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, 1998
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 TELECOMMUNICATIONS 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.)
1730 Fox Drive, San Jose, California 95131-2312
(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 51,156,055 at September 30, 1998.
ASPECT TELECOMMUNICATIONS 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, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
for the Three and Nine Month Periods Ended
September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the Nine Month Periods Ended September 30,
1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3: Quantitative and Qualitative Disclosures About
Market Risk 17
Part II: Other Information
Item 2: Changes in Securities and Use of Proceeds 18
Item 6: Exhibits and Reports on Form 8-K 19
Signature 21
2
ASPECT TELECOMMUNICATIONS CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
Sept 30, December 31,
1998 1997
------------ -------------
(unaudited) **
Current assets:
Cash and cash equivalents $ 76,656 $106,046
Short-term investments 129,108 40,170
Accounts receivable, net 141,407 86,896
Inventories 14,221 12,306
Other current assets 17,467 20,413
------------ -------------
Total current assets 378,859 265,831
Property and equipment, net 69,430 58,704
Intangible assets, net 57,555 42,654
Other assets 14,449 3,154
------------ -------------
Total assets $520,293 $370,343
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,162 $ 9,401
Current portion of notes payable 4,500 6,399
Accrued compensation and related benefits 18,087 14,256
Accrued intellectual property settlement - 14,000
Other accrued liabilities 33,911 36,335
Customer deposits and deferred revenue 28,734 15,626
------------ -------------
Total current liabilities 101,394 96,017
Convertible debentures 151,491 -
Notes payable - 6,531
Shareholders' equity:
Preferred stock, $.01 par value:
2,000,000 shares authorized, none outstanding in 1998 and 1997 - -
Common stock, $.01 par value:
100,000,000 shares authorized, shares outstanding:
51,156,055 in 1998 and 49,996,731 in 1997 172,394 144,524
Net unrealized gain on securities 163 1,267
Accumulated translation adjustments (918) (1,951)
Retained earnings 95,769 123,955
------------ -------------
Total shareholders' equity 267,408 267,795
------------ -------------
Total liabilities and shareholders' equity $520,293 $370,343
============ =============
** Derived from audited financial statements.
See accompanying notes.
3
ASPECT TELECOMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited - in thousands, except per share amounts)
Three Months Ended Sept 30, Nine Months Ended Sept 30,
--------------------------------- ----------------------------------
1998 1997 1998 1997
---------- --------- ---------- --------
Net revenues:
Product $ 91,996 $68,558 $ 255,982 $202,042
Customer support 45,956 30,634 121,518 82,309
---------- --------- --------- --------
Total net revenues 137,952 99,192 377,500 284,351
Cost of revenues:
Cost of product revenues 29,517 21,531 81,833 65,214
Cost of customer support revenues 30,626 21,451 83,175 58,349
---------- --------- --------- --------
Total cost of revenues 60,143 42,982 165,008 123,563
---------- --------- --------- --------
Gross margin 77,809 56,210 212,492 160,788
---------- --------- --------- --------
Operating expenses:
Research and development 18,435 11,452 46,830 33,964
Selling, general and administrative 38,812 27,003 104,634 75,207
Purchased in-process technology - 4,910 68,176 4,910
---------- --------- --------- --------
Total operating expenses 57,247 43,365 219,640 114,081
---------- --------- --------- --------
Income (loss) from operations 20,562 12,845 (7,148) 46,707
Interest and other income, net 435 1,625 2,939 6,466
---------- --------- --------- --------
Income (loss) before income taxes 20,997 14,470 (4,209) 53,173
Provision for income taxes 7,649 7,461 23,977 22,362
---------- --------- --------- --------
Net income (loss) $ 13,348 $ 7,009 $(28,186) $ 30,811
========== ========= ======== ========
Basic earnings (loss) per share $ 0.26 $ 0.14 $ (0.56) $ 0.63
Weighted average shares outstanding 50,946 49,434 50,522 49,131
Diluted earnings (loss) per share $ 0.25 $ 0.13 $ (0.56) $ 0.59
Weighted average shares 54,130 52,233 50,522 52,221
outstanding--assuming dilution
See accompanying notes.
4
ASPECT TELECOMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited - in thousands)
Nine Months Ended Sept 30,
--------------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net income (loss) $(28,186) $ 30,811
Reconciliation of net income (loss) to cash provided by
operating activities:
Depreciation and amortization 24,211 14,245
Purchased in-process technology 68,176 4,910
Interest on convertible debentures 1,277 -
Gain on the sale of equity securities - (2,070)
Changes in assets and liabilities, net of effects from
companies acquired:
Accounts receivable (48,823) (19,871)
Inventories (498) 4,856
Other current assets and other assets (4,226) 3,766
Accounts payable 3,182 376
Accrued compensation and related benefits 6,703 4,330
Accrued intellectual property settlement (14,000) -
Other accrued liabilities (8,172) 9,924
Customer deposits and deferred revenue 12,025 (5,121)
----------- ------------
Cash provided by operating activities 11,669 46,156
Cash flows from financing activities:
Common stock transactions 12,489 5,906
Payments on notes payable (15,744) -
Issuance of convertible debentures, net of issuance costs 145,708 -
----------- ------------
Cash provided by financing activities 142,453 5,906
Cash flows from investing activities:
Short-term investment purchases (215,382) (35,836)
Short-term investment sales and maturities 126,445 53,656
Property and equipment purchases (25,166) (19,423)
Purchase of company, net of cash acquired (71,382) (278)
----------- ------------
Cash used in investing activities (185,485) (1,881)
Effect of exchange rate changes on cash and cash equivalents 1,973 (418)
----------- ------------
Increase (decrease) in cash and cash equivalents (29,390) 49,763
Cash and cash equivalents:
Beginning of period 106,046 47,996
--------- ------------
End of period $ 76,656 $ 97,759
========= ============
Supplemental schedule of noncash investing and
financing activities:
Stock options issued in connection with the acquisition
of Voicetek Corporation $ 11,184 -
Common stock issued in connection with the acquisition
of Commerce Soft Inc. - $ 4,610
See accompanying notes.
5
ASPECT TELECOMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The consolidated financial statements include the accounts of Aspect
Telecommunications Corporation (Aspect or the Company) and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. For further information, refer
to the consolidated financial statements and notes thereto included in the
Company's 1997 Annual Report to Shareholders attached as an appendix to the
Proxy Statement for the 1998 Annual Meeting of Shareholders.
Business Combinations
In May 1998, the Company completed the acquisition of Voicetek Corporation
(Voicetek), a leading supplier of interactive voice response (IVR) and
Intelligent Networks (IN) applications based in Chelmsford, Massachusetts. The
acquisition is intended to augment Aspect customer premise IVR product
offerings, strengthen the Company's position in the network service provider
marketplace and extend the Company's OEM sales channel capabilities. The
acquisition was accounted for as a purchase. The Company paid approximately $72
million in cash for all of Voicetek common and preferred shares outstanding;
converted all outstanding Voicetek options into options to purchase
approximately 450,000 shares of Aspect Common Stock with a fair value of
approximately $11 million; incurred transaction costs of approximately $3.0
million; and assumed certain operating assets and liabilities of Voicetek.
Aspect recorded a one-time charge of $68.2 million in the second quarter of 1998
for purchased in-process technology that had not reached technological
feasibility and had no alternative future use. In addition, the remaining
portion of the purchase price that exceeded the net assets of Voicetek, a total
of $17.8 million, was recorded as intangible assets which are being amortized on
a straight line basis over a period of three to seven years.
The operating results of Voicetek have been included in the consolidated
statements of operations since the date of acquisition. Had the acquisition
taken place at the beginning of 1997, the unaudited pro forma results of
operations would have been as follows for the nine months ended September 30 (in
thousands, except per share data):
1998 1997
Net revenues $385,568 $305,725
Net income 35,700 23,930
Basic earnings per share 0.71 0.49
Diluted earnings per share 0.66 0.46
The pro forma results of operations give effect to certain adjustments,
including amortization of purchased intangibles and goodwill, interest income
associated with funding the acquisition and entries to conform to the Company's
accounting policies. The $68.2 million charge for purchased in-process
technology has been excluded from the pro forma results as it is a material non-
recurring charge.
6
ASPECT TELECOMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In September 1997, the Company acquired Commerce Soft Inc., a developer of
customer interaction technology, and its results of operations are included in
the accompanying financial statements since the date of acquisition. The
transaction was accounted for as a purchase and resulted in a one-time charge of
$4.9 million in the third quarter of 1997 related to in-process technology.
Inventories
Inventories, stated at the lower of cost (first-in, first-out) or market,
consist of:
(in thousands)
September 30, December 31,
1998 1997
------------- ------------
Raw materials $ 5,400 $ 5,331
Work in progress 4,456 3,624
Finished goods 4,365 3,351
------- -------
Total $14,221 $12,306
======= =======
Notes Payable
In October 1997, the Company acquired certain rights to two intellectual
property portfolios by paying $9.8 million in cash and issuing $10 million in
notes payable. These notes were stated net of $1.6 million in discounts with
imputed interest rates of 7%, and were payable in installments over the next
five to six years. In July 1998, the Company acquired remaining rights under one
of these intellectual portfolios by making additional payments of approximately
$7.5 million and extinguished a $5 million face value note payable. In September
1998, the Company paid approximately $3.8 million to extinguish a $5 million
face value note payable related to the second intellectual property portfolio.
Convertible Subordinated Debentures
In August 1998, the Company completed a private placement of approximately $150
million ($490 million principal amount at maturity) of zero coupon convertible
subordinated debentures due 2018. These debentures were priced with a yield to
maturity of 6% per annum. Debenture holders can convert the debentures into
Aspect Common Stock any time prior to maturity at a conversion rate of 8.713 of
Aspect Common Stock per $1,000 principal amount at maturity of debentures.
Holders can require Aspect to repurchase the debentures on August 10, 2003,
August 10, 2008 and August 10, 2013 for cash, or at the election of Aspect, for
Aspect Common Stock, if certain conditions are met. Holders can also require
Aspect to redeem the debentures for cash in the event of a fundamental change.
Aspect can redeem the debentures any time on or after August 10, 2003. The
debentures are not secured by any Aspect assets and are subordinated in right of
payment to all of Aspect senior indebtedness and effectively subordinated to the
debt of the Company's subsidiaries. On October 30, 1998, the Company filed a
registration statement with the Securities and Exchange Commission to register
the debentures and shares of Aspect Common Stock issuable upon conversion for
resale.
Per Share Information
Basic earnings (loss) per share is computed by dividing net income (loss) by the
weighted average common shares outstanding for the period. Diluted earnings
(loss) per share also includes the dilutive impact of stock options. Basic and
diluted
7
ASPECT TELECOMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
earnings (loss) per share for the three and nine month periods ended September
30 are calculated as follows (in thousands, except per share data):
Three Months Ended Nine Months Ended
------------------------- ---------------------------
1998 1997 1998 1997
----------- ------------ ------------- ------------
Weighted average shares outstanding 50,946 49,434 50,522 49,131
Net income (loss) $13,348 $ 7,009 $(28,186) $30,811
Basic earnings (loss) per share $ 0.26 $ 0.14 $ (0.56) $ 0.63
======= ======= ======== =======
Weighted average shares outstanding 50,946 49,434 50,522 49,131
Dilutive effect of options 3,184 2,799 - 3,090
------- ------- -------- -------
Total 54,130 52,233 50,522 52,221
Net income (loss) $13,348 $ 7,009 $(28,186) $30,811
Diluted earnings (loss) per share $ 0.25 $ 0.13 $ (0.56) $ 0.59
======= ======= ======== =======
As of September 30, 1998, there were 10,132,000 options outstanding. The
dilutive effect of options was not included in the calculation of diluted
earnings per share for the nine month period ended September 30, 1998 because
inclusion of these shares would have had an anti-dilutive effect as the Company
had a net loss for that period. The amount of such options excluded from the
diluted earnings per share computation was 3,222,000 for the nine months ended
September 30, 1998.
Additionally, as of September 30, 1998, there were 4,269,000 shares of Common
Stock issuable upon conversion of debentures. The dilutive effect of this
Common Stock was not included in the calculation of diluted earnings per share
for the three and nine month periods ended September 30, 1998 because this
inclusion would have been anti-dilutive. The amount of Common Stock issuable
upon conversion of debentures excluded from the diluted earnings per share
computation was 2,413,000 and 813,000 for the three and nine months ended
September 30, 1998, respectively.
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, and financial condition.
Comprehensive Income (Loss)
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which requires
an enterprise to report the change in net assets during the period from non-
owner sources. For the three and nine months ended September 30, 1998,
comprehensive income (loss) was $13,534,000 and $(28,255,000), respectively.
Comprehensive income for the same periods of the prior year was $6,832,000 and
$28,065,000, respectively. Comprehensive income (loss) represents net income
(loss) for these periods and changes in unrealized gains on securities and
accumulated translation adjustments.
8
ASPECT TELECOMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No.133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedging accounting
when certain conditions are met. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Although the Company has
not fully assessed the implications, on a forward looking basis, the Company
does not believe adoption of this statement will have a material impact on the
Company's financial position or results of operations.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1). This statement provides guidance for an enterprise on
accounting for the costs of computer software developed or obtained for internal
use. SOP 98-1 is effective for fiscal years beginning after December 15, 1998.
On a forward-looking basis, the Company anticipates that accounting for
transactions under SOP 98-1 will not have a material impact on the Company's
financial position or results of operations.
In October 1997, the AICPA issued Statement of Position 97-2, "Software Revenue
Recognition" (SOP 97-2). This statement provides guidance for an enterprise on
applying generally accepted accounting principles in recognizing revenue on
software transactions. The Company adopted SOP 97-2 in the first quarter of 1998
with an insignificant impact on its consolidated financial position or results
of operations for the three and nine months presented. On a forward-looking
basis, the Company anticipates that accounting for transactions under SOP 97-2
will not have a material impact on the Company's financial position or results
of operations.
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas, and major customers.
The Company has not yet determined its reporting segments. This statement is
effective for fiscal years beginning after December 15, 1997. Adoption of this
statement will not impact the Company's consolidated financial position or
results of operations.
Subsequent Events
In October 1998, the Company's Board of Directors approved the repurchase of up
to 5 million shares of its Common Stock. The shares may be purchased in the
open market or private transactions. The number of shares to be purchased and
the timing of purchases will be based on several conditions, including the price
of Aspect Common Stock, general market conditions and other factors. No time
limit was set for the completion of the program.
The Company's Board of Directors has approved the establishment of an option
exchange program for certain employee stock options. Executive officers and non-
employee directors of the Company are not eligible to participate in the
exchange program. Under this program, implemented in November 1998, eligible
employees may elect to exchange existing options with higher exercise prices
for replacement options with an exercise price equal to the closing sale price
of Aspect Common Stock on a specified date in November 1998. The new options
will retain the same characteristics as the options being replaced, except
that employees who participate in the option exchange program will not be able
to exercise any exchanged options for the one year period subsequent to the
exchange.
9
ASPECT TELECOMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The $4.5 million note relating to the 1995 acquisition of TCS was payable on
October 31, 1998. Payment on this note is being delayed pending resolution of
various tax matters relating to periods prior to the Company's acquisition of
TCS.
10
ASPECT TELECOMMUNICATIONS CORPORATION
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 1997 Annual Report to Shareholders.
Aspect Telecommunications provides comprehensive business solutions for mission-
critical call centers worldwide. Aspect integrated call center products and
services help businesses such as airlines, retail sales, financial services and
communications enhance productivity, increase revenues and provide superior
customer service. Aspect products include automatic call distributors, computer-
telephony integration solutions, call center management and reporting software,
automation solutions including interactive voice response systems, and planning
and forecasting packages. The Company also provides business applications
consulting and systems integration services and around-the-clock support.
In May 1998, the Company completed the acquisition of Voicetek Corporation
(Voicetek), a leading supplier of interactive voice response (IVR) and
Intelligent Networks (IN) applications based in Chelmsford, Massachusetts. The
acquisition is intended to augment Aspect customer premise IVR product
offerings, strengthen the Company's position in the network service provider
marketplace and extend the Company's OEM sales channel capabilities. The
acquisition was accounted for as a purchase. The Company paid approximately $72
million in cash for all of Voicetek common and preferred shares outstanding;
converted all outstanding Voicetek options into options to purchase
approximately 450,000 shares of Aspect Common Stock with a fair value of
approximately $11 million; incurred transaction costs of approximately $3.0
million; and assumed certain operating assets and liabilities of Voicetek.
Aspect recorded a one-time charge of $68.2 million in the second quarter of 1998
for purchased in-process technology that had not reached technological
feasibility and had no alternative future use. In addition, the remaining
portion of the purchase price that exceeded the net assets of Voicetek, a total
of $17.8 million, was recorded as intangible assets which are being amortized on
a straight line basis over a period of three to seven years.
In February 1998, Aspect and Lucent Technologies Inc. (Lucent) announced that
they had agreed to dismiss their patent lawsuits against each other, released
each other from claims of past infringement, and settled their patent disputes
by entering into a cross-license agreement. Under the terms of the agreement,
Aspect agreed to pay Lucent a one-time fee and future royalties. As a result of
this subsequent event affecting the 1997 consolidated financial statements, the
Company recorded a non-recurring charge of $14 million in its fourth fiscal
quarter ended December 31, 1997.
In September 1997, the Company acquired Commerce Soft Inc., a developer of
customer interaction technology, and its results of operations are included in
the accompanying financial statements since the date of acquisition. The
transaction was accounted for as a purchase and resulted in a one-time charge of
$4.9 million in 1997 related to in-process technology.
Except for historical information contained herein, the matters discussed in
this report are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, Section 21E of the Securities and
Exchange Act of 1934, as amended, and the Private Securities Litigation Reform
Act of 1995, and are made under the safe-harbor provisions thereof. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected including
the following: the impact of intense competition in the company's product and
service markets; customer acceptance and technical performance of new products
and services; the management of growth; the ability to attract and retain key
personnel in new and traditional business areas and geographic markets; and the
inability to successfully integrate the operations, technologies, products
and/or personnel of acquired companies in a successful, profitable, and timely
manner. Other risks that could cause actual results to differ materially from
11
ASPECT TELECOMMUNICATIONS CORPORATION
those projected are discussed in Aspect's Form 10-K and Annual Report for the
fiscal year ended December 31, 1997, 10-Q for the fiscal quarter ended June 30,
1998 and in the press releases regarding the Voicetek acquisition dated April 1,
1998 and May 11, 1998. 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 the results
of any revision to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
Net Revenues
Total net revenues for the third quarter of 1998 and 1997 were $138 million and
$99 million, respectively, representing an increase of 39% for these
comparative periods. Total net revenues for the nine month periods ended 1998
and 1997 were $378 million and $284 million, respectively, representing an
increase of 33%.
Product revenues for the third quarter of 1998 were $92 million, an increase of
34% over product revenues of $69 million for the same period of 1997. For the
first nine months of 1998, product revenues were $256 million, 27% higher than
the same period in 1997. The increase in product revenues for the third quarter
of 1998 from the same quarter in the prior year is attributed to revenue
increases related to new system sales in the Company's international markets,
add-ons, software and upgrades in North America and the inclusion of revenue
from the Voicetek business acquired in May 1998. The increase in product
revenues for the first nine months of the fiscal year was attributable to
increased new system sales, add-ons and the inclusion of Voicetek revenues since
the date of acquisition.
Customer support revenues for the third quarter of 1998 were $46 million, an
increase of 50% over the third quarter of 1997. For the first nine months of
1998, customer support revenues were $122 million, an increase of 48% compared
with the same period of 1997. The growth in customer support revenues for both
periods resulted primarily from increases in revenue from the Company's
consulting and systems integration business (Global Solutions Services (GSS),
formerly named Consulting and Systems Integration) and increases in the
Company's maintenance revenue as a result of continued growth in its installed
base. Customer support revenues are comprised of contractually agreed-upon
system service and maintenance (which are primarily affected by growth in the
installed base), installation of products, GSS revenue and other support
services.
Gross Margin on Product Revenues
Product gross margin was 68% for the third quarter of 1998 compared to 69% for
the same period of 1997. The decrease in product gross margin reflects slightly
lower margins in our add-on and other product business. For the first nine
months of 1998, product gross margin was 68%, consistent with the same period of
1997. On a forward-looking basis, the Company expects that the following
factors, among others, could have a material impact on product gross margins:
the mix of products sold; the channel of distribution; the portion of systems
revenues related to accounts purchasing multiple systems; the mix and level of
third-party product included as part of systems integration projects; the
results of recently acquired subsidiaries and newly established business units;
and licensing, cross-licensing or royalty arrangements with third parties.
12
ASPECT TELECOMMUNICATIONS CORPORATION
Gross Margin on Customer Support Revenues
Customer support gross margin was 33% for the third quarter of 1998 compared to
30% for the same period of 1997. For the first nine months of 1998, customer
support gross margin was 32% compared to 29% for the same period of 1997. The
increase in support gross margin mainly reflects higher margins in the Company's
GSS business unit. On a forward-looking basis, the Company anticipates that
customer support margins will fluctuate from period to period due to
fluctuations in customer support revenues (since many of the costs of providing
customer support do not vary proportionately with customer support revenues),
ongoing efforts to expand the Company's customer support infrastructure, the
ongoing results of the Company's GSS business unit, and the results of recently
acquired subsidiaries and newly established business units.
Research and Development Expenses
Research and development (R&D) expenses were $18 million for the third quarter
of 1998, representing an increase of 61% compared with R&D expenses of $11
million for the same period of 1997. R&D expenses were $47 million for the first
nine months of 1998, an increase of 38% over R&D expenses of $34 million for the
same period of 1997. The increases in R&D for both periods primarily reflects
increased personnel and infrastructure costs and the inclusion of Voicetek R&D
expenses since the date of acquisition. As a percentage of net revenues, R&D
spending was 13% for the third quarter of 1998 when compared to 12% for the same
period of 1997. R&D spending was 12% for the first nine months of 1998
consistent with the same period of 1997. The Company continues to believe that
significant investment in R&D is required to remain competitive and anticipates,
on a forward-looking basis, that such expenses will increase in terms of
absolute dollars although such expenses as a percentage of net revenues may
fluctuate on a quarterly basis.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses were $39 million for the
third quarter of 1998, an increase of 44% compared with the same period of 1997.
For the first nine months of 1998, SG&A expenses were $105 million an increase
of 39% over the same period of 1997. The increases in SG&A for both periods
reflects increased personnel, infrastructure costs, and the inclusion of
Voicetek SG&A expenses since the date of acquisition. As a percentage of net
revenues, SG&A was 28% for the third quarter and nine months of 1998 compared
with 27% and 26% for the same periods of 1997, respectively. The Company
anticipates, on a forward-looking basis, that SG&A expenses will increase in
terms of absolute dollars although such expenses as a percentage of net revenues
may fluctuate on a quarterly basis.
Purchased In-Process Technology
Purchased in-process technology relates to acquired technology which had not
reached technological feasibility and had no alternative future use. For the
second quarter of 1998, the non-recurring in-process technology charge of $68.2
million related to the acquisition of Voicetek completed in May 1998. For the
third quarter of 1997, the non-recurring in-process technology charge of $4.9
million related to the acquisition of Commerce Soft completed in September 1997.
13
ASPECT TELECOMMUNICATIONS CORPORATION
Net Interest and Other Income
Net interest and other income declined to $435,000 for the third quarter of
1998 from $1.6 million for the same period of 1997 as a result of lower interest
earning balances, primarily resulting from the acquisition of Voicetek in the
second quarter of 1998. Interest expense from the convertible subordinated
debentures issued in August 1998 was substantially offset by interest earned on
the proceeds from the offering. Net interest and other income decreased to
$2.9 million for the first nine months of 1998 from $6.5 million for the same
period of 1997, due primarily to the $2.1 million gain on the sale of equity
securities occurring in the second quarter of 1997 and due to lower interest
earning balances, primarily resulting from the Voicetek acquisition in 1998.
Income Taxes
Excluding non-deductible, non-recurring charges for purchased in-process
technology associated with the acquisitions of Commerce Soft and Voicetek, the
Company's effective income tax rate was 36.4% for the third quarter of 1998 and
37.5% for the first nine months of 1998, down slightly from 38.5% for the
comparable periods of 1997. The rate for the third quarter includes a cumulative
adjustment to bring the 1998 year to date rate to 37.5%. The reduced tax rate
from 1997 to 1998 results from increased foreign sales corporation benefits and
other factors.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company's principal source of liquidity consisted
of cash, cash equivalents, and short-term investments totaling $206 million,
which represented 40% of total assets. The primary sources of cash for the
first nine months of 1998 consisted of $145.7 million of net proceeds from the
issuance of zero coupon convertible subordinated debentures, sales and
maturities of short term investments of $126.4 million, $12.5 million in
proceeds from the issuance of common stock under various stock plans and cash
generated from operating activities of $11.7 million. The primary uses of cash
during the first nine months of 1998 consisted of $215.3 million of purchases of
short-term investments, $71.4 million net cash used in the purchase of Voicetek,
$25.2 million for purchases of property and equipment, and $15.7 million in
payment of notes payable relating primarily to intellectual property
portfolios previously acquired.
As of September 30, 1998, the Company's outstanding long term and short term
borrowings totaled $156.0 million, comprising $151.5 million relating to the
convertible debentures issued during the third quarter of 1998 and $4.5
million incurred in connection with the acquisition of TCS in 1995. Payment of
the $4.5 million note, payable on October 31, 1998, is being delayed
pending resolution of various tax matters relating to periods prior to the
Company's acquisition of TCS.
In October 1998, the Company's Board of Directors approved the repurchase of
up to 5 million shares of Aspect Common Stock.
The Company believes, on a forward-looking basis, that its cash and cash
equivalents, short-term investments, and anticipated cash flow from operations
will be sufficient to meet the Company's presently anticipated cash requirements
during at least the next twelve months.
14
Year 2000 AND PROXIMATE DATES
Many computer systems are expected to experience problems handling dates around
the year 2000 (Y2K). Described below are the actions we have taken, and plan to
take, to address the potential problems resulting as systems attempt to handle
dates around the millennium.
State of Readiness
Our Y2K activities include the following phases: gathering data and taking
inventory; testing systems and products to discover or confirm Y2K compliance;
execution of remediation activities to fix non-compliant products and systems;
and monitoring and testing products and systems on an ongoing basis. The major
business areas impacted are:
Products and Installations: The Company is visiting customers to install Y2K
solutions and has furnished test facilities and equipment for customers to
verify compliance. We believe that substantially all current and legacy products
are Y2K compliant, or that we will have upgrades available by December 1998 to
make them Y2K compliant.
Procurement: We are surveying the Y2K readiness of critical and sole source
suppliers. We are in process of making second requests of suppliers who have
not yet fully responded and will continue to follow up with suppliers for whom
initial assessments have been completed.
Manufacturing: Certain of the Company's manufacturing is outsourced to two
primary suppliers and we are confirming their Y2K status. Our assembly and test
equipment is scheduled for ongoing upgrades to Y2K compliant configurations
through September 1999. Our primary manufacturing application software system is
scheduled to be Y2K compliant by the end of 1998.
Information Technology Systems: The Company has conducted a survey of its
information technology hardware and software and expects that substantially all
non-Y2K compliant hardware and software will be upgraded or replaced by
September 1999.
Facilities and Infrastructure: An assessment of the Y2K readiness of owned and
leased assets is scheduled for completion in December 1998.
Costs
While the Company has not yet completed the evaluation of the required
activities, the estimated costs of Y2K compliance efforts are not expected to
be material to the Company.
Risks
The Company believes the most reasonably likely worst case Y2K scenarios
include the following:
Customers could change their buying patterns in a number of ways, including
accelerating or delaying purchases of, or replacement of, Aspect products and
services.
We could experience a disruption in service to our customers as a result of
the failure of third party products, including the following: third party
products which are non-compliant and are incorporated into Aspect products
could cause our products to fail; a breakdown in telephone, e-mail, voicemail,
the World Wide Web or file transfer programs could impact the responsiveness
of our help desk; Y2K problems at a number of our suppliers including banks,
telephone companies and the United States Postal Service could have a
pervasive impact on our business as a whole; and product features that rely on
date parameters (generally date dependent routings and operating reports)
could malfunction.
15
Although our products are undergoing both Y2K specific, and our normal testing
procedures, our products may not contain all of the necessary date code or other
changes to operate in the year 2000. Any failure of such products to perform
could result in: claims and lawsuits against the Company; significantly impaired
customer satisfaction resulting in customers withholding cash owed to the
Company and delaying or canceling orders; and managerial and technical resources
being diverted away from product development and other business activities.
Any of the above stated consequences, in addition to others which the Company
cannot yet foresee, could have a significant adverse impact on the Company's
business, operating results and financial condition.
Contingency Plans
Until the Y2K compliance of our suppliers, and the compliance timetables of our
customers become clearer, it is not practical to develop comprehensive
contingency plans. We presently anticipate that contingency plans will be
complete by October 1999. Once contingency plans are implemented, however, we
cannot be certain that such plans will prevent significant Y2K problems from
having a material adverse effect on the Company's business, operating results,
and financial condition.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not required to provide disclosures regarding market risk in this
quarterly report on Form 10-Q as its market capitalization is less than $2.5
billion. Such disclosures will be provided in the Company's Annual Report on
Form 10-K for the year ending December 31, 1998.
17
ASPECT TELECOMMUNICATIONS CORPORATION
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Aspect made the following unregistered sales of securities convertible into
Aspect Common Stock for the quarter ended September 30, 1998.
Transaction Date: August 10, 1998
- ------------------------------------------------------------------------------------------------------------------
Amount of Securities Sold: Approximately $150 million zero coupon convertible
subordinated debentures ($490 million principal at
maturity) convertible into 4,269,370 shares of Aspect
Common Stock, $.01 par value/1/
- ------------------------------------------------------------------------------------------------------------------
Yield to Maturity: 6.0% per annum
- ------------------------------------------------------------------------------------------------------------------
Conversion Rate: 8.713 shares of Aspect Common Stock per $1,000 principal
at maturity of debentures
- ------------------------------------------------------------------------------------------------------------------
Maturity Date: August 10, 2018
- ------------------------------------------------------------------------------------------------------------------
Name of Underwriters or Placement Agents: Morgan Stanley Dean Witter and Credit Suisse First Boston
- ------------------------------------------------------------------------------------------------------------------
Consideration Received: The Company received aggregate net proceeds of $145.7
million from the sale of the debentures
- ------------------------------------------------------------------------------------------------------------------
Person or Class of Persons to Whom Securities Were Certain Qualified Institutional Buyers and Institutional
Sold: Accredited Investors
- ------------------------------------------------------------------------------------------------------------------
Exemption from Registration Claimed: The sales and issuances of securities in the transaction
were deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not
involving any public offering. In all such transactions
which relied upon the exemption set forth in Section
4(2) of the Act, the recipients of securities
represented their intentions to acquire the securities
for investment only and not with a view to or for sale
in connection with any distribution thereof, and
appropriate legends were affixed to the securities
issued in such transactions.
- ------------------------------------------------------------------------------------------------------------------
Expenses: In connection with the offering, the Company
made direct and indirect payments for underwriting
discounts and commissions totaling $4.5 million and
incurred other expenses totaling $201,000.
- ------------------------------------------------------------------------------------------------------------------
Use of Proceeds: Net proceeds, following the deduction of the expenses
set forth above, were $145.5 million and were used by
the Company for investments in taxable fixed income
securities.
- ------------------------------------------------------------------------------------------------------------------
- ---------------------------
/1/The number of shares represents those that are initially issuable upon
conversion of the debentures and as a result of the debentures antidilution
provisions, the number of indeterminate shares of Aspect Common Stock that may
be issued from time to time when the debentures are converted.
18
ASPECT TELECOMMUNICATIONS CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 4.1 Indenture. Dated August 10, 1998, by and among the Company and
State Street Bank and Trust Company of California, N.A., as
Trustee, including the form of Debenture.
Exhibit 4.2 Form of Debenture (included in Exhibit 4.1).
Exhibit 4.3 Registration Rights Agreement, dated August 10, 1998, by and among
the Company, Morgan Stanley & Co. Incorporated and Credit Suisse
First Boston Corporation.
Exhibit 27 Financial Data Schedule
B. REPORTS ON FORM 8-K
Reports on Form 8-K filed during the quarter ended September 30, 1998
Form 8-K/A dated May 11, 1998 and filed July 24, 1998
Item 2. Acquisition or Disposition of Assets - Announcement of the
acquisition of Voicetek Corporation.
Item 7. Financial Statements, Pro forma Financial Information and
Exhibits.
(a) Financial Statements of Business Acquired filed in accordance
with Item 7 (a) (4) of the Instructions to Form 8-K.
(b) Pro Forma Financial Information filed in accordance with
Item 7 (a) (4) of the Instructions to Form 8-K.
(c) Exhibits.
2.1 Agreement and Plan of Merger dated April 1, 1998,
among the Registrant, Venus Acquisition Corporation, a
Delaware corporation and wholly-owned subsidiary of
the Registrant, and Voicetek Corporation, a
Massachusetts corporation.
20.1 Press release of the Company dated May 11, 1998.
23.1 Independent Auditors' Consent.
Form 8-K dated August 5, 1998 and filed August 5, 1998
Item 5. Other Events - Announcement of the offering of zero coupon
convertible subordinated debentures.
Item 7. Financial Statements, Pro forma Financial Information and
Exhibits.
(c) Exhibits.
19
ASPECT TELECOMMUNICATIONS CORPORATION
1 Press release of the Company dated July 28,1998.
2 Press release of the Company dated August 5, 1998.
20
ASPECT TELECOMMUNICATIONS CORPORATION
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 Telecommunications Corporation
(Registrant)
Date: November 12, 1998
By
/s/ Eric J. Keller
-----------------------------------------------
Eric J. Keller
Vice President, Finance and Chief Financial
Officer (Duly Authorized and Principal Financial
and Accounting Officer)
21