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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 March 31, 2001
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
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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 51,617,528 at April 30, 2001.
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ASPECT COMMUNICATIONS CORPORATION
INDEX
Page
Description Number
- ----------- ------
Cover Page
Index.................................................................. 2
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2001 and December
31, 2000.............................................................. 3
Condensed Consolidated Statements of Operations for the Three Month
Periods Ended March 31, 2001 and 2000................................. 4
Condensed Consolidated Statements of Cash Flows for the Three Month
Periods Ended March 31, 2001, and 2000................................ 5
Notes to Condensed Consolidated Financial Statements................... 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 9
Item 3: Quantitative and Qualitative Disclosures About Financial Market
Risk.................................................................. 18
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K............................... 18
Signature.............................................................. 19
2
ASPECT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts--unaudited)
March 31, December 31,
2001 2000
--------- ------------
ASSETS
------
Current assets:
Cash and cash equivalents............................. $ 68,555 $ 84,544
Short-term investments................................ 84,419 86,869
Marketable equity securities.......................... 2,281 9,545
Accounts receivable, net.............................. 91,830 135,243
Inventories........................................... 25,800 19,940
Other current assets.................................. 29,667 26,925
-------- --------
Total current assets................................ 302,552 363,066
Property and equipment, net............................. 116,858 108,780
Intangible assets, net.................................. 138,515 146,394
Other assets............................................ 17,312 17,258
-------- --------
Total assets........................................ $575,237 $635,498
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable...................................... $ 29,093 $ 33,553
Accrued compensation and related benefits............. 24,757 28,483
Accrued other liabilities............................. 59,396 67,609
Deferred revenue...................................... 43,114 45,041
-------- --------
Total current liabilities........................... 156,360 174,686
Capital lease obligations............................... 732 852
Deferred taxes.......................................... 5,015 3,394
Convertible subordinated debentures..................... 175,620 173,041
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: 51,612,828 and
51,125,114 at March 31, 2001 and December 31, 2000,
respectively......................................... 194,737 190,947
Deferred compensation................................. (2,028) (2,421)
Accumulated other comprehensive income................ (1,241) 2,726
Retained earnings..................................... 46,042 92,273
-------- --------
Total shareholders' equity.......................... 237,510 283,525
-------- --------
Total liabilities and shareholders' equity.......... $575,237 $635,498
======== ========
See Notes to Condensed Consolidated Financial Statements
3
ASPECT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data--unaudited)
Three Months
Ended March 31,
------------------
2001 2000
-------- --------
Net Revenues:
Licenses................................................. $ 31,503 $ 46,083
Services................................................. 60,885 61,890
Other.................................................... 22,145 36,450
-------- --------
Total Net Revenues..................................... 114,533 144,423
-------- --------
Cost of Revenues:
Cost of licenses revenues................................ 1,997 2,836
Cost of services revenues................................ 38,797 41,215
Cost of other revenues................................... 19,806 24,350
Amortization of intangible assets........................ 1,238 1,221
-------- --------
Total Cost of Revenues................................. 61,838 69,622
-------- --------
Gross Margin............................................... 52,695 74,801
Operating Expenses:
Research and development................................. 23,218 24,401
Sales and marketing...................................... 49,892 38,390
General and administration............................... 11,784 9,223
Restructuring charge..................................... 6,954 --
In-process research and development...................... -- 5,018
Amortization of intangible assets and stock-based
compensation............................................ 6,787 5,131
-------- --------
Total Operating Expenses............................... 98,635 82,163
-------- --------
Loss from operations....................................... (45,940) (7,362)
Interest and other income.................................. 2,194 6,715
Interest and other expense................................. (2,410) (2,596)
-------- --------
Loss before income taxes................................... (46,156) (3,243)
Provision for income taxes................................. (75) (1,204)
-------- --------
Net loss................................................... $(46,231) $ (4,447)
======== ========
Basic and diluted net loss per share....................... $ (0.90) $ (0.09)
======== ========
Weighted average shares outstanding........................ 51,238 50,482
======== ========
See Notes to Condensed Consolidated Financial Statements
4
ASPECT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands--unaudited)
Three Months
Ended March 31,
------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss................................................... $(46,231) $ (4,447)
Reconciliation of net loss to cash provided by (used in)
operating activities:
Depreciation.............................................. 9,898 4,692
Amortization of intangibles and stock-based compensation.. 8,025 6,352
Noncash interest expense on debentures.................... 2,579 2,432
In-process research and development....................... -- 5,018
Deferred taxes............................................ 2,588 (18,724)
Changes in assets and liabilities, net of effects from
companies acquired in 2000:
Accounts receivable...................................... 41,447 (17,406)
Inventories.............................................. (5,961) 87
Other current assets and other assets.................... (1,289) 27,254
Accounts payable......................................... (4,368) 5,962
Accrued compensation and related benefits................ (3,564) (807)
Accrued other liabilities................................ (7,560) (13,051)
Deferred revenue......................................... (1,581) 11,574
-------- --------
Cash provided by (used in) operating activities......... (6,017) 8,936
Cash flows from investing activities:
Short-term investment purchases........................... (36,533) (66,278)
Short-term investment sales and maturities................ 39,612 76,961
Property and equipment purchases.......................... (18,768) (7,907)
Purchase of company, net of cash acquired................. -- (44,942)
-------- --------
Cash used in investing activities....................... (15,689) (42,166)
Cash flows from financing activities:
Other common stock transactions, net...................... 4,037 24,530
Payments on capital lease obligation...................... (120) --
Payments on note payable.................................. -- (1,676)
-------- --------
Cash provided by financing activities................... 3,917 22,854
Effect of exchange rate changes on cash and cash
equivalents.............................................. 1,800 397
Net decrease in cash and cash equivalents.................. (15,989) (9,979)
-------- --------
Cash and cash equivalents:
Beginning of period....................................... 84,544 84,826
-------- --------
End of period............................................. $ 68,555 $ 74,847
======== ========
Supplemental disclosure of cash information:
Cash paid for interest.................................... $ 34 --
======== ========
Supplemental schedule of noncash investing activities:
Stock option issued in connection with the acquisition of
PakNetX Corporation...................................... -- $ 10,422
======== ========
See Notes to Condensed Consolidated Financial Statements
5
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED
Basis of Presentation
The condensed 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 accounting principles generally accepted in
the United States of America 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 accounting
principles generally accepted in the United States of America 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. Certain amounts in the quarter ended March
31, 2000 have been adjusted to reflect the adoption of the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," which became effective for the
Company during the fourth quarter of 2000. Operating results for the three
months ended March 31, 2001 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2001. For further
information, refer to the consolidated financial statements and notes thereto
included in the Company's 2000 "Annual Financial Report to Shareholders"
attached as an appendix to the Proxy Statement for the 2001 Annual Meeting of
Shareholders.
Reclassifications
Certain prior-period amounts have been reclassified to conform to the current-
period presentation.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist of (in thousands):
March 31, December 31,
2001 2000
--------- ------------
Raw materials......................................... $21,524 $14,779
Work in progress...................................... 3,820 3,404
Finished goods........................................ 456 1,757
------- -------
Total inventories................................... $25,800 $19,940
======= =======
Comprehensive Loss
Comprehensive loss is calculated as follows (in thousands):
Three Months
Ended March 31,
------------------
2001 2000
-------- --------
Net loss................................................ $(46,231) $ (4,447)
Unrealized loss on investments, net..................... (4,047) (11,765)
Accumulated translation adjustments, net................ 80 (466)
-------- --------
Total comprehensive loss................................ $(50,198) $(16,678)
======== ========
6
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED (Continued)
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 months ended March 31 are calculated as follows (in thousands, except
per share data):
Three Months
Ended March 31,
-----------------
2001 2000
-------- -------
Net loss................................................. $(46,231) $(4,447)
======== =======
Weighted average shares outstanding...................... 51,381 50,482
Restricted common stock.................................. (143) --
-------- -------
Shares used in calculation, basic and diluted............ 51,238 50,482
======== =======
Basic and diluted net loss per share..................... $ (0.90) $ (0.09)
======== =======
The Company had approximately 13.5 million and 10.6 million common stock
options outstanding for the period ended March 31, 2001 and 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 the period. As of March 31, 2001 and
2000, the Company had 4.3 million shares of common stock issuable upon
conversion of the convertible debentures. Additionally, the Company had
134,500 shares of restricted common stock outstanding at March 31, 2001. 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
Statement of Financial Accounting Standards (SFAS No.) 133, "Accounting for
Derivative Instruments and Hedging Activities," is effective for all fiscal
years beginning after June 15, 2000. SFAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. Under SFAS No. 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The
Company adopted SFAS No. 133 as of January 1, 2001. The adoption of SFAS No.
133 did not have a significant impact on the consolidated financial position,
results of operations, or cash flows of the Company.
Capitalization of Interest Costs
The Company began capitalizing interest costs relating to the construction of
a new building during the third quarter of 2000. For the quarter ended March
31, 2001, approximately $400,000 was capitalized into construction in
progress.
7
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED (Continued)
Restructuring Charge
In February 2001, the Company reduced its workforce by 6% and consolidated
selected facilities in its continuing effort to better optimize operations.
This resulted in a restructuring charge of $7.0 million. Components of the
restructuring accrual as of March 31, 2001 were as follows (in thousands):
Severance Consolidation Other
and of Facilities Restructuring
Outplacement Costs Costs Total
------------ ------------- ------------- -------
Provision................ $ 3,227 $3,219 $508 $ 6,954
Expenses................. (2,287) (484) -- (2,771)
------- ------ ---- -------
Balance at March 31,
2001.................... $ 940 $2,735 $508 $ 4,183
======= ====== ==== =======
Severance and outplacement costs related to the termination of 153 employees.
Employee separation costs include severance and other related benefits.
Functions impacted by the restructuring included sales and sales
infrastructure, support services, manufacturing, and corporate functions. As
of March 31, 2001, the Company made $2.3 million in severance payments, and
the remaining balance will be paid by the third quarter of 2001.
Consolidation of facilities costs includes rent of unoccupied facilities,
long-term asset writedowns of $484,000, and other facilities related costs. As
of March 31, 2001, $2.7 million will be paid over fiscal year 2001 and 2002.
Other restructuring costs primarily include taxes, legal, and travel expenses.
We expect these expenses will be fully paid during the second quarter of 2001.
Subsequent Events
On April 17, 2001, the Company announced that it expects to take a
restructuring charge of approximately $10 to $12 million in the second quarter
of 2001 as a result of a planned workforce reduction of approximately 15% and
a further consolidation of facilities.
8
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in Part
I--Item 1 of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis in the
Company's 2000 Annual Financial Report to Shareholders.
The matters discussed in this report including, but not limited to, statements
relating to (i) the Company's restructuring; (ii) the Company's ongoing effort
to incorporate technology acquired from PakNetX into the Company's products,
including the amortization of intangibles; (iii) changes in anticipated
spending levels in research and development, sales and marketing, and general
and administrative expenses; and (iv) the adequacy of our financial resources
to meet currently anticipated cash flow requirements for the next twelve
months 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. Forward-looking
statements may be identified by phrases such as "we anticipate," "are expected
to," and "on a forward-looking basis," and are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in such forward-looking statements. Specific factors that could
cause actual revenue and earnings per share results to differ include a
potentially prolonged period of generally poor economic conditions that could
impact our customers' purchasing decisions, the significant percentage our
quarterly sales that are consummated in the last few days of the quarter,
making financial predictions difficult and raising a substantial risk of
variance in actual results; fluctuations in our North American and
International business levels; the hiring and retention of key employees;
changes in product line revenues; insufficient, excess, or obsolete inventory
and variations in valuation; the potential disruption to our business which
could result from the current power shortages in California; and foreign
exchange rate fluctuations. For a discussion of these and other risks related
to our business, see the section entitled "Business Environment and Risk
Factors" below. 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.
Background and Acquisition
Aspect Communications Corporation is the leading provider of customer
relationship portals, contact servers for managing dynamic customer contact
transactions across wired and wireless communication channels. The Aspect
Customer Relationship Portal allows businesses to manage customer contacts
dynamically and turn them into relationships, opportunities and customer
loyalty. The Aspect Customer Relationship Portal synchronizes all customer
contact points, including live and self-service, with demonstrated customer
return on investment. Aspect's leadership in electronic customer relationship
management (eCRM) solutions is based on more than 15 years of experience and
over 7,600 implementations deployed worldwide. Aspect powers approximately
78 percent of the Fortune 50. Aspect was incorporated on August 16, 1985 in
California, and is headquartered in San Jose, California, with offices in
major cities around the world.
In February 2001, as part of its continuing effort to optimize operations, the
Company reduced its workforce by 6% and consolidated selected facilities. This
reduction and consolidation resulted in a restructuring charge of $7.0
million.
On February 18, 2000, the Company acquired privately held PakNetX Corporation
(PakNetX), an eBusiness software provider based in Salem, New Hampshire. The
transaction enabled 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 initially
paid approximately $45 million in cash for all the outstanding common and
preferred shares and warrants of PakNetX. In addition, Aspect assumed the
existing PakNetX stock option plan and converted PakNetX stock options into
9
options to purchase approximately 160,000 shares of Aspect common stock with a
fair value of approximately $10 million and incurred transaction costs of
approximately $2 million. In 2000, the Company made an additional $10 million
in milestone payments. This amount was added to goodwill and is being
amortized over the remaining useful life of the intangible asset. The
historical operations of PakNetX are not material to the financial position or
results of operations of the Company.
The total purchase price and final allocation among the tangible and
intangible assets and liabilities acquired including purchased in-process
technology and the $10 million in milestone payments are summarized as follows
(in thousands):
Amortization
Total purchase price: Purchase price allocation: period (years)
- --------------------- -------------------------- --------------
Total cash consideration $54,948 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 34,018 7
In-process technology 5,018 Expensed
Tangible liabilities (1,790)
Deferred tax liabilities (12,878)
------- --------
$67,220 $ 67,220
======= ========
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 March 31, 2001, some components of this technology had been incorporated
into Aspect products, while the remaining components are expected to reach
technological feasibility during the latter part of the fiscal year. 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.
As of March 31, 2001, we have incurred an additional $5.2 million related to
the development of this technology.
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 of the project
that has been completed; and (iii) a discount rate of approximately 25%. As of
March 31, 2001, no significant departures from the assumptions included in the
valuation analysis had occurred.
10
Results of Operations
The following table sets forth statement of operations data for the three
months ended March 31, 2001 expressed as a percentage of total revenues:
Three Months Ended
March 31,
----------------------
2001 2000
--------- ---------
Net Revenues:
Licenses....................................... 28 % 32 %
Services....................................... 53 43
Other.......................................... 19 25
--------- ---------
Total Net Revenues........................... 100 100
--------- ---------
Cost of Revenues:
Cost of licenses revenues...................... 2 2
Cost of services revenues...................... 34 28
Cost of other revenues......................... 17 17
Amortization of intangible assets.............. 1 1
--------- ---------
Total Cost of Revenues....................... 54 48
--------- ---------
Gross Margin..................................... 46 52
Operating Expenses:
Research and development....................... 20 17
Sales and marketing............................ 44 27
General and administration..................... 10 6
Restructuring charge........................... 6 --
In-process research and development............ -- 3
Amortization of intangible assets and stock-
based compensation............................ 6 4
--------- ---------
Total Operating Expenses..................... 86 57
--------- ---------
Loss from operations............................. (40) (5)
Interest and other income........................ 2 5
Interest and other expense....................... (2) (2)
--------- ---------
Loss before income taxes......................... (40) (2)
Provision for income taxes....................... -- (1)
--------- ---------
Net loss......................................... (40)% (3)%
========= =========
11
Revenues
Net revenues for the first quarter of 2001 decreased 21% to $114.5 million
from $144.4 million in the same period last year. International net revenues,
as a percentage of total net revenues over the periods presented were
approximately 30% and 34%, respectively.
Licenses revenues for the first quarter of 2001 decreased 32% to $31.5 million
from $46.1 million in the same period last year. Licenses revenues consist of
strategic and other software revenues. The decrease is primarily due to the
current global economic slowdown, resulting in longer purchase cycles.
Services revenues for the first quarter of 2001 decreased 2% to $60.9 million
from $61.9 million in the same period last year. Services revenues consist
primarily of maintenance and support revenues, consulting services, and
educational fees. Services revenues remained relatively unchanged due to
revenues generated from recurring maintenance and software support contracts.
Other revenues for the first quarter of 2001 decreased 39% to $22.1 million
from $36.5 million in the same period last year. Other revenues consist of
platform (hardware) revenues. The decrease is primarily due to the current
global economic slowdown and the transformation of our business model.
Gross Margin
Gross margin on licenses revenues was 94% for the first quarter of 2001 and
2000. Cost of licenses revenues includes third party software royalties,
product packaging, and documentation.
Gross margin on services revenues was 36% in the first quarter of 2001, and
33% in the first quarter of 2000. Gross margin on services revenues increased
as a result of selling a more profitable mix of services.
Gross margin on other revenues was 11% in the first quarter of 2001, and 33%
in the first quarter of 2000. Cost of other revenues includes labor,
materials, overhead, and other directly allocated costs involved in the
manufacture and delivery of the products. Gross margin on other revenues
decreased due to the repricing of our products, and lower than anticipated
revenues in the first quarter of 2001 while fixed costs remained relatively
flat.
Operating Expenses
Research and development (R&D) expenses in the first quarter of 2001 decreased
5% to $23.2 million from $24.4 million in the first quarter of 2000. R&D
expenditures reflect our ongoing efforts to remain competitive through both
new product development and expanded capabilities for existing products. The
decrease is primarily due to our overall expense reduction initiatives. As a
percentage of net revenues, R&D expenses were 20% and 17% in the first quarter
of 2001 and 2000, respectively. We anticipate, on a forward-looking basis,
that such expenses in absolute dollars will remain relatively flat in 2001,
although such expenses as a percentage of net revenues may fluctuate between
periods.
Sales and marketing (S&M) expenses in the first quarter of 2001 increased 30%
to $49.9 million from $38.4 million in the first quarter of 2000. The increase
primarily resulted from increases in direct sales headcount, sales support
infrastructure, and marketing efforts. S&M expenses as a percentage of net
revenues were 44% in the first three months of 2001 and 27% in the first three
months of 2000. We anticipate, on a forward-looking basis, that S&M expenses
will decrease in 2001, although such expenses as a percentage of net revenues
may fluctuate between periods.
General and administrative (G&A) expenses in the first quarter of 2001
increased 28% to $11.8 million from $9.2 million in the first quarter of 2000.
The increase primarily resulted from the increase in headcount and higher
expenditures on salaries. G&A expenses as a percentage of net revenues were
10% in the first three months of 2001 and 6% in the first three months of
2000. We anticipate, on a forward-looking basis, that such
12
expenses in absolute dollars will decrease in 2001, although such expenses as
a percentage of net revenues may fluctuate between periods.
Restructuring charge of $7.0 million in the first quarter of 2001, or $0.14
per diluted share, relates to the Company's workforce reduction and
consolidation of selected facilities in an effort to optimize operational
efficiency and reduce overall costs. As a result of the restructuring, the
Company expects to reduce expenses by $3 to $4 million in each subsequent
quarter in 2001.
In-process research and development expenses represent 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.
Amortization of intangibles and stock-based compensation expenses relate to
the purchase of intangible assets in connection with various acquisitions and
issuance of restricted stock to specific employees. Amortization expenses
included in cost of revenues were $1.2 million for both quarters ended March
31, 2001 and 2000. Amortization expense and stock-based compensation expenses
included in operating expenses were $6.8 million and $5.1 million in the
quarters ended March 31, 2001 and 2000, respectively.
Interest and Other Income (Expense)
Interest and other income decreased to $2.2 million in the first quarter of
2001 from $6.7 million in the same period last year. The decrease is primarily
due to a pretax gain of $3.7 million on the sale of appreciated marketable
equity securities in the first quarter of 2000 and lower interest income
attributable to lower average investment amounts in the first quarter of 2001.
Interest and other expense was $2.4 million in the first quarter of 2001 as
compared to $2.6 million in the same period last year.
Provision for Income Taxes
The Company recorded an income tax provision at an effective tax rate of less
than 1% for the first three months of 2001 compared with a provision of 48%
for the same period of 2000. The tax rate for the first three months of 2001
differs from the statutory rate due to current year net operating losses for
which no benefit is provided as a result of the full valuation allowance
against the Company's deferred tax assets. The tax rate for the first three
months of 2000 excludes the effect of purchased in-process technology related
to the acquisition of PakNetX and exceeds the statutory rate primarily due to
nondeductible goodwill amortization.
Liquidity and Capital Resources
At March 31, 2001, the principal source of liquidity consisted of cash, cash
equivalents, short-term investments, and marketable equity securities totaling
$155.3 million, which represented 27% of total assets. The primary sources of
cash during the first three months of 2001 were proceeds from the issuance of
common stock under various stock plans of $4.0 million and net sales and
maturities of short-term investments of $3.1 million. The primary uses of cash
during the first three months of 2001 were $18.8 million for the purchase of
property and equipment and $6.0 million for operating activities.
As of March 31, 2001, the fair market value of the Company's marketable equity
securities was $2.3 million. These securities are available for sale at
Aspect's discretion and are subject to market prices, which have historically
fluctuated significantly.
At March 31, 2001, long-term outstanding borrowings totaled $176.3 million,
and are comprised of $175.6 million in convertible debentures and $0.7 million
for a capital lease.
The Company is currently constructing a new facility and is committed to pay a
minimum of an additional $15 million to complete construction of the new
building.
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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 for at least the
next twelve months.
Business Environment Risks
Our Company's Business Focus Continues to Evolve: Historically, we have
supplied the hardware, software, and associated support services for
implementing call center solutions. Our shift to an enterprise software
business model has required and will continue to require substantial change,
potentially resulting in some disruption to our business. Our inability to
successfully continue or complete this transition in a timely manner could
materially affect our business, operating results, or financial condition.
These changes may include 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 operating in the
enterprise software market;
. More revenues being deferred to future periods under software revenue
recognition rules; and/or
. An increased reliance on systems integrators to develop, deploy, and/or
manage our applications.
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 not meeting customer specifications and/or by problems
with system performance, system availability, installation or service delivery
commitments, or 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 principal competitors
currently include companies in the eCRM market and companies that market
traditional telephony products and services.
As the hardware requirements for a traditional call center diminish due to the
emergence of the Internet, local area networks, and other factors, companies
in these markets are merging and obtaining significant positions in the eCRM
and traditional telephony products market. Many current and potential
competitors, including Avaya Inc., Nortel Networks Corporation, Rockwell
International Corporation, Alcatel SA, Siemens AG, Cisco Systems Inc., Siebel
Systems Inc., and Oracle Corporation, have considerably greater resources,
larger customer bases and broader international presence than Aspect.
Consequently, the Company expects to encounter substantial competition from
these and other sources.
We May Be Involved in Litigation: We may be involved in litigation for a
variety of matters. Any claim brought against us would likely have a financial
impact, both because of the effect on our common stock performance and because
of the disruption, costs, and diversion of management attention such a claim
would cause. In our industry, there has been extensive litigation regarding
patents and other intellectual property rights, and we are periodically
notified of such claims by third parties. In the past, we have been sued for
alleged patent infringement.
Organizations in our industry may intend to use intellectual property
litigation to generate revenues. In the future, claims asserting infringement
of intellectual property rights may be asserted or prosecuted against us.
Although we periodically negotiate with third parties to establish
intellectual property license or cross-license agreements, like our patent
cross-license agreement with Lucent Technologies, Inc., such negotiations may
not yield a settlement.
Moreover, even if we negotiate license agreements with a third party, future
disputes with such parties are possible. If we are unable to resolve an
intellectual property dispute through a license, settlement, or successful
litigation, we could be subject to damage assessments and be prevented from
making, using, or selling certain products or services.
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In the future, we could become involved in other types of litigation, such as
shareholder lawsuits for alleged violations of securities laws, claims by
employees, and product liability claims. Any litigation could result in
substantial cost to us and diversion of our efforts.
Doing Business Internationally Involves Significant Risk: We market our
products and services worldwide and anticipate entering additional countries
in the future. If we fail to enter certain major international markets
successfully, our competitive position could be impaired and we may be unable
to compete on a global scale. The financial resources required to enter,
establish, and grow new and existing international markets may be substantial,
and international operations are subject to additional risks including:
. 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 considerations 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.
Regulatory Changes and Changes Made to Generally Accepted Accounting Practices
Principles May Impact Our Business: The electronic communications industry in
general is subject to a wide range of regulations throughout various markets
and throughout various countries in which we currently operate or may wish to
operate in the future. In addition, new products and services may involve
entering into different or newly regulated areas. Changes in these
environments may impact our business and could affect our ability to operate
in certain markets or certain regions from time to time.
Required revisions to generally accepted accounting principles will require us
to review our accounting and financial reporting procedures in order to ensure
continued compliance with required policies. From time to time such changes
may have a short-term impact in the reporting that we do, and these changes
may impact market perception of our financial condition.
Technology Risks
Our Intellectual Property May Be Copied, Obtained, or Developed by Third
Parties: Our success depends in part upon our internally developed technology.
Despite the precautions we take to protect our intellectual property,
unauthorized third parties may copy or otherwise obtain and use our
technology. In addition, third parties may develop similar technology
independently.
Technology Is Rapidly Changing: The market for our products and services is
subject to rapid technological change and new product introductions. Current
competitors or new market entrants may develop new, proprietary products with
features that could adversely affect the competitive position of our products.
We may not successfully anticipate market demand for new products or services,
or introduce them in a timely manner.
The convergence of voice and data networks, and wired and wireless
communications could require substantial modification and customization of our
current products and business models, as well as the introduction of new
products. We may not be able to compete effectively in these markets. In
addition, Aspect's products must readily integrate with major third-party
security, telephony, front-office, and back-office systems. Any changes to
these third-party systems could require us to redesign our products, and any
such redesign might not be possible on a timely basis or achieve market
acceptance.
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Transaction Risks
Acquisitions and Investments May Be Difficult and Disruptive: We have made a
number of acquisitions and have made minority equity investments in other
companies. Acquisitions or investments we make may experience significant
fluctuations in market value or may result in significant write-offs, the
creation of goodwill, or the issuance of additional equity or debt securities.
These acquisitions and investments can, therefore, be costly and disruptive,
and we may be unable to successfully integrate a new business or technology
into our business. We may continue to make such acquisitions and investments,
and there are a number of risks that future transactions could entail. These
risks include the inability to successfully integrate or commercialize
acquired technologies or otherwise realize anticipated synergies or economies
of scale on a timely basis; the negative impact on earnings of significant
charges related to the amortization of purchased technology and goodwill;
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; permanent impairment of our equity investments;
governmental, regulatory, or competitive responses to the proposed
transactions; and/or impairment of relationships with employees, vendors,
and/or customers including, in particular, acquired original equipment
manufacturer and value-added reseller relationships.
Operational/Performance Risks
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 shift in our focus from supplying
telecommunications equipment to becoming a provider of contact server
software, 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 subsequent renewal agreements for support of our products; our ability to
develop and market new products and control costs; and/or changes in market
growth rates for different products and services.
In addition, our products typically represent substantial capital commitments
by customers, involving a potentially long sales cycle. As a result, customer
purchase decisions may be significantly affected by a variety of factors
including trends in capital spending. For example, recent changes in general
economic conditions resulted in many of our customers delaying and/or reducing
their capital spending related to information systems. If the economy
continues to be weak, demand for the Company's products could decrease,
resulting in lower revenues and a decline in the overall rate of the Company's
growth.
We May Experience Difficulty Managing Our Growth and Related Changes: Growth
may place a significant strain on our operational and financial systems. We
are upgrading these systems and may experience substantial disruption and
incur significant expenses and write-offs during these transitions. We must
carefully manage accounts receivables to limit credit risk. We must also
maintain inventories at levels consistent with product demand. Inaccurate data
(for example, credit histories or supply/demand forecasts) could quickly
result in excessive balances or insufficient reserves.
We May Experience Difficulty Expanding Our Distribution Channels: We have
historically sold our products and services through our direct sales force and
a limited number of distributors. Changes in customer preferences, the
competitive environment, or other factors may require us to broaden original
equipment manufacturer distribution channels, as well as expand third-party
distributor, electronic, and other alternative distribution channels. We
anticipate a greater reliance on systems integrators as we complete our
recently announced
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workforce adjustment that will ultimately reduce our internal consulting
resources. We may not be successful in expanding these distribution channels.
We Are Dependent on Key Personnel: We depend on certain key management and
technical personnel and on our ability to attract and retain highly qualified
personnel in labor markets characterized by high turnover among, high demand
for, and limited supply of, qualified people; and we have recently experienced
increased levels of turnover among such personnel. We have recently undergone
significant changes in senior management and technical personnel and may
experience additional changes as a result of continuing volatility in the high
technology employment sector. Further, we increased the size of our sales
force during the last quarters of 2000. New personnel require extensive
training and initially tend to be less productive than those with greater
experience. Any delays or difficulties we encounter in recruiting, training,
or 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.
We Are Dependent on Third Parties: We subcontract substantial elements of our
manufacturing and other support functions to third parties. We depend on
certain critical components in the production of our products and services.
Certain of these components are obtained only from a single supplier and only
in limited quantities. In addition, some of our major suppliers use
proprietary technology and software code that could require significant
redesign of our products in the case of a change in vendor. Further, suppliers
could discontinue 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. We also subcontract various support
functions to third parties. If any of these vendors experience difficulty
meeting our requirements for components we may be unable to meet development
or delivery commitments.
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. We also concentrate engineering,
administrative, and support functions and related infrastructure to support
our international operations at our U.K. offices. In the event of localized
extended outages of critical utilities, including prolonged or recurrent power
interruptions due to the current shortages in California, or a natural
disaster, such as an earthquake or flood, or any disruption of local
transportation systems, we could experience a significant business
interruption.
Financial/Capital Market Risks
The Prices of Our Common Stock and Convertible Subordinated Debentures Are
Volatile: We operate in a rapidly changing high-technology industry that
exhibits significant stock market volatility. Accordingly, the price of our
common stock and our convertible subordinated debentures may be subject to
significant volatility. You cannot consider our past financial performance as
a reliable indicator of performance for any future period, and should not use
historical data to predict future results or trends. For any given quarter, a
shortfall in our operating results from the levels expected by securities
analysts or others could immediately and adversely affect the price of the
convertible subordinated debentures and our common stock. If we do not learn
of such shortfalls until late in a fiscal quarter, there could be an even more
immediate and adverse effect on the price of the convertible subordinated
debentures and our common stock. In addition, this volatility could be
exacerbated by the relatively low trading volume of our common stock and
debentures.
Foreign Currency Exchange: Revenues generated from international operations
are generally denominated in foreign currencies. We enter into foreign
exchange forward contracts to hedge against fluctuations of intercompany
account balances. Market value gains and losses on these hedge contracts are
substantially offset by fluctuations in the underlying balances being hedged,
and the net financial impact has not been material in any of the past three
fiscal years. At March 31, 2001, our primary net foreign currency market
exposures included Euros and British pounds.
Our Debt and Debt Service Obligations Are Significant: We incurred $150
million of principal indebtedness ($490 million principal at maturity) from
the sale of convertible subordinated debentures in August 1998. This
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debt resulted in a ratio of long-term debt to total shareholders' equity of
approximately 74% at March 31, 2001. As a result of this sale, we have
substantially increased our principal and interest obligations. The degree to
which we are leveraged could materially and adversely affect our ability to
obtain additional financing and could make us more vulnerable to industry
downturns and competitive pressures. Our ability to meet our debt service
obligations will depend on our future performance, which will be subject to
financial, business, and other factors affecting our operations, many of which
are beyond our control.
Item 3. Quantitative and Qualitative Disclosures About Financial Market Risk
Reference is made to the information appearing under the caption "Quantitative
and Qualitative Disclosures About Financial Market Risk" of the Registrant's
2000 Annual Financial Report to Shareholders, attached as an appendix to
Aspect's 2001 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 months ended
March 31, 2001.
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 10.82 Employment Agreement between Registrant and Donald P. Casey,
dated January 30, 2001.
Exhibit 10.83 Employment Agreement between Registrant and David B. Wright,
dated February 15, 2001.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 2001.
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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)
/s/ Beatriz V. Infante
Date: May 14, 2001 By: _________________________________
Beatriz V. Infante
Chairman, President, and Chief
Executive Officer
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