UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________ FORM 10-Q/A (Mark One) [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 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 50,605,084 at June 30, 1998. ASPECT TELECOMMUNICATIONS CORPORATION FORM 10-Q/A This Amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form 10-Q, as filed by the Registrant on July 29, 1998, and is being filed to reflect the restatement of the Registrant's condensed consolidated financial statements. See "Restatement of Quarterly Financial Statements" in Notes to the Condensed Consolidated Financial Statements for a discussion of the basis for such restatement. INDEX Description Page Number - ---------------------------------------------------------------- ----------- Cover Page 1 Index 2 Part I: Financial Information Item 1: Financial Statements Condensed Consolidated Balance Sheets as of June 30, 1998 (as restated) and December 31, 1997 3 Condensed Consolidated Statements of Income for the Three and Six Month Periods Ended June 30, 1998 (as restated) and 1997 5 Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 1998 (as restated) and 1997 6 Notes to Condensed Consolidated Financial Statements 8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3: Quantitative and Qualitative Disclosures about Market Risk 17 Part II: Other Information Item 4: Submission of Matters to a Vote of Security Holders 18 Item 6: Exhibits and Reports on Form 8-K 18 Signature 20 ASPECT TELECOMMUNICATIONS CORPORATION PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited - in thousands, except share data) June 30, December 31, 1998 1997 --------------- --------------- (As Restated)* ** ASSETS Current assets: Cash and cash equivalents $ 55,575 $106,046 Short-term investments 27,366 40,170 Accounts receivable, net 106,590 86,896 Inventories 12,283 12,306 Other current assets 14,715 20,413 -------- -------- Total current assets 216,529 265,831 Property and equipment, net 67,598 58,704 Intangible assets, net 127,425 42,654 Other assets 4,302 3,154 -------- -------- Total assets $415,854 $370,343 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 16,496 $ 9,401 Current portion of notes payable 6,799 6,399 Accrued compensation and related benefits 18,157 14,256 Accrued intellectual property settlement - 14,000 Other accrued liabilities 33,042 36,335 Customer deposits and deferred revenue 24,681 15,626 -------- -------- Total current liabilities 99,175 96,017 -------- -------- Notes payable 5,782 6,531 Deferred tax liabilities 8,798 - 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: 50,605,084 in 1998 and 49,996,731 in 1997 163,497 144,524 Net unrealized gain on securities 149 1,267 Accumulated translation adjustments (1,088) (1,951) Retained earnings 139,541 123,955 -------- -------- Total shareholders' equity 302,099 267,795 -------- -------- Total liabilities and shareholders' equity $415,854 $370,343 ======== ======== * See "Restatement of Quarterly Financial Statements" in notes to the condensed consolidated financial statements. ** Derived from audited financial statements. See notes to the condensed consolidated financial statements. ASPECT TELECOMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited - in thousands, except per share amounts) Three Months Ended June 30, Six Months Ended June 30, --------------------------- --------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ (As Restated)* (As Restated)* Net revenues: Product $ 86,654 $ 65,932 $163,986 $133,484 Customer support 39,437 27,610 75,562 51,676 ------------ ------------ ------------ ------------ Total net revenues 126,091 93,542 239,548 185,160 ------------ ------------ ------------ ------------ Cost of revenues: Cost of product revenues 27,944 20,479 52,316 43,684 Cost of customer support revenues 28,379 19,673 52,549 36,899 ------------ ------------ ------------ ------------ Total cost of revenues 56,323 40,152 104,865 80,583 ------------ ------------ ------------ ------------ Gross margin 69,768 53,390 134,683 104,577 ------------ ------------ ------------ ------------ Operating expenses: Research and development 16,125 11,550 28,955 22,512 Selling, general and administrative 35,617 24,820 66,701 48,204 Purchased in-process technology 9,899 - 9,899 - ------------ ------------ ------------ ------------ Total operating expenses 61,641 36,370 105,555 70,716 ------------ ------------ ------------ ------------ Income from operations 8,127 17,020 29,128 33,861 Interest and other income, net 1,091 3,428 2,504 4,841 ------------ ------------ ------------ ------------ Income before income taxes 9,218 20,448 31,632 38,702 Provision for income taxes 7,529 7,872 16,046 14,900 ------------ ------------ ------------ ------------ Net income $ 1,689 $12,576 $ 15,586 $23,802 ============ ============ ============ ============ Basic earnings per share $ 0.03 $ 0.26 $ 0.31 $ 0.49 Weighted average shares outstanding 50,437 49,056 50,292 48,975 Diluted earnings per share $ 0.03 $ 0.24 $ 0.29 $ 0.46 Weighted average shares outstanding--assuming dilution 53,584 51,956 53,392 52,201 * See "Restatement of Quarterly Financial Statements" in notes to the condensed consolidated financial statements. See notes to the condensed consolidated financial statements. ASPECT TELECOMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited - in thousands) Six Months Ended June 30, --------------------------------------- 1998 1997 ----------------- -------------- (As Restated)* Cash flows from operating activities: Net income $ 15,586 $ 23,802 Reconciliation of net income to cash provided by operating activities: Depreciation and amortization 13,761 9,567 Purchased in-process technology 9,899 - Gain on the sale of equity securities - (2,070) Deferred tax liabilities 8,798 - Changes in assets and liabilities, net of effects from companies acquired: Accounts receivable (15,870) (15,083) Inventories 1,356 3,826 Other current assets and other assets 4,597 568 Accounts payable 3,617 1,782 Accrued compensation and related benefits (2,687) 835 Accrued intellectual property settlement (14,000) - Other accrued liabilities (8,861) 8,911 Customer deposits and deferred revenue 8,085 (4,518) ----------------- -------------- Cash provided by operating activities 24,281 27,620 ----------------- -------------- Cash flows from financing activities: Common stock transactions 5,388 4,360 Payments on note payable (7,637) - ----------------- -------------- Cash provided by (used in) financing activities (2,249) 4,360 ----------------- -------------- Cash flows from investing activities: Short-term investment purchases (82,638) (26,770) Short-term investment sales and maturities 95,442 37,345 Property and equipment purchases (15,575) (13,822) Purchase of company, net of cash acquired (71,382) - ----------------- -------------- Cash used in investing activities (74,153) (3,247) ----------------- -------------- Effect of exchange rate changes on cash and cash equivalents 1,650 22 ----------------- -------------- Increase (decrease) in cash and cash equivalents (50,471) 28,755 Cash and cash equivalents: Beginning of period 106,046 47,996 ----------------- -------------- End of period $ 55,575 $ 76,751 ================= ============== Noncash investing and financing activities: Stock options issued in connection with the acquisition of Voicetek Corporation $ 11,184 $ - * See "Restatement of Quarterly Financial Statements" in notes to the condensed consolidated financial statements. See notes to the condensed consolidated financial statements. 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 annual 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 six month periods ended June 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. Restatement of Quarterly Financial Statements Subsequent to the issuance of the Company's June 30, 1998 condensed consolidated financial statements, the SEC issued new guidance on its views regarding the valuation methodology used in determining purchased in-process technology expensed on the date of acquisition. The Company has had discussions with the SEC staff concerning the valuation of purchased in-process technology and other intangible assets acquired in connection with the acquisition of Voicetek Corporation in May 1998 (see "Business Combinations" note). As a result of these discussions, the Company has modified its methods used to value the purchased in-process technology and other intangible assets. The revised valuation is based on management estimates of the after-tax net cash flows and gives explicit consideration to the SEC's views on purchased in-process technology as set forth in its September 9, 1998 letter to the American Institute of Certified Public Accountants. As a result of the revised valuation, the amount of purchase price allocated to in-process technology decreased from $68.2 million to $9.9 million and the amount ascribed to other intangible assets increased from $17.8 million to $89.8 million, including the impact of deferred tax liabilities related to intangible assets of $1.4 million and $15.2 million respectively. The following table outlines the revisions to previously published condensed consolidated financial statements (in thousands, except for per share amounts): Three Months Ended Six Months Ended June 30, 1998 June 30, 1998 -------------------------------- ------------------------------ As Previously As Previously Reported As Restated Reported As Restated -------- ----------- -------- ----------- Research and development $15,565 $16,125 $28,395 $28,955 Selling, general & $34,738 $35,617 $65,822 $66,701 administrative Purchased in-process $68,176 $ 9,899 $68,176 $ 9,899 technology Income (loss) from operations ($48,711) $ 8,127 ($27,710) $29,128 Income (loss) before income ($47,620) $ 9,218 ($25,206) $31,632 taxes Provision for income taxes $ 7,811 $ 7,529 $16,328 $16,046 Net income (loss) ($55,431) $ 1,689 ($41,534) $15,586 Basic earnings (loss) per ($ 1.10) $ 0.03 ($ 0.83) $ 0.31 share Diluted earnings (loss) per ($ 1.10) $ 0.03 ($ 0.83) $ 0.29 share At June 30, 1998 ------------------------------ As Previously Reported As Restated ------------- ------------- Intangible assets, net $ 56,333 $127,425 Other assets $ 9,476 $ 4,302 Deferred tax liabilities $ - $ 8,798 Retained earnings $ 82,421 $139,541 Total shareholders' equity $244,979 $302,099 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's customer premise IVR product offerings, strengthen Aspect'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 Voicetek common and preferred shares outstanding and 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, plus transaction costs of approximately $3 million, and assumed certain operating assets and liabilities. The total purchase price and final allocation among the tangible and intangible assets and liabilities acquired (including purchased in-process technology) is summarized as follows (in thousands): Amortization Period (Years) --------------- Total Purchase Price: Total cash consideration $ 71,843 Value of options assumed 11,184 Transaction costs 2,962 -------- $ 85,989 ======== Purchase Price Allocation: Tangible assets $ 9,135 Intangible assets: Developed and core technology 28,835 7 Assembled workforce 2,441 4 Customer relationships and sales channel 7,685 5 Goodwill 50,875 7 In-process technology 9,899 Expensed ------------ Tangible liabilities (13,751) Deferred tax liabilities (9,130) -------- $ 85,989 ======== The revised valuation was based on management's estimates of the after tax net cash flows and gives explicit consideration to the SEC's views on purchased in- process technology as set forth in its September 9, 1998 letter to the American Institute of Certified Public Accountants. Specifically, the revised valuation gave consideration to the following: (i) a fair market value premise was employed, excluding any Aspect-specific considerations which would result in estimates of investment value for the subject assets; (ii) comprehensive due diligence concerning all potential intangible assets including trademarks/tradenames, patents, copyrights, non-compete agreements, assembled workforce and customer relationships and sales channel; (iii) the value of core technology was explicitly addressed, with a view toward ensuring the relative allocations to core technology and in-process technology were consistent with the relative contributions of each to the final product; (iv) the allocation to in-process technology was based on a calculation that considered only the efforts completed as of the transaction date, and only the cash flow associated with said completed efforts for one generation of the products currently in- process; and (v) it was assessed by the Company's independent accountants and deemed reasonable in light of all the quantitative and qualitative information available. As noted above, Aspect recorded a one-time charge of $9.9 million in the second quarter of 1998 for purchased in-process technology related to two development projects that had not reached technological feasibility, had no alternative future use, and for which successful development was uncertain. The conclusion that each in-process development effort, or any material sub-component, had no alternative future use was reached in consultation with engineering personnel from both Aspect and Voicetek. The first of these projects is an interactive voice response (IVR) product that represents the next generation of Voicetek's "Generations" platform, ported to a Windows NT environment. The primary project tasks open include porting to Windows NT, compliance to industry standard protocols and various feature enhancements. At the time of acquisition, development remained on all tasks and estimated costs to complete were approximately $1.5 million. The second development project is a suite of personal communications services, which will provide modular, integrated applications for voice activated dialing, single number service, personal assistant call screening and unified message control. At the time of acquisition, most of the remaining development effort was focused on completing one of the applications, voice activated dialing, and additional coding for final feature development, as well as further testing. Estimated costs to complete were approximately $2.2 million. Management expects that both products being developed will become available for sale in fiscal 1999; however, no assurances can be given. Aspect will begin to benefit from the acquired research and development related to these products once they begin shipping. Failure to reach successful completion of these projects 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 or results of operations. Significant assumptions used to determine the value of in-process technology included several factors, including the following. First, a forecast of net cash flows that were expected to result from the development effort, using projections prepared by Voicetek management, portions of which (1998 and 1999) were provided to Aspect's Board of Directors. Second, a percentage complete for each project (40% for the first project and 50% for the second project) estimated by considering a number of factors, including the costs invested to date relative to the expected total cost of the development effort and the amount of progress completed as of the transaction date, on a technological basis, relative to the overall technological achievements required to achieve the intended functionality of the eventual product. The technological issues were addressed by engineering representatives from both Aspect and Voicetek. Third, discount rates of approximately 28% and 23% respectively, computed under two discount rate scenarios. The first discount rate was equivalent to the discount rate that would be employed in a Fair Value analysis, i.e., one that considers all cash flows associated with the project and resulting product, and therefore represents a blended rate of all the risks associated with the product. The second discount rate employed was moderately lower, and was intended to be reflective of the fact that the "Exclusion Method" only considers the "completed portion" of the development and the cash flow associated with the same. The results of each scenario were not materially different, and our final allocation to in-process research and development was based on an average of the results of the two scenarios for each project. As of June 30, 1998, technological feasibility had not been reached with respect to either project and no significant departures from the assumptions included in the valuation analysis have occurred. The operating results of Voicetek have been included in the consolidated statements of income 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 six months ended June 30 (in thousands, except per share data): 1998 1997 ----------- ----------- Net revenues $247,616 $198,472 Net income 15,882 14,111 Basic earnings per share 0.32 0.29 Diluted earnings per share 0.30 0.27 The pro forma results of operations give effect to certain adjustments, including amortization of purchased intangibles and goodwill, interest associated with funding the acquisition, and entries to conform to the Company's accounting policies. The $9.9 million charge for purchased in-process technology has been excluded from the pro forma results as it is a material non-recurring charge. 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 purchased in-process technology. Inventories Inventories, stated at the lower of cost (first-in, first-out) or market, consist of: June 30, 1998 December 31, 1997 ---------------- ------------------ (in thousands) Raw materials $ 6,087 $ 5,331 Work in progress 3,469 3,624 Finished goods 2,727 3,351 ------- ------- Total $12,283 $12,306 ======= ======= Per Share Information Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding for the period while diluted earnings per share also includes the dilutive impact of stock options. Basic and diluted earnings per share for the three and six month periods ended June 30 are calculated as follows (in thousands, except per share data): Three Months Ended Six Months Ended June 30, June 30, ---------------------- --------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Weighted average shares outstanding 50,437 49,056 50,292 48,975 Net income $ 1,689 $12,576 $15,586 $23,802 Basic earnings per share $ 0.03 $ 0.26 $ 0.31 $ 0.49 ======= ======= ======= ======= Weighted average shares outstanding 50,437 49,056 50,292 48,975 Dilutive effect of options 3,147 2,900 3,100 3,226 ------- ------- ------- ------- Total 53,584 51,956 53,392 52,201 Net income $ 1,689 $12,576 $15,586 $23,802 Diluted earnings per share $ 0.03 $ 0.24 $ 0.29 $ 0.46 ======= ======= ======= ======= During the three and six months ended June 30, 1998 and 1997, the Company had common stock options outstanding which could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted earnings per share as the common stock options' exercise prices were greater than the average market price of the common shares for the period. For the three and six month periods ended June 30, 1998, 1,674,000 and 1,892,000, respectively, of such common stock options were excluded from the diluted earnings per share computations. For the three and six month periods ended June 30, 1997, 2,932,000 and 2,589,000, respectively, of such common stock options were excluded from the diluted earnings per share computations. ASPECT TELECOMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 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 nonowner sources. For the three and six months ended June 30, 1998, comprehensive income was $2,308,000 and $15,331,000, respectively. Comprehensive income for the same periods of the prior year was $11,780,000 and $21,233,000, respectively. Comprehensive income represents net income for these periods and changes in unrealized gains on securities and accumulated translation adjustments. 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. On a forward-looking basis, although the Company has not fully assessed the implications of this new statement, 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 periods 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 June 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 segments for reporting under this pronouncement. 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. Year 2000 Many computer systems experience problems handling dates from the year 2000 and beyond, and will need to be modified prior to the year 2000 in order to remain functional. The Company is assessing both the internal readiness of its computer systems and the compliance of its products and software sold to customers for handling the year 2000. The Company expects to successfully implement the changes necessary to address these year 2000 issues, and does not believe that the cost of such actions will have a material effect on the Company. There can be no assurance, however, that there will not be delays in, or increased costs associated with, the implementation of such changes, and the Company's inability to implement such changes could have a material adverse effect on the Company's business, operating results, and financial condition. Subsequent Event In October 1997, the Company acquired certain rights to two intellectual property portfolios by paying $9,750,000 in cash and issuing $10,000,000 in notes payable. These notes were stated net of $1,570,000 in discounts with imputed interest rates of 7%, and payable in installments over the next five to six years. In July 1998, the Company made additional payments of approximately $7.5 million to acquire remaining rights under one of these intellectual property portfolios and extinguished a $5 million face value note payable. 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. OVERVIEW Aspect Telecommunications Corporation (Aspect or the Company) is a leading worldwide provider of mission-critical, integrated call center solutions. The Company's solutions include automatic call distribution (ACD) systems and software; computer-telephony integration (CTI) application software and tools; interactive voice response (IVR) systems; Web response systems; call center management information and reporting tools; and call center planning and forecasting packages. The Company also delivers consulting, training, and system integration services that help organizations effectively plan, integrate, staff, and manage call centers. Aspect markets its products and services worldwide to organizations in a broad array of industries including financial services, government, healthcare, retailing, technology, telecommunications, and transportation. In May 1998, the Company completed the acquisition of Voicetek Corporation (Voicetek), a leading supplier of IVR and Intelligent Networks (IN) applications based in Chelmsford, Massachusetts. The acquisition is intended to augment Aspect's customer premise IVR product offerings, strengthen Aspect'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. Subsequent to the issuance of the Company's June 30, 1998 condensed consolidated financial statements, the SEC issued new guidance on its views regarding the valuation methodology used in determining purchased in-process technology expensed on the date of acquisition. The Company has had discussions with the SEC staff concerning the valuation of purchased in-process technology and other intangible assets acquired in connection with the acquisition of Voicetek Corporation in May 1998 (see "Business Combinations" note). As a result of these discussions, the Company has modified its methods used to value the purchased in-process technology and other intangible assets. The revised valuation was based on management's estimates of the after tax net cash flows and gives explicit consideration to the SEC's views on purchased in- process technology as set forth in its September 9, 1998 letter to the American Institute of Certified Public Accountants. Specifically, the revised valuation gave consideration to the following: (i) a fair market value premise was employed, excluding any Aspect-specific considerations which would result in estimates of investment value for the subject assets; (ii) comprehensive due diligence concerning all potential intangible assets including trademarks/tradenames, patents, copyrights, non-compete agreements, assembled workforce and customer relationships and sales channel; (iii) the value of core technology was explicitly addressed, with a view toward ensuring the relative allocations to core technology and in-process technology were consistent with the relative contributions of each to the final product; (iv) the allocation to in-process technology was based on a calculation that considered only the efforts completed as of the transaction date, and only the cash flow associated with said completed efforts for one generation of the products currently in- process; and (v) it was assessed by the Company's independent accountants and deemed reasonable in light of all the quantitative and qualitative information available. Aspect recorded a one-time charge of $9.9 million in the second quarter of 1998 for purchased in-process technology related to two development projects that had not reached technological feasibility, had no alternative future use, and for which successful development was uncertain. The conclusion that each in-process development effort, or any material sub-component, had no alternative future use was reached in consultation with engineering personnel from both Aspect and Voicetek. The first of these projects is an interactive voice response (IVR) product that represents the next generation of Voicetek's "Generations" platform, ported to a Windows NT environment. The primary project tasks open include porting to Windows NT, compliance to industry standard protocols and various feature enhancements. At the time of acquisition, development remained on all tasks and estimated costs to complete were approximately $1.5 million. The second development project is a suite of personal communications services, which will provide modular, integrated applications for voice activated dialing, single number service, personal assistant call screening and unified message control. At the time of acquisition, most of the remaining development effort was focused on completing one of the applications, voice activated dialing, and additional coding for final feature development, as well as further testing. Estimated costs to complete were approximately $2.2 million. Management expects that both products being developed will become available for sale in fiscal 1999; however, no assurances can be given. Aspect will begin to benefit from the acquired research and development related to these products once they begin shipping. Failure to reach successful completion of these projects 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 or results of operations or cash flows. Significant assumptions used to determine the value of in-process technology included several factors, including the following. First, a forecast of net cash flows that were expected to result from the development effort, using projections prepared by Voicetek management, portions of which (1998 and 1999) were provided to Aspect's Board of Directors. Second, a percentage complete for each project (40% for the first project and 50% for the second project) estimated by considering a number of factors including the costs invested to date relative to the expected total cost of the development effort and the amount of progress completed as of the transaction date, on a technological basis, relative to the overall technological achievements required to achieve the intended functionality of the eventual product. The technological issues were addressed by engineering representatives from both Aspect and Voicetek. Third, discount rates of approximately 28% and 23% respectively, computed under two discount rate scenarios. The first discount rate was equivalent to the discount rate that would be employed in a Fair Value analysis, i.e., one that considers all cash flows associated with the project and resulting product, and therefore represents a blended rate of all the risks associated with the product. The second discount rate employed was moderately lower, and was intended to be reflective of the fact that the "Exclusion Method" only considers the "completed portion" of the development and the cash flow associated with the same. The results of each scenario were not materially different, and our final allocation to in-process research and development was based on an average of the results of the two scenarios for each project. As of June 30, 1998, technological feasibility had not been reached with respect to either project and no significant departures from the assumptions included in the valuation analysis have occurred. As a result of the revised valuation, the amount of purchase price allocated to in-process technology decreased from $68.2 million to $9.9 million and the amount ascribed to other intangible assets increased from $17.8 million to $89.8 million, including the impact of deferred taxes of $1.4 million and $15.2 million respectively. As a result, the Company's condensed consolidated financial statements and Management Discussion and Analysis of Financial Condition and Results of Operations have been restated to reflect such adjustments described herein and in "Restatement of Quarterly Financial Statements" in the Notes to Condensed Consolidated Financial Statements. 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 purchased 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 21 E of the Securities Exchange Act of 1934, as amended; and the Private Securities Litigation Reform Act cause actual results to differ materially from those projected. These risks and uncertainties include those discussed specifically herein, as well as variability and uncertainty of revenues and operating results; volatility of stock price; product concentration, technological change, and new products; potential software defects; competition; intellectual property/litigation; management of growth; dependence on key personnel; limited sources of component supply; licenses from third parties; geographic concentration; acquisitions and investments; international operations; regulatory requirements; expansion of distribution channels; and year 2000 compliance issues. For a more detailed description of these risks and uncertainties, see the section titled "Management's Discussion and Analysis -Business Environment and Risk Factors" in the Company's 1997 Annual Report to Shareholders. 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. RESULTS OF OPERATIONS Net Revenues Total net revenues for the second quarter of 1998 were $126 million, representing an increase of 35% compared with total net revenues of $94 million for the same period of 1997. Total net revenues for the first six months of 1998 were $240 million, representing an increase of 29% when compared with total net revenues of $185 million for the same period in 1997. Product revenues for the second quarter of 1998 were $87 million, representing an increase of 31% from $66 million for the same period of 1997. For the first six months of 1998, product revenues were $164 million, an increase of 23% when compared with the same period in 1997. The increases in product revenues for both periods were primarily attributable to increased volume of new system sales, add-ons and upgrades, growth associated with TCS Management Group, Inc. (TCS), and the inclusion of Voicetek revenues since the date of acquisition. Average selling prices on new ACD systems remained relatively unchanged across the periods. Customer support revenues for the second quarter of 1998 were $39 million, an increase of 43% from the same period of the prior year. For the first six months of 1998, customer support revenues were $76 million, an increase of 46% when compared with the same period of 1997. The growth in customer support revenues for both periods reflects increases in the Company's maintenance revenue as a result of the growth in its installed base, and consulting and systems integration (C&SI) revenue. Customer support revenues include charges for providing contractually agreed-upon system service and maintenance (which are primarily affected by growth in the installed base); charges to install products; C&SI revenue; and other support services. Gross Margin on Product Revenues Product gross margin decreased to 68% for the second quarter of 1998 from 69% for the same period of 1997. The decrease in product gross margin primarily reflects a decline in add-on margins partially offset by the strengthening of new system margins. For the first six months of 1998, product gross margin was 68% compared to 67% for the same period of 1997. The increase is primarily attributable to the strengthening of new system margins partially offset by a decrease in add-on margins internationally. 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. Gross Margin on Customer Support Revenues Customer support gross margin decreased to 28% for the second quarter of 1998 from 29% for the same period of 1997 with the modest decrease in support gross margin primarily reflecting lower margins in the Company's C&SI business unit. For the first six months of 1998, customer support gross margin was 30% compared to 29% for the same period of 1997. This increase is primarily attributable to increased North America support margins, partially offset by a decrease in such margins internationally due to increasing infrastructure costs associated with international expansion. 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, and the results of recently acquired subsidiaries and newly established business units. In addition, the Company anticipates that revenue and related margins from its C&SI business will continue to fluctuate significantly on a quarterly basis based on the timing and magnitude of engagements. Research and Development Expenses Research and development (R&D) expenses were $16 million for the second quarter of 1998, an increase of 40% from the same period of 1997. R&D expenses were $29 million for the first six months of 1998, an increase of 29% compared with the same period of 1997. As a percentage of net revenues, R&D spending increased from 12% in the second quarter of 1997 to 13% in the second quarter of 1998. The increases in R&D expenses for both periods primarily reflect increased personnel and infrastructure costs, the inclusion of Voicetek R&D expenses since the date of acquisition and the amortization of the intangible assets related to developed and core technology recorded from the acquisition of Voicetek. As a percentage of net revenues, R&D spending was essentially unchanged at 12% for the first six months of 1998 when compared to the same period of 1997. The Company continues to believe that significant spending 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 for 1998 as a whole, when compared to 1997, 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 $36 million for the second quarter of 1998, an increase of 44% from the same quarter of 1997. SG&A expenses were $67 million for the first six months of 1998, an increase of 38% from the same period of 1997. As a percentage of net revenues, SG&A was 28% for the second quarter and first six months of 1998 compared with 27% and 26% for the same periods of 1997. The increases in SG&A for both periods, both in absolute dollars and as a percentage of revenues, reflect increased personnel, infrastructure costs, the inclusion of Voicetek SG&A expenses since the date of acquisition and the amortization of intangible assets recorded from the acquisition of Voicetek. The Company anticipates, on a forward-looking basis, that SG&A expenses will increase in terms of absolute dollars for 1998 as a whole, when compared to 1997, although such expenses as a percentage of net revenues may fluctuate on a quarterly basis. Purchased In-Process Technology Purchased in-process technology represents a non-recurring charge of $9.9 million, associated with the acquisition of Voicetek completed in May 1998, for technology which had not reached technological feasibility and had no alternative future use. Net Interest and Other Income Net interest and other income decreased to $1.1 million for the second quarter of 1998 from $3.4 million for the same quarter of 1997. Net interest and other income decreased to $2.5 million for the first six months of 1998 from $4.8 million for the same period of 1997. The prior year amounts included approximately $2.1 million from a gain on the sale of appreciated equity securities. Excluding this gain, net interest income declined from approximately $1.4 million to $1.1 million for the three month periods ended June 30, 1997 and 1998, respectively, and declined from approximately $2.8 million to $2.5 million for the six month periods ended June 30, 1997 and 1998, respectively. These decreases reflect lower interest earning balances subsequent to the Voicetek acquisition and the increased mix of tax-advantaged securities, which typically carry lower stated interest rates. Income Taxes Excluding the non-deductible, non-recurring charge for purchased in-process technology associated with the acquisition of Voicetek, the Company's effective income tax rate was 39.4% for the second quarter of 1998 and 38.6% for the first six months of 1998, as compared to 38.5% for the comparable periods of 1997. The increase is due primarily to non-deductible goodwill amortization associated with the acquisition of Voicetek. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1998, the Company's principal source of liquidity consisted of cash, cash equivalents, and short-term investments totaling $83 million, which represented 20% of total assets. The primary sources of cash for the first six months of 1998 consisted of cash provided by operating activities of $24 million, net sales and maturities of short-term investments of $13 million, and proceeds from the issuance of common stock under various stock plans of $5 million. The primary use of cash during the first six months of 1998 consisted of $75 million for the Voicetek acquisition and related transaction costs, $16 million for purchases of property and equipment, and $8 million for payments on notes payable. As of June 30, 1998, the Company's outstanding borrowings, including current and non-current portions of notes payable, totaled $12.6 million. Borrowings consisted of a $4.5 million note payable incurred in connection with the acquisition of TCS, and $8.1 million related to acquisitions of two intellectual property portfolios during 1997. In July 1998, the Company made additional payments of approximately $7.5 million to acquire remaining rights under one of these intellectual property portfolios and extinguished a $5 million face value note payable. The Company believes, on a forward-looking basis, that its cash, cash equivalents, and short-term investments and anticipated cash flow from operations, potentially supplemented by additional financing, will be sufficient to meet the Company's presently anticipated cash requirements during at least the next twelve months. 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. ASPECT TELECOMMUNICATIONS CORPORATION PART II: OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 14, 1998, the Annual Meeting of Shareholders of Aspect Telecommunications Corporation was held in San Jose, California. An election of directors was held with the following individuals being elected to the Board of Directors of the Company: James R. Carreker (45,519,496 votes for, 47,527 votes withheld) Debra J. Engel (45,517,696 votes for, 49,327 votes withheld) Norman A. Fogelsong (45,500,245 votes for, 66,778 votes withheld) James L. Patterson (45,515,696 votes for, 51,327 votes withheld) John W. Peth (45,445,048 votes for, 121,975 votes withheld) Other matters voted upon and approved at the meeting, and the number of affirmative and negative votes cast with respect to each such matter were as follows: To approve the adoption of the Annual Retainer Compensation Plan for the Board of Directors of the Company and the reservation of 50,000 shares of Common Stock for issuance thereunder (43,863,264 votes in favor, 1,295,763 votes opposed, 58,715 abstaining, 349,281 votes withheld). To approve the adoption of the 1998 Directors' Stock Option Plan and the reservation of 300,000 shares of Common Stock for issuance thereunder (29,751,615 votes in favor, 15,409,579 votes opposed, 56,548 abstaining, 349,281 votes withheld). To amend the 1990 Employee Stock Purchase Plan to reserve an additional 1,000,000 shares of Common Stock for issuance thereunder (44,743,869 votes in favor, 433,165 votes opposed, 40,708 abstaining, 349,281 votes withheld). To ratify the appointment of Deloitte & Touche LLP as the independent auditors of the Company for the year ending December 31, 1998 (45,481,652 votes in favor, 40,077 votes opposed, 45,294 abstaining, no votes withheld). Item 6. Exhibits and Reports on Form 8-K A. EXHIBITS Exhibit 27 Financial Data Schedule B. REPORTS ON FORM 8-K Reports on Form 8-K filed during the quarter ended June 30, 1998 Form 8-K dated May 11, 1998 and filed May 22, 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), (b) Financial statements and pro forma financial information omitted in reliance on 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. 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. 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: January 18, 1999 By /s/ Eric J. Keller ---------------------------------------- Eric J. Keller Vice President, Finance and Chief Financial Officer (Duly Authorized and Principal Financial and Accounting Officer)