UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended June 30, 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
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 51,653,418 at July 31, 2001.
1
ASPECT COMMUNICATIONS CORPORATION
INDEX
Description Page Number
- ----------- -----------
Cover Page 1
Index 2
Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows for the
Three and Six Months Ended June 30, 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 17
Part II: Other Information
Item 4: Submission of Matters to a Vote of Security Holders 18
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)
June 30, December 31,
2001 2000
-------- ------------
Assets
Current assets:
Cash and cash equivalents $ 73,355 $ 84,544
Short-term investments 63,571 86,869
Marketable equity securities 766 9,545
Accounts receivable, net 83,838 135,243
Inventories, net 22,530 19,940
Other current assets 20,859 26,925
-------- --------
Total current assets 264,919 363,066
Property and equipment, net 119,082 108,780
Intangible assets, net 130,697 146,394
Other assets 16,816 17,258
-------- --------
Total assets $531,514 $635,498
======== ========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 27,637 $ 33,553
Accrued compensation and related benefits 22,514 28,483
Other accrued liabilities 63,829 67,609
Deferred revenues 38,435 45,041
-------- --------
Total current liabilities 152,415 174,686
Other long-term liabilities 4,390 852
Deferred taxes 5,554 3,394
Convertible subordinated debentures 178,232 173,041
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: 51,646,403 and 51,125,114
at June 30, 2001 and December 31, 2000, respectively 194,701 190,947
Deferred stock compensation (1,819) (2,421)
Accumulated other comprehensive income (loss) (2,044) 2,726
Retained earnings 85 92,273
-------- --------
Total shareholders' equity 190,923 283,525
-------- --------
Total liabilities and shareholders' equity $531,514 $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 Six months ended
June 30, June 30,
------------------------ ----------------------
2001 2000 2001 2000
------------------------ ----------------------
Net revenues:
License revenues $ 28,609 $ 41,770 $ 60,112 $ 87,853
Services revenues 64,827 64,821 125,712 126,711
Other revenues 19,943 25,017 42,088 61,467
------------------------ ----------------------
Total net revenues 113,379 131,608 227,912 276,031
------------------------ ----------------------
Cost of revenues:
Cost of license revenues 2,013 3,276 4,010 6,112
Cost of services revenues 37,843 40,358 76,640 81,573
Cost of other revenues 18,567 20,621 38,373 44,971
Amortization of intangible assets 1,238 1,224 2,476 2,445
------------------------ ----------------------
Total cost of revenues 59,661 65,479 121,499 135,101
------------------------ ----------------------
Gross margin 53,718 66,129 106,413 140,930
Operating expenses:
Research and development 21,983 24,075 45,201 48,476
Sales and marketing 46,062 40,062 95,954 78,452
General and administration 10,027 12,287 21,811 21,510
Restructuring charges 13,153 - 20,107 -
In-process research and development - - - 5,018
Amortization of intangible assets
and stock-based compensation 6,740 6,191 13,527 11,322
------------------------ ----------------------
Total operating expenses 97,965 82,615 196,600 164,778
------------------------ ----------------------
Loss from operations (44,247) (16,486) (90,187) (23,848)
Interest and other income 1,348 8,222 3,542 14,937
Interest and other expense (2,983) (2,409) (5,393) (5,005)
------------------------ ----------------------
Loss before income taxes (45,882) (10,673) (92,038) (13,916)
Provision (benefit) for income taxes 75 (2,989) 150 (1,785)
------------------------ ----------------------
Net loss $ (45,957) $ (7,684) $ (92,188) $ (12,131)
======================== ======================
Basic and diluted loss per share $ (0.89) $ (0.15) $ (1.79) $ (0.24)
======================== ======================
Basic and diluted weighted average shares outstanding 51,486 51,413 51,362 50,948
======================== ======================
See Notes to Condensed Consolidated Financial Statements
4
ASPECT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands--unaudited)
Six Months Ended
June 30,
---------------------
2001 2000
---------------------
Cash flows from operating activities:
Net loss $ (92,188) $ (12,131)
Reconcilation of net loss to cash provided by (used in) operating activities:
Depreciation 19,502 16,451
Amortization of intangible assets and stock-based compensation 16,003 13,767
Gain on sale of marketable securities (409) (9,361)
Impairment of short-term investments 1,300 -
Impairment of property 1,843 -
Non-cash interest expense on debentures 5,191 4,894
In-process research and development - 5,018
Deferred taxes 3,147 (22,987)
Changes in assets and liabilities, net of effects from
company acquired in 2000:
Accounts receivable 48,511 (11,678)
Inventories (2,765) (7,023)
Other current assets and other assets 8,207 16,373
Accounts payable (5,788) 17,026
Accrued compensation and related benefits (5,759) 324
Other accrued liabilities 1,039 (10,048)
Deferred revenues (6,170) 11,482
---------------------
Cash provided by (used in) operating activities (8,336) 12,107
Cash flows from investing activities:
Short-term investment purchases (156,669) (195,428)
Short-term investment sales and maturities 180,085 223,994
Property and equipment purchases (32,674) (30,624)
Purchase of company, net of cash acquired - (44,942)
---------------------
Cash used in investing activities (9,258) (47,000)
Cash flows from financing activities:
Other common stock transactions, net 4,039 30,158
Payments on capital lease obligations (243) -
Payments on note payable - (1,676)
---------------------
Cash provided by financing activities 3,796 28,482
Effect of exchange rate changes on cash and cash equivalents 2,609 1,862
---------------------
Net decrease in cash and cash equivalents $ (11,189) $ (4,549)
=====================
Cash and cash equivalents:
Beginning of period $ 84,544 $ 84,826
---------------------
End of period $ 73,355 $ 80,277
=====================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 65 -
Supplemental schedule of non-cash investing and financing activities:
Stock options issued in connection with the
acquisition of PakNetX Corporation - $ 10,422
Cancellation of restricted stock, net of issuances $ (285) -
See Notes to Condensed Consolidated Financial Statements
5
ASPECT COMMUNICATIONS CORPORATION
NOTES TO 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 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 adjustments) considered necessary
for a fair presentation have been included. Certain amounts in the three and
six months ended June 30, 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 and six months ended June 30, 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. The reclassifications had no significant impact on major
captions.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist of (in thousands):
June 30, December 31,
2001 2000
-------- ------------
Raw materials $18,188 $14,779
Work in progress 3,176 3,404
Finished goods 1,166 1,757
------- -------
Total inventories, net $22,530 $19,940
======= =======
Comprehensive Loss
Comprehensive loss is calculated as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ --------------------
2001 2000 2001 2000
-------- ------- -------- --------
Net loss $(45,957) $ (7,684) $(92,188) $(12,131)
Unrealized loss on investments, net (876) (4,590) (4,923) (16,355)
Accumulated translation adjustments, net 73 219 153 (247)
-------- ------- -------- --------
Total comprehensive loss $(46,760) $(12,055) $(96,958) $(28,733)
======== ======== ======== ========
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.
6
Per Share Information
Basic loss per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share further
includes the dilutive impact of securities or other contracts to issue common
stock (stock options, convertible subordinated debentures, and restricted
stock). Basic and diluted loss per share for the three and six months ended
June 30 are calculated as follows (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
2001 2000 2001 2000
------------------- -------- --------
Net loss $(45,957) $(7,684) $(92,188) $(12,131)
======== ======= ======== ========
Weighted average shares outstanding 51,616 51,413 51,499 50,948
Weighted average shares of restricted common stock (130) - (137) -
-------- ------- -------- --------
Shares used in calculation, basic and diluted 51,486 51,413 51,362 50,948
======== ======= ======== ========
Basic and diluted net loss per share $(0.89) $(0.15) $(1.79) $(0.24)
======== ======= ======== ========
The Company had approximately 13.6 million and 10.5 million common stock options
outstanding as of June 30, 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 June 30, 2001 and 2000, the Company also had 4.3 million shares of
common stock issuable upon conversion of the convertible debentures, and 155,250
shares of restricted common stock outstanding at June 30, 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.
SFAS 133
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
material impact on the consolidated financial position, results of operations,
or cash flows of the Company.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations. SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for under the purchase method and
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. Business combinations
originally accounted for under the pooling of interest method will not be
changed. Management does not expect the adoption of SFAS No. 141 to have a
material impact on the financial position, results of operations or cash flows
of the Company.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives will not be amortized, but will rather be tested at least
annually for impairment. Aspect will adopt SFAS No. 142 for its fiscal year
beginning January 1, 2002. Upon adoption of SFAS No. 142, the Company will stop
the amortization of goodwill with a net carrying value of approximately $53.7
million at December 31, 2001 and the annual amortization of $13.1 million that
resulted from business combinations initiated prior to the adoption of SFAS No.
141. The Company will evaluate goodwill under the SFAS No. 142 transitional
impairment test. Any transitional impairment loss will be recognized as a change
in accounting principle on the date of adoption. If any impairment of goodwill
is recognized prior to date of adoption, a loss will be charged to operating
expenses.
Impairment of Short-Term Investments
During the second quarter of 2001, the Company recorded an impairment charge of
$1.3 million for some of its short-term investments. The assets were determined
to be impaired because the Company held debt securities of certain entities that
were unsuccessful in obtaining additional financing and these entities ability
to repay amounts owed was not likely. The Company will continue to review its
existing short-term investments for impairment and make adjustments as needed.
Capitalization of Interest Costs
The Company began capitalizing interest costs relating to the construction of a
new building during the third quarter of 2000. As of June 30, 2001,
approximately $500,000 was capitalized into construction in progress.
Capitalization of interest terminated in July 2001 because the building was
ready for its intended use.
7
Restructuring Charge
In February 2001 and April 2001, the Company reduced its workforce by 6% and
11%, respectively, and consolidated selected facilities in its continuing effort
to better optimize operations. This resulted in restructuring charges of $7.0
million and $13.2 million, respectively. As of June 30, 2001, the total
restructuring accrual was $12.3 million, of which, $8.5 million was a short-term
liability and $3.8 million was a long-term liability. Components of the
restructuring accrual as of June 30, 2001 were as follows (in thousands):
Severance and Consolidation of Other Restructuring
Outplacement Facilities Costs Costs Total
----------------------------------------------------------------------
Provision I $ 3,227 $ 3,219 $508 $ 6,954
Payments and property write downs (2,287) (484) - (2,771)
----------------------------------------------------------------------
Balance at March 31, 2001 940 2,735 508 4,183
Provision II 4,947 8,076 130 13,153
Payments and property write downs (3,394) (1,609) (57) (5,060)
----------------------------------------------------------------------
Balance at June 30, 2001 $ 2,493 $ 9,202 $581 $12,276
======================================================================
Severance and outplacement costs related to the termination of 457 employees.
Employee separation costs include severance and other related benefits.
Functions impacted by the restructuring included sales and sales infrastructure,
support services, manufacturing, marketing, research and development, and
corporate functions. As of June 30, 2001, the Company made $5.7 million in
severance payments, and the remaining balance will be paid by the end of 2001.
Consolidation of facilities costs include rent of unoccupied facilities,
property write downs and other facilities related costs. As of June 30, 2001,
the Company paid $250,000 in expenses and wrote down $1.8 million in property.
The remaining accrual balance will be paid over the next 5 years.
Other restructuring costs primarily include taxes, legal, and travel expenses.
The Company expects these expenses to be fully paid during the third quarter of
2001.
2001 Stock Option Exchange Program
In April 2001, the Company's Board of Directors approved the 2001 Stock Option
Exchange Program. Under this program, eligible employees may elect to exchange
their existing options for new options to purchase the same number of shares of
Aspect common stock, but with a grant date of December 20, 2001. The new options
will be issued from Aspect's 1996 Employee Stock Option Plan and will be
nonstatutory stock options. The individuals participating in this program must
be employees of Aspect on the re-grant date to be eligible to receive the new
stock options. No consideration for the canceled stock options will be provided
to individuals terminating employment prior to the re-grant date. The new
grants will have an exercise price equal to the closing sale price of the
Company's common stock on the date of re-grant. The new stock options will vest
on the same schedule as the canceled options; provided, however, that vesting is
suspended from the cancellation date until the new grant date. The new stock
options will have the same expiration date as the cancelled options.
At the expiration date of this program, June 19, 2001, the Company had accepted
for exchange options to purchase 4,327,897 shares of common stock, representing
approximately 48% of the options that were eligible to be tendered. Upon the
terms and subject to the conditions of the program, we will grant new options to
purchase an aggregate of 4,327,897 shares of Aspect common stock on or about
December 20, 2001.
Bank Line of Credit
On June 19, 2001, the Company obtained a secured line of credit with Comerica
Bank in the amount of $20.0 million, which bears interest at the Company's
choice of either the bank's prime rate (6.75% at June 30, 2001) or LIBOR + 1.75%
(LIBOR was 3.86% at June 30, 2001). The Company also obtained a secured
equipment line of $5.0 million with the same bank, which bears interest at the
Company's choice of either the bank's prime rate or LIBOR + 2.00%. Both credit
facilities are secured by a general lien on all Company assets. Borrowings under
the $20.0 million line of credit are available for one year from date of
agreement and borrowings under the equipment line are available through December
2001, at which time all borrowings thereunder become term notes, which are
payable in equal monthly installments, including interest, over 3 years. At June
30, 2001, no amounts were outstanding under either facility and the Company was
in compliance with all related covenants and restrictions. The financial
covenants include adjusted tangible net worth, quick ratio, earnings before
interest expense, income taxes, depreciation and amortization (EBITDA),
unrestricted cash, and leverage ratio.
Subsequent Event
Aspect is currently in an arbitration proceeding in the United Kingdom which
relates to a dispute between Aspect and Universities of Superannuation Scheme
Limited ("USS") regarding an Agreement to Lease between Aspect and USS. USS is
seeking specific performance by Aspect of the Agreement to Lease and damages in
excess of 50,000 British Pounds (approximately US $70,600 at current exchange
rates). In July 2001, the High Court of Justice, Chancery Division in the United
Kingdom granted a stay of the proceedings and the dispute was referred to
arbitration.
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 ongoing effort to incorporate technology acquired
from PakNetX into the Company's products, including the amortization of
intangibles; (ii) changes in anticipated spending levels in research and
development, sales and marketing, and general and administrative expenses; and
(iii) 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 business
communications solutions that help companies improve customer satisfaction,
reduce operating costs, gather market intelligence and increase revenue. Aspect
is the trusted mission-critical partner of 76 percent of the Fortune 50, daily
managing more than 3 million customer sales and service professionals worldwide.
Aspect provides the mission-critical software platform, development environment
and applications that seamlessly integrate voice-over-IP, traditional telephony,
e-mail, voicemail, Web, fax and wireless business communications, while
guaranteeing investment protection in a company's front-office, back-office,
Internet and telephony infrastructures. Aspect's leadership in business
communications solutions is based on more than 16 years of experience and over
7,600 implementations deployed worldwide. The Company is headquartered in San
Jose, California, with offices around the world, as well as an extensive global
network of systems integrators, independent software vendors and distribution
partners.
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 contact server 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 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 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):
9
Amortization
period
Total purchase price: Purchase price allocation: (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 PakNetX's contact
server products and contact center applications that had not reached
technological feasibility. As a result, successful development of this
technology was uncertain. As of June 30, 2001, some components of this
technology have 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 June 30, 2001, the Company has incurred an
additional $7.1 million in operating expenses 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 had
been completed; and (iii) a discount rate of approximately 25%. As of June 30,
2001, no significant departures from the assumptions included in the valuation
analysis had occurred.
In February 2001 and April 2001, the Company reduced its workforce by 6% and
11%, respectively, and consolidated selected facilities in its continuing effort
to better optimize operations. This resulted in restructuring charges of $7.0
million and $13.2 million, respectively.
10
Results of Operations
The following table sets forth statement of operations data for the three and
six months ended June 30, 2001 expressed as a percentage of total revenues:
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2001 2000 2001 2000
-----------------------------------------
Net revenues:
License revenues 25% 32% 26% 32%
Services revenues 57% 49% 56% 46%
Other revenues 18% 19% 18% 22%
-----------------------------------------
Total net revenues 100% 100% 100% 100%
-----------------------------------------
Cost of revenues:
Cost of license revenues 2% 2% 2% 2%
Cost of services revenues 34% 31% 33% 30%
Cost of other revenues 16% 16% 17% 16%
Amortization of intangible assets 1% 1% 1% 1%
-----------------------------------------
Total cost of revenues 53% 50% 53% 49%
-----------------------------------------
Gross margin 47% 50% 47% 51%
Operating expenses:
Research and development 19% 18% 20% 18%
Sales and marketing 41% 30% 42% 28%
General and administration 8% 10% 10% 8%
Restructuring charges 12% - 9% -
In-process research and development - - - 2%
Amortization of intangible assets
and stock-based compensation 6% 5% 6% 4%
-----------------------------------------
Total operating expenses 86% 63% 87% 60%
-----------------------------------------
Loss from operations (39%) (13%) (40%) (9%)
Interest and other income 1% 7% 2% 5%
Interest and other expense (2%) (2%) (2%) (1%)
-----------------------------------------
Loss before income taxes (40%) (8%) (40%) (5%)
Provision (benefit) for income taxes - (2%) - (1%)
-----------------------------------------
Net loss (40%) (6%) (40%) (4%)
-----------------------------------------
11
Revenues
- --------
Net revenues for the second quarter of 2001 decreased 14% to $113.4 million from
$131.6 million in the second quarter of 2000. Net revenues for the first six
months of 2001 decreased 17% to $227.9 million from $276.0 million in the first
six months of 2000. As a percentage of total net revenues, international net
revenues were 29% for the second quarter and first six months of 2001 and
35% and 34% for the second quarter and first six months of 2000, respectively.
License revenues for the second quarter of 2001 decreased 32% to $28.6 million
from $41.8 million in the second quarter of 2000. License revenues for the first
six months of 2001 decreased 32% to $60.1 million from $87.9 million in the
first six months of 2000. License revenues consist of strategic and other
software revenues. The decrease across all periods presented was primarily due
to recent changes in global economic conditions causing many of our customers to
delay and/or reduce their capital spending.
Services revenues were $64.8 million for the second quarter of 2001 and 2000.
Services revenues were $125.7 million and $126.7 million for the first six
months of 2001 and 2000, respectively. Services revenues consist primarily of
maintenance and support revenues, consulting services, and educational fees.
Services revenues remained relatively unchanged across all periods presented due
to revenues generated from recurring maintenance and software support contracts
from the existing installed base.
Other revenues for the second quarter of 2001 decreased 20% to $19.9 million
from $25.0 million in the second quarter of 2000. Other revenues for the first
six months of 2001 decreased 32% to $42.1 million from $61.5 million in the
first six months of 2000. Other revenues consist of hardware revenues. The
decrease across all periods presented was primarily due to the global economic
slowdown and the transformation of our business model.
Gross Margin
- ------------
Gross margin on license revenues was 93% and 92% for the second quarter of 2001
and 2000, respectively. Gross margin on license revenues was 93% for the first
six months of 2001 and 2000. Cost of license revenues includes third party
software royalties, product packaging, and documentation.
Gross margin on services revenues was 42% and 38% for the second quarter of 2001
and 2000, respectively. Gross margin on services revenues was 39% and 36% for
the first six months of 2001 and 2000, respectively. Cost of services revenues
include expense related to support, consulting and education. Gross margin on
services revenues increased across all periods presented as a result of selling
more profitable support services and less consulting services.
Gross margin on other revenues was 7% and 18% for the second quarter of 2001 and
2000, respectively. Gross margin on other revenues was 9% and 27% for the first
six months of 2001 and 2000, respectively. Cost of other revenues includes
labor, materials, overhead, and other directly allocated costs involved in the
manufacture and delivery of our hardware products. Gross margin on other
revenues decreased across all periods presented due to product mix, and lower
than anticipated revenues and increased period costs.
Operating Expenses
- ------------------
Research and development (R&D) expenses for the second quarter of 2001 decreased
9% to $22.0 million from $24.1 million in the second quarter of 2000. R&D
expenses for the first six months of 2001 decreased 7% to $45.2 million from
$48.5 million in the first six months 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 across all periods
presented was primarily due to the savings from workforce adjustments during
the first half of 2001, and lower spending related to our expense reduction
initiatives. As a percentage of net revenues, R&D expenses were 19% and 18%
for the second quarter of 2001 and 2000, respectively, and 20% and 18% for the
first six months 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 expenses for the second quarter of 2001 increased 15% to
$46.1 million from $40.1 million in the second quarter of 2000. Sales and
marketing expenses for the first six months of 2001 increased 22% to $96.0
million from $78.5 million in the first six months of 2000. The increase across
all periods presented resulted primarily from focused efforts to support our
sales and marketing strategies by investing in personnel, marketing initiatives,
and training. The increase was offset by lower spending in other functions as
part of our expense reduction initiatives. As a percentage of net revenues,
sales and marketing expenses were 41% and 30% for the second quarter of 2001 and
2000, respectively, and 42% and 28% for the first six months of 2001 and 2000,
respectively. We anticipate, on a forward-looking basis, that sales and
marketing expenses will remain relatively flat in 2001, although such expenses
as a percentage of net revenues may fluctuate between periods.
General and administrative (G&A) expenses for the second quarter of 2001
decreased 18% to $10.0 million from $12.3 million in the second quarter of 2000.
G&A expenses were $21.8 million and $21.5 million for the first six months of
2001 and 2000, respectively. G&A expenses decreased in the second quarter of
2001 from 2000 primarily due to the savings from workforce adjustments and lower
spending related to our expense reduction initiatives. The decrease was
partially offset by an increase in outsourced functions. As a percentage of net
revenues, G&A expenses were 8% and 10% for the second quarter of 2001 and 2000,
respectively, and 10% and 8% for the first six months of 2001 and 2000,
respectively. We anticipate, on a forward-looking basis, that such expenses in
absolute dollars will decrease in 2001, although such expenses as a percentage
of net revenues may fluctuate between periods.
12
Restructuring charges were $13.2 million and $20.2 million for the second
quarter and the first six months of 2001, or $0.26 and $0.39 per diluted share,
respectively. The charges relate to the Company's workforce reductions and
consolidation of selected facilities in an effort to reduce overall costs and
optimize operational efficiency.
In-process research and development expenses represent a non-recurring charge of
$5 million in the second quarter of 2000, related to the acquisition of PakNetX.
Amortization of intangible assets and/or stock-based compensation expenses
included in cost of revenues and operating expenses were $8.0 million and $7.4
million for the second quarter of 2001 and 2000, respectively. These expenses
included in cost of revenues and operating expenses were $16.0 million and $13.8
million for the first six months of 2001 and 2000, respectively. Amortization
of intangible assets and stock-based compensation relate to the purchase of
intangible assets in connection with various acquisitions and issuance of
restricted stock to specific employees.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives will not be amortized, but will rather be tested at least
annually for impairment. Aspect will adopt SFAS No. 142 for its fiscal year
beginning January 1, 2002. Upon adoption of SFAS No. 142, the Company will stop
the amortization of goodwill with a net carrying value of approximately $53.7
million at December 31, 2001 and the annual amortization of $13.1 million that
resulted from business combinations initiated prior to the adoption of SFAS No.
141. The Company will evaluate goodwill under the SFAS No. 142 transitional
impairment test. Any transitional impairment loss will be recognized as a change
in accounting principle on the date of adoption. If any impairment of goodwill
is recognized prior to date of adoption, the loss will be charged to operating
expenses.
Interest and Other Income (Expense)
- ----------------------------------
Interest and other income was $1.3 million and $8.2 million for the second
quarter of 2001 and 2000, respectively. Interest and other income was $3.5
million and $14.9 million for the first six months of 2001 and 2000,
respectively. The decrease across all periods presented was primarily due to
the gain on the sale of marketable equity securities in 2000, lower interest
income attributable to lower average investment amounts in 2001, and the loss
from the impairment of certain short-term investments in 2001. The pre-tax
gain on the sale of marketable equity securities was $5.7 million and $9.4
million for the second quarter and the first six months of 2000, respectively.
For the first six months of 2001, the loss from the impairment of short-term
investments was $1.3 million and the pre-tax gain was $409,000 on the sale of
marketable equity securities.
Interest and other expense was $3.0 million and $2.4 million for the second
quarter of 2001 and 2000, respectively. Interest and other expense was $5.4
million and $5.0 million for the first six months of 2001 and 2000,
respectively. The increase across all periods presented was primarily due to the
increase of the accretion of interest on the convertible subordinated
debentures.
Provision for Income Taxes
- --------------------------
The Company recorded an income tax provision at an effective tax rate of less
than 1% for the second quarter and first six months of 2001 compared with a
benefit, excluding the effect of purchased in-process technology related to
acquisitions, of 28% and 20% for the same periods of 2000. The tax rate for the
second quarter and first six 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 benefit rate for the second quarter and first six months of 2000
is less than the statutory rate primarily due to nondeductible goodwill
amortization.
Liquidity and Capital Resources
- -------------------------------
At June 30, 2001, the principal source of liquidity consisted of cash, cash
equivalents, short-term investments, and marketable equity securities totaling
$137.7 million, which represented 26% of total assets. The primary sources of
cash during the first six months of 2001 were net sales of short-term
investments of $23.4 million and proceeds from the issuance of common stock
under various stock plans of $4.0 million. The primary uses of cash during the
first six months of 2001 were $32.7 million for the purchase of property and
equipment and $8.3 million to support operating activities.
13
The primary sources of cash during the first six months of 2000 were $12.1
million generated from operating activities, net sales of short-term investments
of $28.6 million, and proceeds from the issuance of common stock under various
stock plans of $30.2 million. The primary uses of cash during the first six
months of 2000 were $44.9 million cash paid to acquire PakNetX, and $30.6
million for the purchase of property and equipment.
The Company has been constructing a new facility. As of June 30, 2001, Aspect
is committed to pay a minimum of an additional $10 million to fully complete the
construction of the new building.
As of June 30, 2001, the fair market value of the Company's marketable equity
securities was $766,000. These securities are available for sale at Aspect's
discretion and are subject to market prices, which have historically fluctuated
significantly.
On June 19, 2001, the Company obtained a secured line of credit with Comerica
Bank in the amount of $20.0 million, which bears interest at the Company's
choice of either the bank's prime rate (6.75% at June 30, 2001) or LIBOR + 1.75
(LIBOR was 3.86% at June 30, 2001). The Company also obtained a secured
equipment line of $5.0 million with the same bank, which bears interest at the
Company's choice of either the bank's prime rate or LIBOR + 2.00%. Both credit
facilities are secured by a general lien on all Company assets. Borrowings under
the $20.0 million line of credit are available for one year from date of
agreement and borrowings under the equipment line are available through December
2001, at which time all borrowings thereunder become term notes, which are
payable in equal monthly installments, including interest, over 3 years. At June
30, 2001, no amounts were outstanding under either facility and the Company was
in compliance with all related covenants and restrictions. The financial
covenants include adjusted tangible net worth, quick ratio, earnings before
interest expense, income taxes, depreciation and amortization (EBITDA),
unrestricted cash, and leverage ratio.
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.
Effect of New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, Business Combinations. SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. Business combinations originally accounted for under the pooling
of interest method will not be changed. Management does not expect the adoption
of SFAS 141 to have an impact on the financial position, results of operations
or cash flows of the Company.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives will not be amortized, but will rather be tested at least
annually for impairment. Aspect will adopt SFAS No. 142 for its fiscal year
beginning January 1, 2002. Upon adoption of SFAS No. 142, the Company will stop
the amortization of goodwill with a net carrying value of approximately $53.7
million at December 31, 2001 and the annual amortization of $13.1 million that
resulted from business combinations initiated prior to the adoption of SFAS No.
141. The Company will evaluate goodwill under the SFAS No. 142 transitional
impairment test. Any transitional impairment loss will be recognized as a change
in accounting principle on the date of adoption. If any impairment of goodwill
is recognized prior to date of adoption, the loss will be charged to operating
expenses.
Business Environment and Risk Factors
The Overall Economic Climate Continues to Be Weak: Our products typically
represent substantial capital commitments by customers, involving a potentially
long sales cycle. As a result, customer purchase decisions may be significantly
affected by a variety of factors including trends in capital spending for
telecommunications or enterprise software for contact center servers, market
competition, and the availability or announcement of alternative technologies.
Continued recent weakness in global economic conditions has 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 revenue growth.
Our Company's Business Focus Continues to Evolve: 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 from a hardware to an
enterprise software business 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 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.
14
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. Claims brought against us may 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.
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 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,
15
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.
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; 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.
We May Experience Difficulty Managing Our Changes in Growth: Growth may place a
significant strain on our operational and financial systems. We are upgrading
these systems and may experience substantial disruption and incur significant
expenses and write-offs during these transitions. We must carefully manage
accounts receivables to limit credit risk. We must also maintain inventories at
levels consistent with product demand. Inaccurate data (for example, credit
histories or supply/demand forecasts) could quickly result in excessive balances
or insufficient reserves.
We May Experience Difficulty Expanding Our Distribution Channels: We have
historically sold our products and services through our direct sales force and a
limited number of distributors. Changes in customer preferences, the competitive
environment, or other factors may require us to broaden original equipment
manufacturer distribution channels, as well as expand third-party distributor,
electronic, and other alternative distribution channels. We anticipate a
greater reliance on systems integrators as we complete our recently announced
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
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 two 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
16
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 San
Jose, California. We also concentrate 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 our
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 our 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 June 30, 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. We obtained a secured line
of credit and an equipment line totaling $25 million in June 2001. We had no
amounts outstanding under either credit facility at June 30, 2001. The
outstanding debt results in a ratio of long-term debt to total shareholders'
equity of approximately 94% at June 30, 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 second quarter or first six months
of 2001.
17
Part II: Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On May 16, 2001, the Annual Meeting of Shareholders of Aspect Communications
Corporation was held in San Jose, California.
An election of directors was held with the following individuals being elected
to the Board of Directors of the Company:
FOR WITHHELD
---------- --------
Donald P. Casey 47,720,648 410,917
Debra J. Engel 47,678,007 453,558
Norman A. Fogelsong 47,704,290 427,275
Beatriz V. Infante 47,573,736 557,829
Christopher B. Paisley 47,702,592 428,973
John W. Peth 47,728,900 402,665
David B. Wright 47,711,759 419,806
Other matters voted upon and approved at the meeting, and the number of
affirmations and negative votes cast with respect to each such matters were as
follows:
To approve an amendment to the 1999 Equity Incentive Plan to increase the number
of shares of common stock reserved for issuance thereunder by 2,450,000 shares
(34,194,745 votes in favor, 13,787,679 votes opposed, 149,141 votes abstaining).
To approve an amendment to the Aspect Incentive Plan (46,476,340 votes in favor,
1,493,558 votes opposed, 161,667 votes abstaining).
To ratify the appointment of Deloitte & Touche LLP as independent auditors of
the Company for the fiscal year ending December 31, 2001 (47,908,775 votes in
favor, 181,050 votes opposed, 41,740 votes abstaining).
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.82 Severance Agreement between the Registrant and Gary L. Smith, dated
June 18, 2001.
10.83 * Comerica Bank Credit Agreement, dated June 19, 2001
- ---------
* Material has been omitted pursuant to a request for confidential treatment and
such material has been filed separately with the SEC.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 2001.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Aspect Communications Corporation
(Registrant)
Date: August 14, 2001 By /s/ Betsy Rafael
-----------------------------------------------
Betsy Rafael
Executive Vice President, Finance,
Chief Financial Officer, and Secretary
19