stock Transfer Corporation, dated March 12,
2000.
------------
(1) Incorporated by reference to Registrant's Current Report on Form
8-K filed on March 17, 2000.
20
(b) Reports on Form 8-K during the quarter ended March 31, 2000:
On March 17, 2000, the Company filed a Report on Form 8-K
reporting that on March 13, 2000, Aspect announced that it
entered into a definitive merger agreement with i2. The
definitive merger agreement contemplates that, subject to the
satisfaction of certain conditions contained therein, including
the approval of the merger referred to therein by the
stockholders of Aspect and i2 and the expiration or early
termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, i2 would acquire
Aspect in a stock-for-stock transaction. Upon consummation of the
merger, i2 will issue or reserve for issuance approximately 44.9
million shares of its common stock for all of the outstanding
equity securities of Aspect.
In connection with the execution of the merger agreement,
Aspect amended its stockholders' rights plan to provide, among
other things, that no person or entity would be considered to be
an "acquiring person" thereunder by reason of any transaction
contemplated by the merger agreement.
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Aspect Development, Inc.
May 12, 2000 /s/ David S. Dury
--------------------------------------
David S. Dury
Senior Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
22