UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-Q (Mark One) [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 1999 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 47,487,079 at July 31, 1999. 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 June 30, 1999 and December 31, 1998 3 Condensed Consolidated Statements of Operations for the Three and Six Month Periods Ended June 30, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3: Qualitative and Quantitative Disclosures About Financial Market Risk 14 Part II: Other Information Item 4: Submission of Matters to a Vote of Security Holders 15 Item 5: Other Information 15 Item 6: Exhibits and Reports on Form 8-K 15 Signature 17 2 ASPECT TELECOMMUNICATIONS CORPORATION Part I: Financial Information Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) June 30, December 31, 1999 1998 --------------- -------------- ASSETS (unaudited) ** Current assets: Cash and cash equivalents $ 71,009 $ 67,071 Short-term investments 132,999 129,040 Accounts receivable, net 91,346 132,818 Inventories 18,085 18,916 Other current assets 24,786 14,820 --------------- -------------- Total current assets 338,225 362,665 Property and equipment, net 70,809 69,192 Intangible assets, net 108,928 119,052 Other assets 10,962 9,750 --------------- -------------- Total assets $ 528,924 $ 560,659 =============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 19,674 $ 18,239 Accrued compensation and related benefits 21,590 21,049 Other accrued liabilities 34,048 38,029 Customer deposits and deferred revenue 37,923 27,171 --------------- -------------- Total current liabilities 113,235 104,488 Deferred taxes 2,884 4,270 Convertible subordinated debentures 158,357 153,744 Commitments and contingencies Shareholders' equity: Preferred stock, $.01 par value: 2,000,000 shares authorized, none outstanding in 1999 and 1998 -- -- Common stock, $.01 par value: 100,000,000 shares authorized, shares outstanding: 47,328,546 in 1999 and 49,309,383 in 1998 125,088 142,132 Accumulated other comprehensive loss (1,336) (420) Retained earnings 130,696 156,445 --------------- -------------- Total shareholders' equity 254,448 298,157 --------------- -------------- Total liabilities and shareholders' equity $ 528,924 $ 560,659 =============== ============== ** Derived from audited financial statements. See notes to the condensed consolidated financial statements. 3 ASPECT TELECOMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data - unaudited) Three Months Ended June 30, Six Months Ended June 30, ------------------------------------ ------------------------------------- 1999 1998 1999 1998 ---------------- ----------------- ---------------- ----------------- Net revenues: Product $ 64,566 $ 86,654 $ 115,762 $ 163,986 Customer support 47,620 39,437 96,509 75,562 ---------------- ----------------- ---------------- ----------------- Total net revenues 112,186 126,091 212,271 239,548 Cost of revenues: Cost of product revenues 22,044 27,944 39,784 52,316 Cost of customer support revenues 36,498 28,379 72,151 52,549 ---------------- ----------------- ---------------- ----------------- Total cost of revenues 58,542 56,323 111,935 104,865 ---------------- ----------------- ---------------- ----------------- Gross margin 53,644 69,768 100,336 134,683 Operating expenses: Research and development 21,916 16,125 41,417 28,955 Selling, general and administrative 49,186 35,617 95,129 66,701 Purchased in-process technology - 9,899 - 9,899 ---------------- ----------------- ---------------- ----------------- Total operating expenses 71,102 61,641 136,546 105,555 ---------------- ----------------- ---------------- ----------------- Income (loss) from operations (17,458) 8,127 (36,210) 29,128 Interest income (expense), net (355) 1,091 (574) 2,504 ---------------- ----------------- ---------------- ----------------- Income (loss) before income taxes (17,813) 9,218 (36,784) 31,632 Income tax (provision) benefit 5,343 (7,529) 11,035 (16,046) ---------------- ----------------- ---------------- ----------------- Net income (loss) $ (12,470) $ 1,689 $ (25,749) $ 15,586 ================ ================= ================ ================= Basic earnings (loss) per share ($0.26) $0.03 ($0.53) $0.31 Weighted average shares outstanding 47,634 50,437 48,395 50,292 Diluted earnings (loss) per share ($0.26) $0.03 ($0.53) $0.29 Weighted average shares outstanding- assuming dilution 47,634 53,584 48,395 53,392 See notes to the condensed consolidated financial statements. 4 ASPECT TELECOMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited - in thousands) Six Months Ended June 30, ----------------------------------- 1999 1998 -------------- --------------- Cash flows from operating activities: Net income (loss) ($25,749) $15,586 Reconciliation of net income (loss) to cash provided by operating activities: Depreciation and amortization 20,812 13,761 Purchased in-process technology -- 9,899 Noncash interest expense on debentures 4,613 -- Deferred taxes (3,099) 333 Changes in assets and liabilities net of effect of company acquired in 1998: Accounts receivable 38,192 (15,870) Inventories (330) 1,356 Other current assets and other assets (8,120) 13,062 Accounts payable 1,518 3,617 Accrued compensation and related benefits 2,021 (2,687) Accrued intellectual property settlement -- (14,000) Other accrued liabilities (2,463) (8,861) Customer deposits and deferred revenue 11,066 8,085 -------------- --------------- Cash provided by operating activities 38,461 24,281 Cash flows from financing activities: Repurchase of common stock (21,709) -- Other common stock transactions - net 4,444 5,388 Payment on note payable (1,574) (7,637) -------------- --------------- Cash used in financing activities (18,839) (2,249) Cash flows from investing activities: Short-term investment purchases (56,542) (82,638) Short-term investment sales and maturities 52,583 95,442 Property and equipment purchases (12,305) (15,575) Purchase of company, net of cash acquired -- (71,382) -------------- --------------- Cash used in investing activities (16,264) (74,153) Effect of exchange rate changes on cash and cash equivalents 580 1,650 -------------- --------------- Increase (decrease) in cash and cash equivalents 3,938 (50,471) Cash and cash equivalents: Beginning of period 67,071 106,046 -------------- --------------- End of period $71,009 $ 55,575 ============== =============== See notes to the condensed consolidated financial statements. 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 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 months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the consolidated financial statements and notes thereto included in the Company's 1998 Annual Report to Shareholders attached as an appendix to the Proxy Statement for the 1999 Annual Meeting of Shareholders. Reclassifications Certain prior-year amounts have been reclassified to conform to the current-year presentation. Inventories Inventories, stated at the lower of cost (first-in, first-out) or market, consist of (in thousands): June 30, December 31, 1999 1998 -------- ------------ Raw materials $ 7,317 $ 9,494 Work in progress 2,952 4,829 Finished goods 7,816 4,593 ------- ------- Total $18,085 $18,916 ======= ======= 6 ASPECT TELECOMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Per Share Information Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share further includes the dilutive impact of stock options. Basic and diluted earnings (loss) per share for the three and six months ended June 30 are calculated as follows (in thousands, except per share data): Three Months Ended Six Months Ended --------------------------- ------------------------- 1999 1998 1999 1998 ------------ ------------- ------------ ----------- Basic EPS: Weighted average shares outstanding 47,634 50,437 48,395 50,292 Net income (loss) $ (12,470) $ 1,689 $ (25,749) $15,586 Basic earnings (loss) per share $ (0.26) $ 0.03 $ (0.53) $ 0.31 ========= ======= ========= ======= Diluted EPS: Weighted average shares outstanding 47,634 50,437 48,395 50,292 Dilutive effect of options -- 3,147 -- 3,100 --------- ------- --------- ------- Total 47,634 53,584 48,395 53,392 Net income (loss) $ (12,470) $ 1,689 $ (25,749) $15,586 Diluted earnings (loss) per share $ (0.26) $ 0.03 $ (0.53) $ 0.29 ========= ======= ========= ======= As of June 30, 1999, the Company had approximately 600,000 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 for the three and six month periods ended June 30, 1999 because inclusion of these shares would have had an anti-dilutive effect as the Company had a net loss for those periods. Similarly, the Company had 9.1 million options outstanding that were excluded from the computation of diluted earnings per share as the exercise prices were greater than the average market price of the common shares for the three and six month periods ending June 30, 1999. Additionally, as of June 30, 1999, there were 4.3 million shares of common stock issuable upon conversion of debentures. These shares and the effect of accrued interest expense on the debentures was not included in the calculation of diluted earnings per share for the three and six month periods ended June 30, 1999 because this inclusion would have been anti-dilutive. Contingencies The Company is from time to time involved in litigation or claims that arise in the normal course of business. The Company does not expect that any current litigation or claims will have a material adverse effect on the Company's business, operating results, or financial condition. Comprehensive Income (Loss) For the three and six months ended June 30, 1999, comprehensive loss was $12,228,000 and $26,665,000, respectively. Comprehensive income for the same periods of the prior year were $2,308,000 and $15,331,000, respectively. 7 ASPECT TELECOMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Comprehensive income (loss) represents net income (loss) for these periods and changes in unrealized gains on securities and accumulated translation adjustments. Share Repurchase Program In October 1998, the Company's Board of Directors approved a stock repurchase program to acquire up to five million shares of its common stock. In the quarter ended June 30, 1999, the Company purchased 1,740,000 shares at an average acquisition price of $6.87 per share. 2,990,000 shares have been repurchased in the six months ended June 30, 1999 at an average acquisition price of $7.26 per share and a total of 5,000,000 shares have been repurchased under this program at an average acquisition price of $10.66 per share. The Company completed the repurchase program in April 1999 and has retired all shares repurchased. Shareholder Rights Plan On May 11, 1999, the Company's Board of Directors declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock, $0.01 par value, of the Company. The dividend is payable on May 26, 1999 to shareholders of record as of the close of business on that date. Each Right entitles the registered holder to purchase from the Company one-thousandth of a share of Series A Participating Preferred Stock, $0.01 par value, of the Company, subject to adjustment, at a price of $80.00 per one-thousandth of a share, subject to adjustment. The description and terms of the Rights are set forth in a Preferred Shares Rights Agreement dated as of May 11, 1999 between the Company and BankBoston, N.A. as Rights Agent. 8 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 1998 Annual Report to Shareholders. Overview Aspect Telecommunications Corporation (Aspect or the Company) is a leading provider of customer relationship management (CRM) solutions that enable companies in a broad array of industries worldwide to ensure consistent interactions with their customers. The Aspect(R) Customer Relationship Portal (a mixed-media customer contact solution that manages customer interactions by telephone, Web, e-mail and fax) delivers a consistent customer experience through one virtual place that connects customers with the right enterprise resources. The Aspect Customer Relationship Portal, along with Aspect Customer Self-Service, Aspect Customer Interaction and Aspect Customer DataMart, are essential for a company's complete CRM solution. These integrate with products from leading front- and back-office vendors and operate on a range of platforms, including the mission-critical Aspect Telephony Server. 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 transaction 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 Company recorded a one-time charge of $10 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 subcomponent, had no alternative future use was reached in consultation with engineering personnel from both Aspect and Voicetek. 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 (convertible subordinated debentures) due 2018. The convertible subordinated debentures are priced at a yield to maturity of 6% per annum and are convertible into Aspect common stock anytime prior to maturity at a conversion rate of 8.713 share per $1,000 principal amount. 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. 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 Aspect 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. The registration statement was declared effective on February 2, 1999. 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. See "Business Environment and Risk Factors" discussed in the Company's Annual Report and Form 10-K 9 ASPECT TELECOMMUNICATIONS CORPORATION for the fiscal year ended December 31, 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. The Company 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 revenues for the second quarter of 1999 were $112.2 million, representing a decrease of 11% from $126.1 million for the same period of 1998. Total net revenues for the first six months of 1999 were $212.3, representing a decrease of 11% when compared with total net revenues of $239.5 million for the same period in 1998. Product revenues for the second quarter of 1999 were $64.6 million, a decrease of 25% from product revenues of $86.7 million for the second quarter of 1998. For the first six months of 1999, product revenues were $115.8 million, a decrease of 29% from $164.0 million in the same period in 1998. The decrease is primarily due to declines in revenue from sales of new call center systems and add-ons in the United States, partially offset by revenue associated with Voicetek which was acquired in May 1998. International product revenues in the second quarter of 1999 increased 15.1% over the second quarter of the prior year. Customer support revenues for the second quarter of 1999 were $47.6 million, an increase of 21% over support revenues of $39.4 million for the same period of 1998. For the first six months of 1999, customer support revenues were $96.5 million, an increase of 28% from $75.6 million in the same period in 1998. Growth in customer support revenues resulted primarily from increases in maintenance revenues as a result of the growth in the Company's installed base, including the installed base added through acquisitions; and expanded revenue from consulting and systems integration projects. Customer support revenues include fees for providing contractually agreed-upon system service and maintenance (which typically commence twelve months from the date a system is installed and, accordingly, are primarily affected by growth in the installed base); installation of products; systems integration revenues; and other support services. Gross Margin on Product Revenues Product gross margin was 65.9% for the second quarter of 1999 compared to 67.8% for the second quarter of 1998. For the first six months of 1999, product gross margin was 65.6%, compared with 68.1% for the same period in 1998. The decline in product gross margin from 1998 to 1999 primarily reflects increased mix of revenue from third party products included as part of system integration projects in the most recent quarter (which typically have lower margins) as well as the increased proportional impact of fixed costs when compared to revenue. On a forward-looking basis, the Company expects that the following factors, among others, could have a material impact on product gross margins: the shift in the Company's business focus to becoming a provider of customer relationship solutions; variations in the mix and volume of products sold; the channels 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 cross-licensing or royalty arrangements with third parties. 10 ASPECT TELECOMMUNICATIONS CORPORATION Gross Margin on Customer Support Revenues Customer support gross margin was 23.4% for the second quarter of 1999 compared to 28.0% for the second quarter of 1998. For the first six months of 1999, customer support gross margin was 25.2%, compared with 30.5% for the same period in 1998. The decrease in customer support margins between the periods reflects customer support revenues not growing proportionately with the costs associated with providing the related services, in particular costs associated with consulting and systems integration projects. 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 fluctuations in the level of consulting and systems integration revenue. Research and Development Expenses Research and development (R&D) expenses were $21.9 million for the second quarter of 1999, an increase of 36% over $16.1 million for the second quarter of 1998. For the first six months of 1999, R&D expenses were $41.4 million, an increase of 43% over $29.0 million for the same period in 1998. R&D expenditures reflect the Company's ongoing efforts to remain competitive through both new product development and expanded features for existing products. The increases across the periods presented reflect increased staffing costs, associated infrastructure costs, and the inclusion of Voicetek's R&D expenses in 1999, including amortization costs associated with developed and core technology intangible assets. As a percentage of net revenues, R&D spending was 19.5% for the second quarter of 1999 compared to 12.8% for the second quarter of 1998. Excluding amortization of intangible assets, R&D expenses were $20.9 million for the second quarter of 1999 and $15.6 million for the same period of 1998. 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 in 1999 will increase in absolute dollars, although such expenses as a percentage of net revenues may fluctuate between periods. Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses were $49.2 million for the second quarter of 1999, an increase of 38% over $35.6 million in the second quarter of 1998. For the first six months of 1999, SG&A expenses were $95.1 million, an increase of 43% over $66.7 million for the same period in 1998. The increase between these two periods were primarily caused by increased staffing costs, infrastructure expansion, and increased amortization expenses related to the acquisition of Voicetek, partially offset by a decline in legal expenses following the intellectual property settlement. SG&A expenses as a percentage of net revenues were 44% for the second quarter of 1999 and 28% for the second quarter of 1998. Excluding amortization of acquired intangible assets, SG&A expenses were $46.3 million and $33.8 million for the second quarters of 1999 and 1998, respectively. The Company anticipates, on a forward-looking basis, that SG&A expenses will continue to increase in absolute dollars for 1999, when compared with 1998, although such expenses as a percentage of net revenues may fluctuate between periods. Net Interest Income (Expense) Net interest expense was $355,000 for the three months ended June 30, 1999 compared to net interest income of $1.1 million for the three months ended June 30, 1998. This decline resulted from interest expense associated with the issuance of approximately $150 million of convertible subordinated debentures in August 1998 (approximately $158 million in principal and accrued interest at June 30, 1999), the utilization of cash associated with the Company's stock repurchase program and generally lower interest rates earned on invested cash. 11 ASPECT TELECOMMUNICATIONS CORPORATION Income Taxes The Company recorded an income tax benefit at a 30% rate for the three and six months ended June 30, 1999. Excluding the non-deductible, non-recurring charge for purchased in-process technology associated with the acquisition of Voicetek, the Company's effective tax rate was 39.4% for the second quarter of 1998 and 38.6% for the first six months of 1998. The rate in 1999 is lower primarily due to the non-deductible goodwill amortization from prior years' acquisitions which reduces the amount of tax benefit that can be recognized in a loss period. The Company has sufficient prior year taxable income to allow recognition of the tax benefit. Liquidity and Capital Resources At June 30, 1999, the Company's principal source of liquidity consisted of cash, cash equivalents, and short-term investments totaling $204 million, which represented 38.6% of total assets. The primary sources of cash for the first six months of 1999 were cash provided by operating activities of $38.5 million and proceeds from the issuance of common stock under various stock plans of $4.4 million. The primary uses of cash for the first six months of 1999 were net purchases of short-term investments of $4.0 million, $21.7 million used for the stock repurchase program, $12.3 million for the purchase of property and equipment, and $1.6 million for payments on a note payable. At June 30, 1999, the Company's outstanding borrowings, including current portions of notes payable, totaled $160 million, and comprised $158 million of convertible subordinated debentures and $1.7 million remaining on a $4.5 million note payable incurred in connection with the acquisition of TCS in 1995. Payment of the remaining balance is being delayed pending resolution of various tax matters relating to periods prior to the Company's acquisition of TCS. The note payable is included in "other liabilities" in the accompanying balance sheet. The Company believes, on a forward-looking basis, that its cash, 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. Year 2000 and Proximate Dates The information provided below constitutes a "Year 2000 Readiness Disclosure" for purposes of the Year 2000 Readiness Disclosure Act. Many computer systems are expected to experience problems handling dates around the year 2000 (Y2K). Described below are the actions we have taken or plan to take to address the potential problems that could result as systems attempt to handle dates around the millennium. State of Readiness: The Company's 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 ongoing monitoring and testing of products and systems. The major business areas impacted are as follows: . Products and Installations: The Company believes that substantially all of the Company's products are Y2K compliant, or that upgrades will be available shortly to make them Y2K compliant. The Company has contacted customers on the Y2K status of company products, posted a full Y2K status of products on the Aspect web site, is visiting customers to install Y2K solutions and has furnished test facilities and equipment to allow customers to verify compliance. . Procurement: The Company has surveyed the Y2K readiness of critical and sole- source suppliers. The Company is monitoring these critical suppliers and will continue to follow up with them on their Y2K readiness. Risk assessments and contingency plans are being prepared for critical suppliers. 12 ASPECT TELECOMMUNICATIONS CORPORATION . Manufacturing: Certain of the Company's manufacturing is outsourced to two primary suppliers and the Company is monitoring their Y2K readiness. The Company's assembly and test equipment is scheduled for ongoing upgrades to Y2K compliant configurations through September 1999. The Company's primary manufacturing application software has been upgraded to a version that has successfully passed Y2K testing. . Information Technology Systems: The Company has conducted a survey of its information technology hardware and software and has a Y2K project team focusing on testing and remediation of necessary components. The Company 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 was substantially completed in January 1999. The Company is currently confirming compliance status and upgrading components as necessary. The Company anticipates that substantially all non-Y2K compliant facilities components will be upgraded or replaced by September 1999. Costs: It is expected that the total costs of Y2K compliance efforts will approximate $10 million, of which an estimated $8 million has been spent to date. All anticipated costs are based on the Company's current evaluation of the Y2K activities and are subject to change as activities progress. The estimated Y2K costs include consultant fees, internal hardware and software upgrade or replacement costs and internal resources dedicated to identifiable Y2K efforts. Some of these costs represent the acceleration of costs that would have been incurred in the normal course of business in future periods. The Company has adequate funds to pay for the expected costs of Y2K activities. 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, the Company's products and services. . The Company could experience a disruption in service to its 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 the Company's products could cause such products to fail; - A breakdown in telephone, e-mail, voicemail, Web or file transfer programs could impact the responsiveness of the Company's help desk; - Y2K problems at a number of the Company's suppliers including banks, telephone companies and transport and mail services could have a pervasive impact on business as a whole; and/or - Product features that rely on date parameters, such as scheduled operating procedures and operating reports, could malfunction. The Company's products may not contain all of the necessary date code or other changes to operate in the year 2000. OEM and other customers may use our products in applications or in ways we are unaware, or customers could delay reacting to our notification of Y2K non compliance so that remediation is not practical in 1999. 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/or . Managerial and technical resources being diverted away from product development and other business activities. 13 ASPECT TELECOMMUNICATIONS CORPORATION Any of the above stated consequences, in addition to others that management cannot yet foresee, could have a significant adverse impact on the Company's business, operating results or financial condition. Contingency Plans: The Company is currently developing contingency plans for critical business processes, suppliers, and systems. The Company presently anticipates that contingency plans will be complete by October 1999. Once contingency plans are implemented, however, management cannot be certain that such plans will prevent significant Y2K problems from occurring. Item 3. Quantitative and Qualitative Disclosures About Financial Market Risk Reference is made to the information appearing under the caption "Quantitative and Qualitative Disclosures About Financial Market Risk" on pages F-11 through F-12 of the Registrant's 1998 Annual Financial Report to Shareholders attached as an appendix to the Registrant's 1999 Proxy Statement, which information is hereby incorporated by reference. 14 ASPECT TELECOMMUNICATIONS CORPORATION Part II: Other Information Item 4. Submission of Matters to a Vote of Security Holders On April 29, 1999, 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 (39,969,047 votes for, 991,113 votes withheld) Craig A. Conway (39,987,164 votes for, 972,996 votes withheld) Debra J. Engel (39,985,132 votes for, 975,028 votes withheld) Norman A. Fogelsong (39,971,806 votes for, 988,354 votes withheld) John W. Peth (39,969,149 votes for, 991,011 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 1999 Equity Incentive Plan and the reservation of 1,500,00 shares of Common Stock for issuance thereunder (24,709,455 votes in favor, 16,159,020 votes opposed, 91,685 votes abstaining). To amend the 1990 Employee Stock Purchase Plan to reserve an additional 500,000 shares of Common Stock for issuance thereunder (38,732,733 votes in favor, 2,183,043 votes opposed, 44,384 votes abstaining). To ratify the appointment of Deloitte & Touche LLP as the independent auditors of the Company for the year ending December 31, 1999 (40,795,585 votes in favor, 132,884 votes opposed, 31,691 votes abstaining). Item 5. Other Information On July 15, 1999, the Company announced that it plans, subject to shareholder approval, to change its corporate name to Aspect Communications Corporation from Aspect Telecommunications Corporation on or about October 1, 1999, to more closely reflect the nature of its business as a leading provider of customer relationship management solutions. The Company will retain both its logo and its Nasdaq market trading symbol ASPT. Item 6. Exhibits and Reports on Form 8-K A. Exhibits Exhibit 3.3 Certificate of Determination of the Rights, Preferences and Privileges of the Series A Participating Preferred Stock, dated May 11, 1999*. Exhibit 4.4 Preferred Shares Rights Agreement, dated May 11, 1999*. Exhibit 10.69 Employment Agreement between the Registrant and Eric J. Keller, dated May 15, 1999. 15 ASPECT TELECOMMUNICATIONS CORPORATION * Incorporated by reference to the Registration Statement on Form 8-A filed with the Securities and Exchange Commission on June 25, 1999. Exhibit 27 Financial Data Schedule B. Reports on Form 8-K No reports on Form 8-K filed during the quarter ended June 30, 1999. 16 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: August 11, 1999 By /s/ R. Gregory Miller ------------------------- R. Gregory Miller Interim Chief Financial and Accounting Officer (Principal Financial and Accounting Officer) 17