UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 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 51,893,240 at October 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 September 30, 2001
and December 31, 2000 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 10
Item 3: Quantitative and Qualitative Disclosures About Financial
Market Risk 18
Part II: Other Information
Item 1: Legal Proceedings 19
Item 2: Changes in Securities and Use of Proceeds 19
Item 3: Defaults Upon Senior Securities 19
Item 4: Submission of Matters to a Vote of Security Holders 19
Item 5: Other Information 19
Item 6: Exhibits and Reports on Form 8-K
Signature 20
2
ASPECT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share amounts - unaudited)
September 30, December 31,
2001 2000
---------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 67,177 $ 84,544
Short-term investments 66,362 86,869
Marketable equity securities - 9,545
Accounts receivable, net 87,526 135,243
Inventories 21,989 19,940
Other current assets 24,149 26,925
---------------- -----------------
Total current assets 267,203 363,066
Property and equipment, net 119,579 108,780
Intangible assets, net 123,002 146,394
Other assets 16,763 17,258
---------------- -----------------
Total assets $ 526,547 $ 635,498
================ =================
Liabilities and shareholders' equity
Current liabilities:
Short-term borrowings $ 16,210 -
Accounts payable 21,197 $ 33,553
Accrued compensation and related benefits 24,490 28,483
Other accrued liabilities 71,164 67,609
Deferred revenues 35,034 45,041
---------------- -----------------
Total current liabilities 168,095 174,686
Deferred taxes 4,642 3,394
Other long-term liabilities 5,779 852
Convertible subordinated debentures 180,888 173,041
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: 51,875,553 and 51,125,114
at September 30, 2001 and December 31, 2000, respectively 195,742 190,947
Deferred stock compensation (1,416) (2,421)
Accumulated other comprehensive income (loss) (1,521) 2,726
Retained earnings (deficit) (25,662) 92,273
--------------- ------------------
Total shareholders' equity 167,143 283,525
--------------- ------------------
Total liabilities and shareholders' equity $ 526,547 $ 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 Nine months ended
September 30, September 30,
--------------------------- -------------------------
2001 2000 2001 2000
--------------------------- -------------------------
Net revenues:
License revenues $ 21,813 $ 54,022 $ 81,925 $ 141,875
Services revenues 68,242 62,962 193,954 189,673
Other revenues 18,596 31,488 60,684 92,955
--------------------------- -------------------------
Total net revenues 108,651 148,472 336,563 424,503
--------------------------- -------------------------
Cost of revenues:
Cost of license revenues 3,139 3,668 7,149 9,780
Cost of services revenues 36,119 40,843 112,759 122,416
Cost of other revenues 16,512 25,908 54,885 70,879
Amortization of intangible assets 1,254 1,227 3,730 3,672
--------------------------- ------------------------
Total cost of revenues 57,024 71,646 178,523 206,747
--------------------------- ------------------------
Gross margin 51,627 76,826 158,040 217,756
Operating expenses:
Research and development 20,615 25,159 65,816 73,635
Sales and marketing 40,705 45,342 136,659 123,794
General and administration 8,312 12,035 30,123 33,545
Restructuring charges - - 20,107 -
In-process research and development - - - 5,018
Amortization of intangible assets
and stock-based compensation 6,634 6,576 20,161 17,898
--------------------------- ------------------------
Total operating expenses 76,266 89,112 272,866 253,890
--------------------------- ------------------------
Loss from operations (24,639) (12,286) (114,826) (36,134)
Interest and other income 1,411 10,277 4,953 25,214
Interest and other expense (2,444) (2,725) (7,837) (7,730)
--------------------------- ------------------------
Loss before income taxes (25,672) (4,734) (117,710) (18,650)
Provision (benefit) for income taxes 75 (926) 225 (2,711)
--------------------------- ------------------------
Net loss $(25,747) $ (3,808) $(117,935) $ (15,939)
=========================== ========================
Basic and diluted loss per share $ (0.50) $ (0.07) $ (2.29) $ (0.31)
=========================== ========================
Basic and diluted weighted average shares outstanding 51,624 51,538 51,449 51,164
=========================== ========================
See Notes to Condensed Consolidated Financial Statements
4
ASPECT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands - unaudited)
Nine Months Ended
September 30,
---------------------------
2001 2000
---------------------------
Cash flows from operating activities:
Net loss $(117,935) $(15,939)
Reconciliation of net loss to cash used in operating activities:
Depreciation 29,223 25,572
Amortization of intangible assets and stock-based compensation 23,891 21,568
Gain on sale of marketable securities (563) (17,087)
Impairment of short-term investments 1,300 -
Impairment of property 2,303 -
Non-cash interest expense on debentures 7,847 7,398
In-process research and development - 5,018
Deferred taxes 2,832 (28,490)
Changes in assets and liabilities, net of effects from
company acquired in 2000:
Accounts receivable 46,526 (37,856)
Inventories (1,522) (9,133)
Other current assets and other assets 4,190 1,876
Accounts payable (11,323) 23,911
Accrued compensation and related benefits (3,887) (514)
Other accrued liabilities 6,770 12,772
Deferred revenues (9,905) 7,226
---------------------------
Cash used in operating activities (20,253) (3,678)
Cash flows from investing activities:
Short-term investment purchases (113,905) (234,986)
Short-term investment sales and maturities 136,257 295,877
Property and equipment purchases (42,761) (48,851)
Purchase of company, net of cash acquired - (49,942)
---------------------------
Cash used in investing activities (20,409) (37,902)
Cash flows from financing activities:
Other common stock transactions, net 5,307 38,376
Repurchase of common stock - (20,854)
Payments on capital lease obligations (369) -
Proceeds from borrowings, net 18,617 -
Payments on note payable - (1,676)
---------------------------
Cash provided by financing activities 23,555 15,846
Effect of exchange rate changes on cash and cash equivalents (260) 3,403
---------------------------
Net decrease in cash and cash equivalents $ (17,367) $(22,331)
===========================
Cash and cash equivalents:
Beginning of period $ 84,544 $ 84,826
---------------------------
End of period $ 67,177 $ 62,495
===========================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 93 -
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
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 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
nine months ended September 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 nine months ended September 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):
September 30, December 31,
2001 2000
---- ----
Raw materials $16,269 $14,779
Work in progress 3,063 3,404
Finished goods 2,657 1,757
----- -----
Total inventories $21,989 $19,940
======= =======
Comprehensive Loss
Comprehensive loss is calculated as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net loss $(25,747) $ (3,808) $(117,935) $(15,939)
Unrealized gain/(loss) on investments, net 493 (21,651) (4,430) (38,006)
Accumulated translation adjustments, net 31 (606) 183 (845)
-------- ------- ---------- --------
Total comprehensive loss $(25,223) $(26,065) $(122,182) $(54,790)
========= ========= ========== =========
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.
The Company is currently in an arbitration proceeding in the United Kingdom
which relates to a dispute between the Company and Universities Superannuation
Scheme Limited ("USS") regarding an Agreement to Lease between the Company and
USS. USS is seeking specific performance by the Company of the Agreement to
Lease and damages in excess of 50,000 (British pounds) (approximately US $73,650
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.
6
The Company's current estimate of its obligation relating to the lease is $3.2
million through the third quarter of 2002 which has been accrued. The maximum
obligation under the lease is estimated to be $31.5 million payable over 15
years.
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 nine months ended
September 30 are calculated as follows (in thousands, except per share data):
Three months ended Nine months ended
September 30, September 30,
--------------------------- ----------------------------
2001 2000 2001 2000
--------------------------- ----------------------------
Net loss $(25,747) $(3,808) $(117,935) $(15,939)
Weighted average shares outstanding 51,749 51,644 51,582 51,199
Weighted average shares of restricted common stock (125) (106) (133) (35)
--------------------------- ----------------------------
Shares used in calculation, basic and diluted 51,624 51,538 51,449 51,164
=========================== ============================
Basic and diluted net loss per share $ (0.50) $ (0.07) $ (2.29) $ (0.31)
=========================== ============================
The Company had approximately 7.2 million and 11.9 million common stock options
outstanding as of September 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 September 30, 2001 and 2000, the Company also had 4.3
million shares of common stock issuable upon conversion of the convertible
debentures, and 125,250 shares of restricted common stock outstanding at
September 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.
SFAS 141
In June 2001, the Financial Accounting Standards Board (FASB) 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. The adoption of SFAS No. 141 did not have a material impact on
the financial position, results of operations or cash flows of the Company.
SFAS 142
In June 2001, FASB 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 to determine the
impact. 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. The Company has not determined whether adoption of SFAS No. 142 will
have an impact on its financial results.
SFAS 144
In August 2001, FASB issued SFAS No.144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company will
adopt
7
SFAS No. 144 for its fiscal year beginning January 1, 2002. The Company has not
determined whether adoption of SFAS No. 144 will have an impact on its financial
results.
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 their 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 September 30, 2001,
approximately $850,000 was capitalized into construction in progress.
Capitalization of interest terminated in July 2001 because the building was
ready for its intended use.
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 September 30, 2001, the total
restructuring accrual was $10.8 million, of which, $7.9 million was a short-term
liability and $2.9 million was a long-term liability. Components of the
restructuring accrual as of September 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
Payments and property write downs (859) (604) (39) (1,502)
-------------------------------------------------------------------------------------
Balance at September 30, 2001 1,634 8,598 542 10,774
=====================================================================================
Severance and outplacement costs relate 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 September 30, 2001, the Company made $6.5 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 September 30,
2001, the Company paid approximately $400,000 in expenses and wrote down $2.3
million in property. The remaining accrual balance will be paid over the next
five years.
Other restructuring costs primarily include taxes, legal, and travel expenses.
The Company expects the remaining expenses to be paid by the end of the second
quarter of 2002.
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
8
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; however, 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 shares of Aspect common stock on or about December 20, 2001. Based on
the amount of eligible employees on September 30, 2001, the Company will grant
new options to purchase an aggregate of 4,071,772 shares of Aspect common stock
in December 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 (6.00% at September 30, 2001) or LIBOR
(2.7425% at September 30, 2001) + 1.75%. 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 (2.785% at September
30, 2001) + 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 the date of the agreement. 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 three years. At September 30, 2001, the Company had $15.0 million
outstanding under the credit facility and $3.6 million outstanding under the
equipment line. The Company was in compliance with all related covenants and
restrictions at September 30, 2001. 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 Events
In October 2001, the Company announced a workforce reduction of approximately
16%, or approximately 350 people and a 10% reduction in executive salaries. The
Company expects to take a charge to fourth quarter earnings of approximately $20
to $23 million.
In October 2001, the Company entered into a five year loan with Fremont Bank in
the amount of $25 million which bears interest at an initial rate of 8% which is
then re-measured semi-annually beginning May 2002 at the rate of LIBOR + 3.75%
subject to a floor of 8% and a ceiling of 14%. The loan is secured by a security
interest in the San Jose buildings. Borrowings are payable in equal monthly
installments including interest until November 1, 2006. The Company received net
proceeds from the loan of $22.5 million.
9
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 and (iv) the Company's
restructuring 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 September 11th events in the
United Stated have caused increased instability in the global economic
environment, the significant percentage of 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 Acquisitions
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 500
companies, managing more than 3 million customer sales and service professionals
worldwide on a daily basis. 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 providing 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):
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
10
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 September 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 fourth
quarter of 2001. Failure to successfully complete the remaining components of
this project could result in impairment of the associated capitalized intangible
assets and could require the Company to accelerate the time period over which
the intangibles are being amortized, which could have a material adverse effect
on the Company's business, financial condition, results of operations, or cash
flows. As of September 30, 2001, the Company has incurred an additional $8.3
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 September
30, 2001, no significant departures from the assumptions included in the
valuation analysis had occurred.
Restructuring Charges
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. Subsequent to September 30, 2001, the
Company announced a further workforce reduction of approximately 16%, or
approximately 350 people and a 10% reduction in executive salaries. The Company
expects to take a charge to fourth quarter earnings of approximately $20 to $23
million.
11
Results of Operations
The following table sets forth statements of operations data for the three and
nine months ended September 30, 2001 and 2000 expressed as a percentage of total
revenues:
Three months ended Nine months ended
September 30, September 30,
------------------------- ------------------------
2001 2000 2001 2000
------------------------- ------------------------
Net revenues:
License revenues 20% 36% 24% 33%
Services revenues 63% 43% 58% 45%
Other revenues 17% 21% 18% 22%
------------------------- ------------------------
Total net revenues 100% 100% 100% 100%
------------------------- ------------------------
Cost of revenues:
Cost of license revenues 3% 2% 2% 2%
Cost of services revenues 33% 28% 34% 29%
Cost of other revenues 15% 17% 16% 17%
Amortization of intangible assets 1% 1% 1% 1%
------------------------- ------------------------
Total cost of revenues 52% 48% 53% 49%
------------------------- ------------------------
Gross margin 48% 52% 47% 51%
Operating expenses:
Research and development 19% 17% 19% 18%
Sales and marketing 38% 31% 41% 29%
General and administration 8% 8% 9% 8%
Restructuring charges - - 6% -
In-process research and development - - - 1%
Amortization of intangible assets
and stock-based compensation 6% 4% 6% 4%
------------------------- ------------------------
Total operating expenses 71% 60% 81% 60%
------------------------- ------------------------
Loss from operations (23%) (8%) (34%) (9%)
Interest and other income 1% 7% 1% 6%
Interest and other expense (2%) (2%) (2%) (1%)
------------------------- ------------------------
Loss before income taxes (24%) (3%) (35%) (4%)
Provision (benefit) for income taxes - - - -
------------------------- ------------------------
Net loss (24%) (3%) (35%) (4%)
========================= ========================
12
Revenues
- --------
Net revenues for the third quarter of 2001 decreased 27% to $108.7 million from
$148.5 million in the third quarter of 2000. Net revenues for the first nine
months of 2001 decreased 21% to $336.6 million from $424.5 million in the first
nine months of 2000. As a percentage of total net revenues, international net
revenues were 26% and 27% for the third quarter and first nine months of 2001,
respectively and 28% for both the third quarter and first nine months of 2000.
License revenues for the third quarter of 2001 decreased 60% to $21.8 million
from $54.0 million in the third quarter of 2000. License revenues for the first
nine months of 2001 decreased 42% to $81.9 million from $141.9 million in the
first nine months of 2000. License revenues consist of both data call center
software and business communications solutions. 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. In
addition, the September 11th events in the U.S. put additional financial
constraints on certain industries, such as the airlines, who in some cases, have
further delayed purchases.
Services revenues for the third quarter of 2001 increased 8% to $68.2 million
from $63.0 million in the third quarter of 2000. Services revenues in the first
nine months of 2001 increased 2% to $194.0 million from $189.7 million in the
first nine months of 2000. Services revenues consist primarily of maintenance
and support revenues, consulting services, and educational fees. The increase
across all periods was primarily due to an increase in maintenance and software
support contracts from an increased customer base.
Other revenues for the third quarter of 2001 decreased 41% to $18.6 million from
$31.5 million in the third quarter of 2000. Other revenues for the first nine
months of 2001 decreased 35% to $60.7 million from $93.0 million in the first
nine months of 2000. Other revenues consist of hardware revenues from both new
system sales and upgrades to existing systems. The decrease across all periods
presented was primarily due to the global economic slowdown.
Gross Margin
- ------------
Gross margin on license revenues was 80% and 91% for the third quarter of 2001
and 2000, respectively. Gross margin on license revenues was 87% and 91% for the
first nine months of 2001 and 2000, respectively. Cost of license revenues
include third party software royalties, product packaging, and documentation.
The decrease across all periods was primarily due to lower than anticipated
revenue while cost of revenues remained constant.
Gross margin on services revenues was 47% and 35% for the third quarter of 2001
and 2000, respectively. Gross margin on services revenues was 42% and 35% for
the first nine months of 2001 and 2000, respectively. Cost of services revenues
include expenses related to support, consulting, and education. Gross margin on
services revenues increased across all periods presented as a result of higher
revenue levels while cost of revenues decreased due to the expense control
activities, and selling a more profitable mix of services.
Gross margin on other revenues was 11% and 18% for the third quarter of 2001 and
2000, respectively. Gross margin on other revenues was 10% and 24% for the first
nine 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 increased period costs,
lower than anticipated revenues, and a shift in product mix to lower margin
products.
Operating Expenses
- ------------------
Research and development (R&D) expenses for the third quarter of 2001 decreased
18% to $20.6 million from $25.2 million in the third quarter of 2000. R&D
expenses for the first nine months of 2001 decreased 11% to $65.8 million from
$73.6 million in the first nine 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 17% for
the third quarter of 2001 and 2000, respectively, and 19% and 18% for the first
nine months of 2001 and 2000, respectively. We anticipate, on a forward-looking
basis, that such expenses in absolute dollars will decrease for the remainder of
2001, although such expenses as a percentage of net revenues may fluctuate
between periods.
Sales and marketing expenses for the third quarter of 2001 decreased 10% to
$40.7 million from $45.3 million in the third quarter of 2000. Sales and
marketing expenses for the first nine months of 2001 increased 10% to $136.7
million from $123.8 million in the first nine months of 2000. The decrease in
the third quarter of 2001 compared to the third quarter in 2000 was primarily
due to savings from workforce adjustments and lower commission expenses from a
decrease in revenue levels. The increase for the first nine months of 2001
compared to the same period in 2000 resulted primarily from focused efforts to
support our sales and marketing strategies by investing in personnel, marketing
initiatives, and training in the first half of 2000. As a percentage of net
revenues, sales and marketing expenses were 38% and 31% for the third quarter of
2001 and 2000, respectively, and 41% and 29% for the first nine months of 2001
and 2000, respectively. We anticipate, on a forward-looking basis, that sales
and marketing expenses will decrease for the remainder of 2001, although such
expenses as a percentage of net revenues may fluctuate between periods.
General and administrative (G&A) expenses for the third quarter of 2001
decreased 31% to $8.3 million from $12.0 million in the third quarter of 2000.
G&A expenses for the first nine months of 2001 decreased 10% to $30.1 million
from $33.5 million in
13
the first nine months of 2000. The decrease across all periods presented was
primarily due to the savings from workforce adjustments functions. As a
percentage of net revenues, G&A expenses were 8% for the third quarter of 2001
and 2000, and 9% and 8% for the first nine months of 2001 and 2000,
respectively. We anticipate, on a forward-looking basis, that such expenses in
absolute dollars will decrease for the remainder of 2001, although such expenses
as a percentage of net revenues may fluctuate between periods.
Restructuring charges were $20.1 million for the first nine months of 2001, or
$0.39 per diluted share. 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
$5.0 million in the second quarter of 2000, related to the acquisition of
PakNetX.
Amortization of intangible assets and stock-based compensation expenses included
in cost of revenues and operating expenses were $7.9 million and $7.8 million
for the third quarter of 2001 and 2000, respectively. These expenses included in
cost of revenues and operating expenses were $23.9 million and $21.6 million for
the first nine 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 to determine the impact. 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. The Company has not determined whether
adoption of SFAS No. 142 will have an impact on its financial results.
Interest and Other Income (Expense)
- -----------------------------------
Interest and other income was $1.4 million and $10.3 million for the third
quarter of 2001 and 2000, respectively. Interest and other income was $5.0
million and $25.2 million for the first nine 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 and lower interest
income attributable to lower average investment amounts in 2001. In addition,
the decrease for the first nine months of 2001 compared to 2000 was also a
result of the loss from the impairment of certain short-term investments in
2001. The periods pre-tax gain on the sale of marketable equity securities was
$7.7 million and $17.1 million for the third quarter and the first nine months
of 2000, respectively. For the third quarter of 2001, the pre-tax gain was
$154,000 on the sale of marketable securities. For the first nine months of
2001, the pre-tax gain was $563,000 on the sale of marketable securities and the
loss from the impairment of short-term investments was $1.3 million.
Interest and other expense was $2.4 million and $2.7 million for the third
quarter of 2001 and 2000, respectively. Interest and other expense was $7.8
million and $7.7 million for the first nine months of 2001 and 2000,
respectively. Interest and other expense across all periods presented primarily
relates to 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 third quarter and first nine months of 2001 compared with a
benefit, excluding the effect of purchased in-process technology related to
acquisitions, of 20% for the same periods of 2000. The tax rate for the third
quarter and first nine 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 first three and nine months of 2000 is less than the
statutory rate primarily due to nondeductible goodwill amortization.
Liquidity and Capital Resources
At September 30, 2001, the principal source of liquidity consisted of cash, cash
equivalents and short-term investments totaling $133.5 million, which
represented 25% of total assets. The primary sources of cash during the first
nine months of 2001 were net proceeds from sales of short term investments of
$22.4 million, proceeds from borrowings of $18.6 million, and proceeds from the
issuance of common stock under various stock plans of $5.3 million. The primary
uses of cash during the first nine months of 2001 were $42.8 million for the
purchase of property and equipment, and $20.3 million to support operating
activities.
14
The primary sources of cash during the first nine months of 2000 were net sales
of short term investments of $60.9 million and proceeds from the issuance of
common stock under various stock plans of $38.4 million. The primary uses of
cash during the first nine months of 2000 were $49.9 million cash paid to
acquire PakNetX, $48.9 million for the purchase of property and equipment, and
$20.9 million for the repurchase of common stock.
The Company substantially completed construction on its new facility in the
third quarter of 2001. As of September 30, 2001, Aspect is committed to pay a
minimum of an additional $2.4 million for future obligations related to the
final completion of the new building.
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 (6.00% at September 30, 2001) or LIBOR
(2.7425% at September 30, 2001) + 1.75%. 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 (2.785% at September
30, 2001) + 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 the date of the agreement. Borrowings under the equipment line
are available through in December 2001, at which time all borrowings thereunder
become term notes, which are payable in equal monthly installments, including
interest, over three years. At September 30, 2001, the Company had $15.0 million
outstanding under the credit facility, and $3.6 million outstanding under the
equipment loan. The Company was in compliance with all related covenants and
restrictions at September 30, 2001. 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, and
anticipated cash flow from operations will be sufficient to meet presently
anticipated cash requirements for at least the next twelve months.
Effect of Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) 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. The adoption of SFAS 141 did not have an
impact on the financial position, results of operations or cash flows of the
Company.
In June 2001, (FASB) 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 to
determine the impact. 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. The Company has not determined whether adoption of SFAS No.
142 will have an impact on its financial results.
In August 2001, FASB issued SFAS No.144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company will
adopt SFAS No. 144 for its fiscal year beginning January 1, 2002. The Company
has not determined whether adoption of SFAS No. 144 will have an impact on its
financial results.
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. Further, the recent September 11th events in the United
States have caused increased instability in the global economic environment. 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
15
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:
o Changes in management and technical personnel;
o Modifications to the pricing and positioning of our products which could
impact revenues and operating results;
o Expanded or differing competition
resulting from operating in the enterprise software market;
o More revenues being deferred to future periods under revenue
recognition rules; and/or
o 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 market develops for converged voice data networks and products and the
demand for Public Switched Telephony Network (PSTN) based call centers
diminishes, 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,
Cisco Systems Inc., and Genesys SA (Alcatel), 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.
The Company is currently in an arbitration proceeding in the United Kingdom
which relates to a dispute between the Company and Universities Superannuation
Scheme Limited ("USS") regarding an Agreement to Lease between the Company and
USS. USS is seeking specific performance by the Company of the Agreement to
Lease and damages in excess of 50,000 British pounds (approximately US $73,650
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. The Company's current estimate of its obligation
relating to the lease is $3.2 million through the third quarter of 2002 which
has been accrued. The maximum obligation under the lease is estimated to be
$31.5 million payable over 15 years.
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:
o The cost and timing of the multiple governmental approvals and product
modifications required by many countries;
o Market acceptance;
o Exchange rate fluctuations;
o Delays in market deregulation;
o Difficulties in staffing and managing foreign subsidiary
operations; and/or
o 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.
16
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, 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 Changes in Our Business: The changes in
our business may place a significant strain on our operational and financial
systems. We may experience substantial disruption from changes in our systems
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 distributionchannels. 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.
17
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. 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.
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 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 September 30, 2001, our primary net foreign currency market
exposures included British pounds, Euros, Australian dollars and Canadian
dollars.
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 $15
million outstanding under the credit facility and $3.6 million under the
equipment line at September 30, 2001. The outstanding debt results in a ratio of
long-term debt to total shareholders' equity of approximately 110% at September
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 third quarter or first nine months
of 2001.
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Part II: Other Information
Item 1. Legal Proceedings
We may become involved in litigation, from time to time, which arises in the
ordinary course of business. In the opinion of management, we are not currently
involved in any legal proceedings, other than the arbitration proceeding
specifically identified in the notes to the condensed consolidated financial
statements which, individually or in the aggregate, could have a material
negative effect on our financial condition, operations or cash flows.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
None.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30, 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)
Date: November 14, 2001 By /s/ Betsy Rafael
---------------------------------------------
Betsy Rafael
Executive Vice President, Finance,
Chief Financial Officer, and
Secretary
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