-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FiczPrlB1DkpgUbeX/Pa4mia7MdlZNmJFXcumEDrcKGm43Seof6TYqjDNvVo6UEY h7T5ChpANFFPQfmlYpqOXg== 0000891618-97-004610.txt : 19971113 0000891618-97-004610.hdr.sgml : 19971113 ACCESSION NUMBER: 0000891618-97-004610 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASPECT TELECOMMUNICATIONS CORP CENTRAL INDEX KEY: 0000779390 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 953962471 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18391 FILM NUMBER: 97716361 BUSINESS ADDRESS: STREET 1: 1730 FOX DR CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 4084412200 MAIL ADDRESS: STREET 1: 1730 FOX DRIVE CITY: SAN JOSE STATE: CA ZIP: 95131 10-Q 1 FORM 10-Q FOR QUARTERLY PERIOD ENDED 9/30/97 1 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, 1997 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 49,792,491 at October 31, 1997. 2 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, 1997 and December 31, 1996 3 Condensed Consolidated Statements of Income for the Three and Nine Month Periods Ended September 30, 1997 and 1996 4 Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 1997 and 1996 5 Notes to Condensed Consolidated Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II: Other Information Item 1: Legal Proceedings 13 Item 2: Changes in Securities 14 Item 6: Exhibits and Reports on Form 8-K 14 Signature 15
2 3 ASPECT TELECOMMUNICATIONS CORPORATION PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
ASSETS September 30, December 31, 1997 1996 ------------- ------------ (unaudited) ** Current assets: Cash and cash equivalents $ 97,759 $ 47,996 Short-term investments 50,197 67,801 Accounts receivable, net 72,089 53,211 Inventories 10,367 15,485 Other current assets 11,657 14,731 --------- --------- Total current assets 242,069 199,224 Property and equipment, net 58,197 51,348 Intangible assets, net 26,181 28,888 Other assets 3,389 3,633 --------- --------- Total assets $ 329,836 $ 283,093 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,421 $ 10,027 Accrued compensation and related benefits 13,187 8,896 Other accrued liabilities 29,550 20,741 Customer deposits and deferred revenue 14,150 19,481 --------- --------- Total current liabilities 67,308 59,145 Note payable 4,500 4,500 Shareholders' equity: Preferred stock, $.01 par value: 2,000,000 shares authorized, none outstanding in 1997 and 1996 - - Common stock, $.01 par value: 100,000,000 shares authorized, shares outstanding: 49,670,912 in 1997 and 48,806,580 in 1996 138,701 128,186 Net unrealized gain on available-for-sale securities 1,508 2,534 Accumulated translation adjustments (1,765) (45) Retained earnings 119,584 88,773 --------- --------- Total shareholders' equity 258,028 219,448 --------- --------- Total liabilities and shareholders' equity $ 329,836 $ 283,093 ========= ========= ** Derived from audited financial statements.
See accompanying notes. 3 4 ASPECT TELECOMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited - in thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Net revenues: Product $ 68,558 $ 60,071 $202,042 $165,572 Customer support 30,634 20,153 82,309 54,582 -------- -------- -------- -------- Total net revenues 99,192 80,224 284,351 220,154 Cost of revenues: Cost of product revenues 21,531 20,213 65,214 54,847 Cost of customer support revenues 21,451 14,873 58,349 39,612 -------- -------- -------- -------- Total cost of revenues 42,982 35,086 123,563 94,459 -------- -------- -------- -------- Gross margin 56,210 45,138 160,788 125,695 Operating expenses: Research and development 11,452 8,930 33,964 24,595 Selling, general and administrative 27,003 21,260 75,207 58,882 Purchased in-process technology 4,910 - 4,910 - -------- -------- -------- -------- Total operating expenses 43,365 30,190 114,081 83,477 -------- -------- -------- -------- Income from operations 12,845 14,948 46,707 42,218 Interest and other income, net 1,625 482 6,466 1,033 -------- -------- -------- -------- Income before income taxes 14,470 15,430 53,173 43,251 Provision for income taxes 7,461 5,740 22,362 16,062 -------- -------- -------- -------- Net income $ 7,009 $ 9,690 $ 30,811 $ 27,189 ======== ======== ======== ======== Primary earnings per share: Net income per share (a) $ 0.13 $ 0.21 $ 0.59 $ 0.59 ======== ======== ======== ======== Shares used in per share computations (a) 52,233 46,588 52,221 46,432 ======== ======== ======== ======== Fully diluted earnings per share: Net income per share (a) $ 0.13 $ 0.19 $ 0.59 $ 0.54 ======== ======== ======== ======== Shares used in per share computations (a) 52,452 52,846 52,251 52,692 ======== ======== ======== ======== (a) Share and per share data for all periods presented reflect a two-for-one stock split effective January 28, 1997.
See accompanying notes. 4 5 ASPECT TELECOMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited - in thousands)
Nine Months Ended September 30, -------------------- 1997 1996 -------- -------- Cash flows from operating activities: Net income $ 30,811 $ 27,189 Reconciliation of net income to cash provided by operating activities: Depreciation and amortization 14,245 10,644 Purchased in-process technology 4,910 - Gain on the sale of equity securities (2,070) - Changes in assets and liabilities, net of effects from company acquired in 1997: Accounts Receivable (19,871) (6,692) Inventories 4,856 (4,502) Other current assets and other assets 3,766 (1,882) Accounts payable 376 (1,489) Accrued compensation and related benefits 4,330 1,412 Other accrued liabilities 9,924 9,182 Customer deposits and deferred revenue (5,121) 3,553 -------- -------- Cash provided by operating activities 46,156 37,415 Cash flows from financing activities: Common stock transactions 5,906 5,376 -------- -------- Cash provided by financing activities 5,906 5,376 Cash flows from investing activities: Short-term investment purchases (35,836) (75,457) Short-term investment sales and maturities 53,656 70,313 Property and equipment purchases (19,423) (27,370) Purchase of company, net of cash acquired (278) - -------- -------- Cash used in investing activities (1,881) (32,514) Effect of exchange rate changes on cash and cash equivalents (418) (321) -------- -------- Increase in cash and cash equivalents 49,763 9,956 Cash and cash equivalents: Beginning of period 47,996 22,102 -------- -------- End of period $ 97,759 $ 32,058 ======== ======== Supplemental disclosure of noncash investing activities: Common stock issued in connection with the acquisition of Commerce Soft Inc. $ 4,610 -
See accompanying notes. 5 6 ASPECT TELECOMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Basis of Presentation The consolidated financial statements include the accounts of Aspect Telecommunications Corporation 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, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information, refer to the consolidated financial statements and notes thereto included in the Company's 1996 Annual Report to Shareholders. Certain prior year amounts have been reclassified to conform to the current year presentation. Business Combination On September 2, 1997, the Company acquired Commerce Soft Inc. (Commerce Soft), a developer of customer interaction technology. In connection with the acquisition, the Company issued approximately 177,000 shares of common stock for all the outstanding stock of Commerce Soft and assumed outstanding Commerce Soft stock options, which were converted to options to purchase approximately 21,000 shares of the Company's common stock. The transaction was accounted for as a purchase which resulted in a one-time charge of $4.9 million in the third quarter ending September 30, 1997 related to in-process technology. The remaining portion of the purchase price that exceeded the net assets of Commerce Soft was recorded as an intangible asset and is being amortized over a period of two years. The results of operations of Commerce Soft are included in the accompanying financial statements since the date of acquisition. The historical operations of Commerce Soft are not material to the Company's consolidated operations and financial position, and therefore pro forma summaries are not presented. Per Share Information Per share information for the periods presented is computed using the weighted average number of common and common equivalent shares outstanding. For primary earnings per share calculations, common equivalent shares consist of the incremental shares issuable upon the assumed exercise of dilutive stock options using the treasury stock method. The fully diluted earnings per share calculations for both the three and nine month periods ended September 30, 1997 are computed in a manner similar to the primary earnings per share calculations. For the fully diluted earnings per share calculations for both the three and nine month periods ended September 30, 1996, common equivalent shares also include the dilutive effect of incremental shares issuable upon the conversion of the 5% convertible subordinated debentures, and net income is adjusted for the interest expense, net of income taxes, related to the debentures. On October 15, 1996, the Company converted all $55 million of its convertible subordinated debentures into approximately 5.7 million shares of the Company's common stock. 6 7 ASPECT TELECOMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Inventories Inventories, valued at the lower of cost (first-in, first-out) or market, consist of:
(in thousands) September 30, December 31, 1997 1996 ------------- ------------ Raw materials $ 5,237 $ 7,058 Work-in-progress 2,344 3,081 Finished goods 2,786 5,346 ------- ------- Total $10,367 $15,485 ======= =======
New Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The Company is required to adopt SFAS 128 in the fourth quarter of fiscal 1997 and will restate at that time earnings per share (EPS) data for prior periods to conform with SFAS 128. Earlier application is not permitted. SFAS 128 replaces current EPS reporting requirements and requires dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. If SFAS 128 had been in effect during the three month periods ended September 30, 1997 and 1996, basic EPS would have been $0.14 and $0.23, respectively. If the pronouncement had been in effect during the nine month periods ended September 30, 1997 and 1996, basic EPS would have been $0.63 and $0.64, respectively. Diluted EPS under SFAS 128 would have been approximately the same as the fully diluted EPS currently reported for all periods presented. In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from nonowner sources, and 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. Adoption of these statements will not impact the Company's consolidated financial position, results of operations or cash flows. Both statements are effective for fiscal years beginning after December 15, 1997, with earlier application permitted. Contingencies On March 5, 1997, Lucent Technologies Inc. ("Lucent") filed a lawsuit in the United States District Court for the Eastern District of Pennsylvania alleging that the Company infringes four of Lucent's U.S. patents (the "Lucent Patents"). In its complaint, Lucent is seeking to enjoin the Company from allegedly continuing to infringe the Lucent Patents and is seeking an unspecified amount of compensatory damages, treble damages for alleged willful infringement, and interest, expenses and attorneys' fees. On May 2, 1997, the Company filed an answer in response to the Lucent complaint, asserting that the Lucent Patents are invalid and denying the alleged patent infringement. The Company believes that it has meritorious defenses to the asserted claims and intends to defend the litigation vigorously. Although the Company 7 8 ASPECT TELECOMMUNICATONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS does not believe that any of its products infringe any valid claims of the Lucent Patents, the outcome of litigation is inherently unpredictable, and there can be no assurance that the results of these proceedings will be favorable to the Company or that they will not have a material adverse effect on the Company's business, operating results or financial condition. Regardless of the ultimate outcome, the Lucent litigation could result in substantial expense to the Company and significant diversion of effort by the Company's technical and managerial personnel. If the court determines that the Company infringes the Lucent Patents and that the Lucent Patents are valid and enforceable, it could issue an injunction prohibiting the Company from making, using or selling certain products and it could assess significant damages against the Company. Accordingly, an adverse determination in the proceeding could subject the Company to significant liabilities and require the Company to seek a license from Lucent. Although intellectual property disputes are often settled through licensing or similar arrangements, costs associated with such arrangements may be substantial, and there can be no assurance that a license from Lucent, if required, would be available to the Company on acceptable terms or at all. Jury selection for the trial of this lawsuit is scheduled to begin on April 13, 1998. 8 9 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 1996 Annual Report to Shareholders. Aspect Telecommunications Corporation (the Company) is a global provider of comprehensive business solutions for companies with mission-critical call centers that exist to generate revenue, service customers, and handle inquiries. The Company's products include automatic call distributors, interactive response systems, call center management information and reporting tools, call center planning and forecasting packages, and computer-telephony integration tools and software. The Company also provides services vital to call center environments, including business applications consulting, systems integration, and training. In 1996, the Company completed two acquisitions: Envoy Holdings Limited (Envoy) on September 30, 1996, and Prospect Software, Inc. (Prospect) on October 21, 1996. Envoy provides call center and telebusiness solutions designed to improve customer service through consulting services, software, and systems integration. Prospect is a provider of application development tools for building connectivity to a variety of call center systems and network-based computer applications. Both acquisitions were accounted for as pooling of interests and all financial results for 1996 reflect the acquisitions. As the historical operations of Envoy and Prospect were not significant to any year presented, the Company's financial statements for years prior to 1996 were not restated and the financial effects of results of operations for both acquired companies for years prior to 1996 were accounted for as increases to retained earnings in 1996. On September 2, 1997, the Company acquired Commerce Soft Inc. (Commerce Soft), a developer of customer interaction technology. In connection with the acquisition, the Company issued approximately 177,000 shares of common stock for all the outstanding stock of Commerce Soft and assumed outstanding Commerce Soft stock options, which were converted to options to purchase approximately 21,000 shares of the Company's common stock. The transaction was accounted for as a purchase which resulted in a one-time charge of $4.9 million in the third quarter ending September 30, 1997 related to in-process technology. The remaining portion of the purchase price that exceeded the net assets of Commerce Soft was recorded as an intangible asset and is being amortized over a period of two years. The results of operations of Commerce Soft are included in the accompanying financial statements since the date of acquisition. On December 20, 1996, the Company announced that its Board of Directors approved a two-for-one stock split effective January 28, 1997, for shareholders of record as of January 6, 1997. All share and per share amounts in this Form 10-Q reflect the stock split. The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Specifically, the Company wishes to alert readers that, except for the historical information contained herein, the following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation, statements regarding the Company's expectations, beliefs, intentions or future strategies, which are dependent on certain risks and uncertainties that may cause actual results to differ materially from those expressed in these or any other forward-looking statements made by or on behalf of the Company. These risks and uncertainties include variability and uncertainty of revenues and operating results; volatility of stock price; product concentration, technological change, and new products; 9 10 ASPECT TELECOMMUNICATIONS CORPORATION 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; and expansion of distribution channels. For a more detailed description of these risks and uncertainties, see the section titled "Management's Discussion and Analysis - Risk Factors" in the Company's 1996 Annual Report to Shareholders. RESULTS OF OPERATIONS Net Revenues Total net revenues for the third quarter of 1997 were $99 million, representing an increase of 24% compared with total net revenues of $80 million for the same period of 1996. Total net revenues for the first nine months of 1997 were $284 million, up 29% compared with the same period in 1996. Product revenues for the third quarter of 1997 were $69 million, up 14% compared with product revenues of $60 million for the same period of 1996. For the first nine months of 1997, product revenues grew 22% to $202 million, up from $166 million in the same period in 1996. The increases in product revenues for both periods were primarily attributable to increased demand for new systems and add-ons. Growth in product revenues for the third quarter and first nine months of 1997, compared with the same periods of 1996, was significantly higher in international markets than in North America. Average selling price on new systems remained relatively unchanged across the periods. Customer support revenues for the third quarter of 1997 were $31 million, a $10 million or 52% increase from the third quarter of 1996. For the first nine months of 1997, customer support revenues were $82 million, up 51% compared with the same period of 1996. The increases in customer support revenues for both periods resulted primarily from increases in maintenance revenue as a result of the growth in the Company's installed base. Customer support revenues include charges for providing contractually agreed-upon ongoing system service and maintenance, which typically commence twelve months from the date a system is first installed; charges to install products at customer sites; consulting and systems integration revenue; and other support services provided to the Company's customers. Contract support revenues are largely dependent on renewable customer support contracts and will be primarily affected by the general growth in the installed base. Installation revenue is generally associated with certain product revenue, although no installation revenue is ordinarily received for product sales to the Company's distributors. In 1996, the Company established the Aspect Consulting and Systems Integration (C&SI) business unit. C&SI revenues are dependent on the Company's ability to obtain contracts for suitable projects and successfully complete these projects. Since many of the costs associated with providing customer support do not vary proportionately with customer support revenues, quarterly fluctuations in customer support revenues can have a significant impact on the related gross margin. Gross Margin on Product Revenues Product gross margin increased to 69% for the third quarter of 1997 from 66% for the same period of 1996. For the first nine months of 1997, product gross margins were 68%, up from 67% for the same period of 1996. The strengthening in product gross margin in both periods reflects increases in add-on margins, among other factors. 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; and the results of newly acquired subsidiaries and newly established business units. 10 11 ASPECT TELECOMMUNICATIONS CORPORATION Gross Margin on Customer Support Revenues Customer support gross margin increased to 30% for the third quarter of 1997 from 26% for the same period of 1996. For the first nine months of 1997, customer support gross margin increased to 29% from 27% for the same period of 1996. The increases in customer support gross margin for both periods were primarily attributable to growth in maintenance revenues at a rate significantly greater than related costs. On a forward-looking basis, the Company anticipates that customer support margins will vary from quarter to quarter due to fluctuations in customer support revenues, since many of the costs associated with providing customer support do not vary proportionately with customer support revenues, the expansion of its customer support infrastructure, and the Company's ability to build a successful C&SI business unit. Research and Development Expenses Research and development ("R&D") expenses were $11 million for the third quarter of 1997, representing an increase of 28% when compared with R&D expenses of $9 million for the same period of 1996. For the first nine months of 1997, R&D expenses were $34 million, up 38% from the same period of 1996. R&D increases for both periods were primarily attributable to increased personnel and labor costs, as well as, other infrastructure costs. As a percentage of net revenues, R&D spending was 12% for both the third quarter and first nine months of 1997 compared to 11% for the same periods of 1996. 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 for 1997 as a whole, when compared to 1996, 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 $27 million for the third quarter of 1997, representing an increase of 27% when compared with SG&A expenses of $21 million for the same period of 1996. For the first nine months of 1997, SG&A expenses were $75 million, up 28% from the same period of 1996. The increases in SG&A for both periods were primarily related to increased personnel, infrastructure, and legal costs. As a percentage of net revenues, SG&A was 27% for the third quarter of 1997 and 26% for the first nine months of 1997 compared with 27% for both periods in 1996. The Company anticipates, on a forward-looking basis, that SG&A expenses will increase in terms of absolute dollars for 1997 as a whole, when compared to 1996, although such expenses as a percentage of net revenues may fluctuate on a quarterly basis. In addition, on a forward-looking basis, legal expenses are expected to increase in future periods due to the Lucent Technologies Inc. litigation (see Part II, Item 1. Legal Proceedings). Net Interest and Other Income Net interest and other income increased to $1.6 million for the third quarter of 1997 from $0.5 million for the same period of 1996. Net interest and other income increased to $6.5 million for the first nine months of 1997 from $1.0 million for the same period of 1996. Included in other income for the nine months of 1997 is approximately $2 million from a gain on the sale of appreciated equity securities. The increases in interest and other income during 1997 were due primarily to such gain on the sale of equity securities, higher interest earning balances, and the conversion of the Company's $55 million of convertible subordinated debentures in October 1996. Interest expense on the convertible subordinated debentures for the three month and nine month periods ended September 30, 1996 was $0.7 million and $2.2 million, respectively. 11 12 ASPECT TELECOMMUNICATIONS CORPORATION Income Taxes The Company's effective income tax rate was 51.6% and 42.1%, respectively, for the three month and nine month periods ending September 30, 1997. These rates reflect the tax effect of the non-deductible, non-recurring charge for purchased in-process technology associated with the acquisition of Commerce Soft. Exclusive of this non-recurring charge, the Company's effective tax rate for both the three month and the nine month periods ending September 30, 1997 was 38.5%, up from 37.2% and 37.1%, respectively, for the comparable periods in 1996. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1997, the Company's principal source of liquidity consisted of cash, cash equivalents, and short-term investments totaling $148 million, which represented 45% of total assets. The primary sources of cash for the first nine months of 1997 consisted of cash provided by operating activities of $46 million, net of a $20 million increase in accounts receivable, net sales and maturities of short-term investments of $18 million, and proceeds from the issuance of common stock under various stock plans of $6 million. The primary uses of cash for the nine month period of 1997 was for property and equipment purchases of approximately $19 million. As of September 30, 1997, the Company's outstanding borrowings consisted of a $4.5 million note payable incurred in connection with the acquisition of TCS in October 1995. The Company believes, on a forward-looking basis, that its cash, cash equivalents, and 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. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). The Company is required to adopt SFAS 128 in the fourth quarter of fiscal 1997 and will restate at that time earnings per share (EPS) data for prior periods to conform with SFAS 128. Earlier application is not permitted. The requirements of SFAS 128 and the pro forma effect of adopting SFAS 128 are disclosed in the Notes to Condensed Consolidated Financial Statements. In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from nonowner sources, and 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. Adoption of these statements will not impact the Company's consolidated financial position, results of operations or cash flows. Both statements are effective for fiscal years beginning after December 15, 1997, with earlier application permitted. 12 13 ASPECT TELECOMMUNICATIONS CORPORATION PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The segment of the telecommunications market that includes the Company's products has been characterized by extensive litigation regarding patents and other intellectual property rights. As is common in the telecommunications industry, the Company has been in the past and may in the future be notified of claims that its products or services are subject to patents or other proprietary rights of third parties. Although the Company attempts to ensure that its products and processes do not infringe such third-party patents or proprietary rights, there can be no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted or prosecuted against the Company. Periodically, the Company negotiates with third parties to establish patent license or cross-license agreements. There can be no assurance that such negotiations will result in the Company obtaining a license on satisfactory terms or at all. Moreover, license agreements with third parties may not include all intellectual property rights that may be issued to or owned by the licensors, and thus future disputes with these companies are possible. In the event an intellectual property dispute is not settled through a license, litigation could ensue. Any litigation or interference proceedings that may be declared by the United States Patent and Trademark Office to determine the priority of inventions, could result in substantial expense to the Company and significant diversion of effort by the Company's technical and management personnel. An adverse determination in such litigation or proceeding, including without limitation the Lucent litigation discussed below, could prevent the Company from making, using or selling certain of its products, and subject the Company to damage assessments, all of which could have a material adverse effect on the Company's business, operating results or financial condition. On March 5, 1997, Lucent Technologies Inc. ("Lucent") filed a lawsuit in the United States District Court for the Eastern District of Pennsylvania alleging that the Company infringes four of Lucent's U.S. patents (the "Lucent Patents"). In its complaint, Lucent is seeking to enjoin the Company from allegedly continuing to infringe the Lucent Patents and is seeking an unspecified amount of compensatory damages, treble damages for alleged willful infringement, and interest, expenses and attorneys' fees. On May 2, 1997, the Company filed an answer in response to the Lucent complaint, asserting that the Lucent Patents are invalid and denying the alleged patent infringement. The Company believes that it has meritorious defenses to the asserted claims and intends to defend the litigation vigorously. Although the Company does not believe that any of its products infringe any valid claims of the Lucent Patents, the outcome of litigation is inherently unpredictable, and there can be no assurance that the results of these proceedings will be favorable to the Company or that they will not have a material adverse effect on the Company's business, operating results or financial condition. Regardless of the ultimate outcome, the Lucent litigation could result in substantial expense to the Company and significant diversion of effort by the Company's technical and management personnel. If the court determines that the Company infringes the Lucent Patents and that the Lucent Patents are valid and enforceable, it could issue an injunction prohibiting the Company from making, using or selling certain products and it could assess significant damages against the Company. Accordingly, an adverse determination in the proceeding could subject the Company to significant liabilities and require the Company to seek a license from Lucent. Although intellectual property disputes are often settled through licensing or similar arrangements, costs associated with such arrangements may be substantial, and there can be no assurance that a license from Lucent, if required, would be available to the Company on acceptable terms or at all. Jury selection for the trial of this lawsuit is scheduled to begin on April 13, 1998. In the future, the Company could become involved in other types of litigation, such as shareholder lawsuits for alleged violations of securities laws, claims asserted by current or former employees, and product liability claims. An adverse outcome in such litigation could have a material adverse effect on the 13 14 ASPECT TELECOMMUNICATIONS CORPORATION Company's business, operating results or financial condition. Regardless of merit, source, or outcome of the litigation, it could result in substantial cost to and diversion of effort by the Company. ITEM 2. CHANGES IN SECURITIES On September 2, 1997, the Company acquired Commerce Soft Inc. (Commerce Soft). In connection with the acquisition, Aspect issued 177,309 shares of the Company's common stock to the shareholders of Commerce Soft following the merger of a wholly-owned subsidiary of the Company with and into Commerce Soft. The sales of the above securities were deemed to be exempt from registration under the Securities Act of 1933, as amended (the Act), in reliance on Section 4(2) of the Act as transactions by an issuer not involving a public offering. The recipients of securities in each such transaction represented their intention 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 attached to the share certificates issued in such transactions. All recipients had adequate access to information about the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS Exhibit 11.1 Statement re: Computation of Earnings Per Share Exhibit 27 Financial Data Schedule B. REPORTS ON FORM 8-K Reports on Form 8-K filed during the quarter ended September 30, 1997: Form 8-K dated July 18, 1997: Item 5. Other Events - Announcement of earnings and results of operations for the quarter ended June 30, 1997. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits - Aspect Telecommunications Corporation Press Release dated July 16, 1997. 14 15 ASPECT TELECOMMUNICATIONS CORPORATION SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ASPECT TELECOMMUNICATIONS CORPORATION (Registrant) Date: November 13, 1997 By /s/ ERIC J. KELLER --------------------------------------- Eric J. Keller Vice President, Finance and Chief Financial Officer (Duly Authorized and Principal Financial and Accounting Officer) 15 16 EXHIBIT INDEX Exhibit Description - ------- ------------ 11.1 Statement re: Computation of Earnings Per Share 27 Financial Data Schedule EX-11.1 2 COMPUTATION OF EARNINGS PER SHARE 1 ASPECT TELECOMMUNICATIONS CORPORATION EXHIBIT 11.1: Statement re: Computation of Earnings Per Share (in thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1997 1996 1997 1996 ------- -------- ------- --------- Primary: Weighted average common shares outstanding during the period 49,434 42,883 49,131 42,674 Common share equivalents: Dilutive effect of stock options 2,799 3,705 3,090 3,758 ------- ------- ------- ------- Total 52,233 46,588 52,221 46,432 ======= ======= ======= ======= Net income $ 7,009 $ 9,690 $30,811 $27,189 ======= ======= ======= ======= Primary earnings per share $ 0.13 $ 0.21 $ 0.59 $ 0.59 ======= ======= ======= =======
2 ASPECT TELECOMMUNICATIONS CORPORATION EXHIBIT 11.1 (CONTINUED): Statement re: Computation of Earnings Per Share (in thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1997 1996 1997 1996 ------- -------- -------- ------- Fully Diluted: Weighted average common shares outstanding during the period 49,434 42,883 49,131 42,674 Common share equivalents: Dilutive effect of stock options 3,018 4,304 3,120 4,359 Weighted average shares issuable upon assumed conversion of debt - 5,659 - 5,659 ------- ------- ------- ------- Total 52,452 52,846 52,251 52,692 ======= ======= ======= ======= Net income $ 7,009 $ 9,690 $30,811 $27,189 Interest expense during the period on convertible subordinated debentures, net of tax - 461 - 1,383 ------- ------- ------- ------- Net income adjusted for fully diluted calculations $ 7,009 $10,151 $30,811 $28,572 ======= ======= ======= ======= Fully diluted earnings per share $ 0.13 $ 0.19 $ 0.59 $ 0.54 ======= ======= ======= =======
EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDING SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 97,759 50,197 73,749 1,660 10,367 242,069 114,893 56,696 329,836 67,308 4,500 0 0 138,701 119,327 329,836 202,042 284,351 65,215 123,563 114,081 0 199 53,173 22,362 0 0 0 0 30,811 0.59 0.59
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