-----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, N60e/9yrYbHd7TOAiF/sdvivmJnJ60qcHSNJUf+bo/SeRZfKjnjNNlP6V+qv0a0u EXlNstofL6DV9U0Z3Dgsjw== 0000891618-98-001352.txt : 19980330 0000891618-98-001352.hdr.sgml : 19980330 ACCESSION NUMBER: 0000891618-98-001352 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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-K405 SEC ACT: SEC FILE NUMBER: 000-18391 FILM NUMBER: 98576408 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-K405 1 FORM 10-K405 FOR FISCAL YEAR ENDED 12/31/97 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended December 31, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] 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 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of class) 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 17, 1998, was $978,156,309 based upon the last sale price reported for such date on the Nasdaq Stock Market. For purposes of this disclosure, shares of Common Stock held by persons known to the Registrant (based on information provided by such persons and/or the most recent schedule 13G's filed by such persons) to beneficially own more than 5% of the Registrant's Common Stock and shares held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination is not necessarily a conclusive determination for other purposes. The number of shares of the Registrant's Common Stock outstanding as of March 17, 1998, was 50,227,126. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1998 Proxy Statement for the Annual Meeting of Shareholders of Aspect Telecommunications Corporation (Proxy Statement) scheduled to be held on May 14, 1998, are incorporated by reference in Parts I, II, III, and IV of the Report on Form 10-K. 2 ASPECT TELECOMMUNICATIONS CORPORATION PART I ITEM 1. BUSINESS Aspect Telecommunications Corporation(1) (Aspect or the Company) is a worldwide provider of comprehensive business solutions for companies that generate revenue, serve customers, and handle inquiries. The Company's solutions include automatic call distributor (ACD) systems and software; computer-telephony integration (CTI) application software and tools; interactive voice response (IVR) systems; Web response systems; management information and reporting tools; and planning and forecasting packages. The Company also delivers consulting, training, and systems integration services that help companies plan, integrate, staff, and manage call centers effectively. In September 1997, the Company acquired Commerce Soft Inc. (Commerce Soft), a developer of customer interaction technology. The transaction was accounted for as a purchase and the operating results of Commerce Soft have been included in the consolidated statements of income since the date of acquisition. In 1996, the Company completed two acquisitions: Envoy Holdings Limited (Envoy) and Prospect Software, Inc. (Prospect). 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 have not been restated and the financial effects of the results of operations for years prior to 1996 for both acquired companies have been accounted for as increases to retained earnings in 1996. In October 1995, the Company acquired TCS Management Group, Inc. (TCS), a company engaged in the business of designing, marketing, and supporting software that automates the tasks associated with managing the workforce in a call center. The acquisition was accounted for as a purchase and the operating results of TCS have been included in the consolidated statements of income since the date of acquisition. 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 32E 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. 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. Such risks and uncertainties are described below and in the section titled "Business Environment and Risk Factors" in the 1997 Annual Financial Report to Shareholders, an appendix to the 1998 Proxy Statement, which is incorporated by reference in this Annual Report on Form 10-K. Aspect has periodically acquired companies and intellectual property and made minority equity investments in companies with products, services, or technologies that potentially complement the Company's business. In the future, the Company may make further strategic acquisitions and investments or enter into joint ventures or strategic alliances with other companies. Such transactions entail numerous risks, including the following: inability to successfully integrate such companies' personnel and businesses; inability to realize anticipated synergies, economies of scale, or other value associated with such transactions; inability to commercialize acquired technologies successfully or on a timely basis; diversion of management's attention and disruption of the Company's ongoing business; inability to retain key technical and managerial personnel; inability to establish and maintain uniform standards, controls, procedures, and policies; and impairment of relationships with employees, customers, or others. In addition, future acquisitions or investments by the Company may result in the issuance of additional equity or debt securities, significant one-time write-offs, and the - -------- (1) Aspect, the Aspect logo, ActionAgent, Affinity Alliance, Agility, Application Bridge, Aspect Architect, Aspect TeleCaster, Aspect TeleSet, Aspect WinSet, CustomView, Event Bridge, and Network InterQueue are trademarks or registered trademarks of Aspect Telecommunications Corporation. All other product or service names mentioned in this document may be the trademarks of the companies with which they are associated. 2 3 creation of goodwill or other intangible assets that result in future charges to earnings. Failure to avoid these or other risks and costs associated with such business combinations, investments, joint ventures, or strategic alliances could have a material adverse effect on the Company's business, operating results, and financial condition. The Company has experienced a period of rapid growth that has placed a significant strain on the Company's managerial and operational resources. To manage its growth, the Company must continue to implement and improve its operational and financial systems and to expand, train, and manage its employee base. For example, the Company intends to implement upgrades to its internal integrated business application software systems. There can be no assurance that complications will not arise from these software system transitions, resulting in substantial unanticipated expenses. In addition, the Company must carefully manage accounts receivables to limit credit risk and maintain inventories at levels consistent with product demand and the requirements of new product introductions. Inaccuracies in demand forecasts or disruption in the supply chain could quickly result in insufficient or excessive inventories and obsolescence expense. INDUSTRY BACKGROUND Many companies recognize that excellent customer service can be employed to differentiate their firms from competitors and gain market share. As a result, customer service has received greater prominence and resource allocation in a wide variety of manufacturing and service industries. In addition to seeking improved overall responsiveness to customer needs, certain companies have recognized the benefits of market segmentation by introducing premium service marketing programs, which provide a prioritized level of service for their most valued customers. In many cases, companies attempt to differentiate themselves from their competitors by providing superior customer service by telephone. The opportunity for conducting business over the telephone has risen in recent years, reflecting telecommunications deregulation, which has reduced the cost of using the telephone as a business tool. Many companies have established telephone sales and support centers staffed by employees who handle the thousands of calls that may be received each day. This demand for handling customer transactions by telephone has created a market for intelligent call control and management systems that process large volumes of transactions. Aspect has coined the term "call transaction processing" to describe the market for these application-specific telecommunications systems and to distinguish it from the more established markets of general connectivity (such as private branch exchange, or PBX, and key systems) and office automation telecommunications products (such as facsimile machines and voice messaging systems). The Company believes that the call transaction processing market is characterized by mission-critical applications and value-oriented relationships between vendors and customers. Increased emphasis on customer service by a wide variety of manufacturing and service companies has led to a growing number of call transaction processing applications in such diverse industries as computer software and systems, financial services, insurance, travel and entertainment, retail catalog sales, office products, consumer products, public utilities, publishing, and health care. PRODUCTS AND SERVICES The Company's products and services are designed to create a comprehensive array of integrated call center solutions. The products include automatic call distributors, workforce productivity products, networking software for virtual call centers, interactive response systems, management information and reporting tools for call centers, CTI middleware, graphical user interface integration- enabling software, and call center planning and forecasting software packages. The services include installation and cutover support for system implementation, ongoing system support services, business applications consulting, systems integration, and customer education services. Collectively, these products and services provide integrated benefits in intelligent call management, workforce productivity, call transaction automation, and business reengineering for customer-centric corporate initiatives. In 1997, approximately 70 percent of the Company's net revenues were product revenues and the balance were customer support revenues. 3 4 AUTOMATIC CALL DISTRIBUTOR PRODUCTS Historically, the Company's core product offering has been a highly scalable, mission-critical family of digital automatic call distributor systems known as the Aspect ACD System. Introduced in 1987, this product line has accounted for the majority of the Company's sales volume to date, and has helped establish the Company's reputation in the call center industry. Through the end of 1997, Aspect has delivered approximately 1,500 of these systems to customers in a diverse array of industries including transportation, financial services, technology, insurance, retailing, government and telecommunications. Because these systems are deployed in mission-critical applications such as customer service, direct sales, and help desks, the underlying software and platform have been designed for high availability as well as flexibility, and span multiple uses. From time-to-time since the product's introduction, Aspect has upgraded the technological base of the Aspect ACD System from Release 1 through Release 6, incorporating both new software capabilities and more powerful processors and larger storage components. In November 1997, the Company announced Aspect ACD Software Release 7, which utilizes a more advanced processor and operating system as underlying technologies. The external functionality of this new release is similar to the prior product version, designed to provide a straightforward upgrade path for existing customers while offering larger configurations and more intuitive design and implementation tools for both existing and potential new customers. The Aspect ACD Software Release 7 marks the first of this series of Company applications implementing a horizontally layered architecture designed to allow the call distribution functionality to be packaged and sold through systems integrators or directly to major end-user customers. In early 1998, the Company announced general availability of the ACD Software Release 7 in its major markets. WORKFORCE PRODUCTIVITY PRODUCTS Coupled with its ACD products, Aspect has offered advanced desktop technology for call center agents and supervisory staff, designed for high-volume call handling. The Aspect TeleSet is a freestanding special-purpose telephone set designed specifically for the requirements of modern call centers. The Aspect TeleCaster is a wall-mounted visual alerting panel providing at-a-glance system- wide or group status information. Aspect WinSet for Windows software brings the capabilities of the Aspect TeleSet into a desktop personal computer, replacing the Aspect TeleSet with a simple adapter and a personal computer graphical interface, replicating and extending the call handling functions of the telephone on the computer screen. Extending the geographical boundaries of the call center, the Aspect Remote StaffCenter allows clusters of Aspect TeleSets and Aspect WinSets to be located at a distance from the main center. Customers use this capability to extend the call center working environment to branch offices and to establish operating centers in sites more convenient to employees' homes. The Anywhere Agent capability extends the range of Aspect TeleSet functionality to other remote locations, including home offices, via the WinSet application. With the acquisition of Commerce Soft in 1997, the Company gained technology that expands the call handling scope of its call center products to include interactive processing of transactions initiated over the Internet World Wide Web. Early implementations of these capabilities have been delivered as systems integration custom projects and, in 1998, the Company announced a standard product offering named WebAgent, based on the Commerce Soft technology. NETWORKING SOFTWARE FOR VIRTUAL CALL CENTERS With many Aspect ACD Systems implemented in accounts comprising multiple geographic sites, the Company has developed capabilities to meet the needs of these large, distributed operations. In response to customer requirements, the Company introduced Network InterQueue software in 1995. This software, resident in each system in a network of two to more than 50 sites, is designed to provide a real-time coordinated load-balancing and resource allocation function that allows large call centers to be implemented as a single virtual system distributed over a large geographic area. In response to anticipated reductions in international telecommunications costs, the Company believes that more global call center customers will seek to implement "follow-the-sun" multi-site, networked call centers located several time zones apart. Using international variants of Network InterQueue software, these implementations will be designed to 4 5 allow calls to enter a global virtual call center network from any location and be served at the site best able to handle each call. INTERACTIVE RESPONSE SYSTEMS PRODUCTS In 1994, the Company introduced the Aspect Agility interactive response system, providing an automated capability for delivering customer-requested interactive information in a call center environment. Since its introduction, Agility systems have been implemented in a wide array of applications, leveraging corporate data to fulfill user requests for flight arrivals, bank balances, stock quotes, warranty authorizations, and other self-service transactions that do not require immediate access to a human service representative. Agility ActionAgent software is an integral software agent that is designed to perform even complex tasks with precision and reliability. MANAGEMENT INFORMATION AND REPORTING TOOLS Aspect offers call center managers, supervisors, and analysts, as well as staff outside the call center department a wide variety of management information features, including detailed and summary views of calling volumes, call handling efficiencies, trends, and other business and IT-related information. The Aspect CustomView family of management information software consists of: ReportWriter which allows the development and customization of reports; ReportRunner to run, schedule, and distribute reports; and ReportFolios for templates of frequently sought reports. The Aspect System Management Suite is an integrated set of software applications providing a graphical user interface for direct access and centralized control of call center system resources and features. Its five integrated software packages include Hardware Administrator, Agent Administrator, System Administrator, Route Administrator, and Alert Manager. Using these desktop programs, users can set up call routings and add, delete, and update resources to adapt to changing conditions. CTI MIDDLEWARE Starting in 1988, Aspect began delivering technology that was an early leading product for computer-telephony integration. Aspect Application Bridge software, a message-oriented data stream allowing data-directed call routing and synchronized screen-pop applications, has now been installed on approximately 500 systems and is responsible for presenting customer screen information to agents concurrent with audio cut-through. Since 1992, Application Bridge software has been available as a high-speed Ethernet connection and has been combined with Aspect Resource Bridge and Aspect Event Bridge software to provide client/server data networking technology designed to allow the systems employed in the call center to evolve into servers in enterprise-wide data networks. With the acquisition of Prospect Software in 1996, the Company added an important CTI product family, namely a switch-neutral CTI open application programming interface toolkit and a set of software procedures for development of screen pops and intelligent data-directed routing applications. There are more than 250 installations of Prospect CTI middleware, including sites coupled to Aspect ACD Systems as well as to PBX or ACD systems from other switch vendors, including Lucent Technologies Inc. (Lucent), Northern Telecom Limited (Nortel), and Rockwell International Corporation (Rockwell). GRAPHICAL USER INTERFACE INTEGRATION-ENABLING SOFTWARE To achieve integration between a variety of application software modules and set the basis for future integration, including applications developed by both the Company and third-parties, Aspect created the Aspect Architect workflow creation tool, a graphical user interface for the design of call flows, work flows, scripts, and other flowchart-like specifications of state-driven software. Included as a component of Aspect ACD Software Release 7, the Aspect Architect provides an important integration-enabling software capability. CALL CENTER PLANNING AND FORECASTING SOFTWARE A common issue for many call center managers is the provision of appropriate levels of staff resources for expected transaction volumes by time of day, and under varying assumptions about operating conditions. With the acquisition of 5 6 TCS Management Group in 1995, the Company established an independent subsidiary that is a market leader in workforce staff forecasting and planning requirements software. The TCS TeleCenter System is a personal computer-based software package that allows users to define operating requirements, staff preferences and alternative case scenarios, and then to produce likely performance outcomes. After resource constraints are adjusted and optimized, a forecast for staff resources for each operating period is produced, and staff rosters and schedules are developed. SYSTEMS INSTALLATION AND CUTOVER SUPPORT SERVICES Inherent in the selection of a supplier of call center technology is the customer's need for support in the provisioning of the software and hardware, connection and integration to telephony and data networks, definition and setup of routing statements, definition of agent skills, and planning for the startup of operations-whether for the first day of operation in a new center or for the transfer of call traffic from an existing center. The Company provides project management and a cross-functional support services team to its direct customers to meet these requirements. ONGOING SYSTEM SUPPORT SERVICES Once in service, the Company's products are generally considered to be mission-critical systems in front office applications by the Company's customers. Therefore, the availability of 24-hour, 7-day, 365-day-per-year support is required by the Company's typical customers. A variety of ongoing support plans allows customers to tailor the level of support being purchased. The Company maintains several customer operations support centers, which allows the Company to provide needed levels of customer access and trouble resolution. An extensive field-deployed spare parts inventory and trained field support staff are designed to assure rapid response when system performance is impacted by a hardware-related problem. For software or configuration issues, most problems are resolved via interactive tools for the analysts in the support centers or via online download of software corrections. BUSINESS APPLICATIONS CONSULTING Many of the Company's solutions are highly configurable, but require the customer or a third party to determine exactly how to best utilize the capabilities available. For the Company's main product offerings, a field-based set of applications consultants assists direct customers in relating Aspect solutions to their specific business requirements. When needed, specialists and other resources may be utilized to select and recommend optimum solutions. Customized script development and other applications-oriented solutions services are available on a case-specific basis. SYSTEMS INTEGRATION SERVICES In 1996, the Company formed a special professional services organization to create and deliver vendor-independent systems integration services for customers needing one-of-a-kind high-end call centers. During 1997, the Aspect Consulting and Systems Integration business unit significantly expanded its business volume from the previous year and brought the Company high-end opportunities that were not previously available. CUSTOMER EDUCATION SERVICES The Company routinely trains its customers in the correct methods for operating and gaining utility from its software packages and integrated systems. SALES AND MARKETING The Company sells its systems on a direct basis in major metropolitan markets in the United States and through its subsidiaries in international markets. In addition, the Company has agreements under which various distributors sell, install, and support Aspect solutions. The Company historically has relied primarily on its direct sales force and a limited number of distributors. In the future, the Company may depend increasingly on expanded distributor, electronic, and other alternate distribution channels to accommodate changing customer preferences. As a result, if the Company is unable to successfully expand its channels 6 7 of distribution to address changes in customer preferences, competitive environment, or other factors, it could have a material adverse effect on the Company's business, operating results, and financial condition. The Company currently operates in several international markets and anticipates entering additional markets in the future. The financial resources required to enter a new international market may vary substantially, and many countries require multiple governmental approvals prior to allowing a new entrant into the market. The cost and timing of these approvals, which may require the Company to modify its products, are often subject to considerable uncertainty and could result in longer lead times than initially anticipated. The Company's international operations are subject to additional risks, including market acceptance; exchange rate fluctuations; delays in telecommunications deregulation; difficulties in staffing and managing foreign subsidiary operations; political and economic instability; potentially negative tax consequences; and foreign and domestic trade legislation, which could result in the creation of trade barriers such as tariffs, duties, quotas, and other restrictions. Failure to successfully enter certain international markets on a timely basis could impair the Company's competitive position in such markets and prevent the Company from obtaining the scale advantages of global competitors. The Company's customers generally purchase the Aspect ACD System outright or place the system on a third-party full-payout lease. Aspect's standard terms of payment, regardless of whether the customer is using a third-party lease, include a deposit at the time of placing the order, a progress payment at delivery, and a final payment after installation. The Company generally recognizes revenue from the sale of systems upon installation at the customer site; revenues from add-ons, upgrades, software licenses, and sales to distributors are generally recognized upon shipment to the customer or distributor. Customer support revenues consist primarily of revenues from new system installations, which are recognized when the service is provided, and ongoing customer support revenues, which are recognized ratably over the support period. The Company's revenues, gross margins, and operating results may fluctuate significantly from period to period for many reasons including, without limitation: reduced demand for the Company's products and services; a limited number of large systems or multisystem orders accounting for a significant portion of product revenues in any particular quarter; dependence on new customers for a significant percentage of product revenues; fluctuations in the results of operations of existing operations, recently acquired subsidiaries, newly established business units or distributors of the Company's products or services, or mix of products and services and channels of distribution; or changes in market growth rates for different products and services. In addition, the Company's products typically represent substantial capital commitments by customers, involving a long sales cycle and, as a result, customer purchase decisions have been, and in the future may be, significantly affected by a variety of factors including, without limitation: general economic and financial market conditions; world political events; trends in capital spending for telecommunications products; market competition and the availability or announcement of alternative technologies; and the degree to which call transaction processing is mission critical for customers. The average selling price for the Aspect ACD System is approximately $400,000, and prices range from approximately $100,000 to approximately $2.5 million for fully configured systems, depending on system size and optional features. PRODUCT SUPPORT The Company installs, maintains, and supports systems sold directly in the United States with the Company's own employees or qualified third parties in selected cities. Although the Company anticipates that some customers may elect to maintain their own systems in the future, substantially all direct U.S. customers currently have support contracts with the Company. The Company subcontracts some field support for certain customers to distributors and other third parties in selected geographic locations. The Company expects to expand support coverage to additional cities, primarily through the addition of direct field support employees. In international markets, customers receive support directly from Aspect, from distributors, or from certain third parties. The Company has established Customer Operations Support Centers based in San Jose, California; Atlanta, Georgia; London, England; Langen, Germany; and Amsterdam, The Netherlands. The purchase price of a system typically includes an initial twelve-month support and warranty period (warranty only in international markets), which begins at the installation date. Subsequent support (initial support in international markets) is provided to the Company's direct customers under a contractual support agreement. 7 8 PRODUCT DEVELOPMENT The Company has a continuing program of product development directed toward the enhancement of existing products based upon current and anticipated customer needs. The Company's research and product development efforts also emphasize introduction of new products to broaden the Company's product line and to reach a larger segment of the call transaction processing market, which has expanded to include transactions using many different forms of media, including the World Wide Web, fax, IVR, and electronic mail. During 1997, 1996, and 1995, the Company invested approximately $45,700,000, $34,600,000, and $23,500,000, respectively, in research and development. The Company believes that a significant commitment of financial resources and talent will be necessary to maintain and increase its competitive position in the years ahead, and expects to increase its total spending for research and development in 1998. The Company's product development organization includes approximately 240 persons as of December 31, 1997. Due to their complexity and sophistication, from time to time the Company's software products contain defects that can be difficult to correct. There can be no assurance that software defects will not cause delays in product introductions and shipments, result in increased costs, require design modifications, impair customer satisfaction with the Company's products, or result in unanticipated downtime and lost revenues. Any such event could materially adversely affect the Company's business, operating results, and financial condition. The Company's products are subject to various regulations that require, among other things, that the Company's products meet certain radio frequency emission standards, be compatible with the public telephone networks, and conform to certain safety and other standards. Sales of products that fail to comply with these regulations may be prohibited by regulatory authorities until appropriate modifications are made. There can be no assurance that the Company will be successful in obtaining or maintaining the necessary regulatory approvals for its products, and failure to do so could have a material adverse effect on the Company's business, operating results, and financial condition. MANUFACTURING The Company's manufacturing operations consist primarily of final assembly and testing of materials, components, subassemblies, and systems, together with related quality management processes. The Company presently uses third parties to perform various levels of product assembly. The Company believes that its approach to system design has allowed flexibility in the manufacturing process and has allowed the Company to satisfy a wide variety of customer configuration requirements, while achieving high quality and reasonable lead times. To date, customer returns of the Company's products have not been material. The Company orders materials with differing lead times, generally 30 to 120 days ahead of required date of delivery to the Company. Because this is a longer timeframe than the average customer order to shipment cycle, the Company acquires materials and builds standard assemblies based on forecasted production requirements. Upon receipt of firm orders from customers, the Company assembles fully configured systems, and subjects them to a number of tests before shipment. The Company's manufacturing procedures are designed to assure rapid response to customer orders, but create a risk of excess or inadequate inventory when orders do not match forecasts. Certain critical components are presently available only from a single source or from limited sources of supply. Some of these suppliers utilize proprietary technology that could require redesign of the Company's products with a change in vendor. Additionally, there can be no assurance suppliers will not discontinue or modify these components in a manner incompatible with the Company's use. Some manufacturing processes have been contracted to outside vendors, and certain of the tools and processes cannot be easily migrated to other vendors. Any difficulty these vendors have in meeting the Company's requirements for any reason could have a material adverse effect on the Company's business, operating results, and financial condition. The Company manufactures components incorporated into its products pursuant to engineering and manufacturing licenses from third parties. The Company depends upon the licensors to provide technical support and cooperation in optimizing the Company's use of the licensed technologies. Should any of the licensors become unable to provide such technical support, the Company would have to develop internal capabilities or otherwise locate alternative technical support. This in turn could adversely affect the Company's ability to complete timely shipments during the transition. If, 8 9 due to a breach of a license agreement or otherwise, the Company becomes unable to continue to utilize the applicable licensed technology, the Company's business, operating results, and financial condition could be materially adversely affected. COMPETITION The Company believes the market for its products and services is highly competitive and that competition is likely to intensify. The Company's principal competitors currently include companies that market ACD systems, private branch exchange systems that include ACD features, and alternative or complementary technologies and services such as CTI software companies and systems integrators. The Company anticipates that telephone operating companies could market ACD functionality. Additional potential competitors include companies with technologies capable of providing call transaction processing, including participants in the problem tracking and resolution software market, pre-network routing companies, and a wide variety of CTI and software companies. As the hardware requirements for a traditional call center diminish due to the emergence of the Internet, local area networks, and other factors, other companies may obtain a significant position in the call transaction processing market. Many current and potential competitors, including but not limited to Lucent, Nortel, Rockwell, and Siemens Business Communications Systems, Inc., have longer operating histories, considerably greater resources, and larger customer bases than Aspect. Consequently, the Company expects to encounter substantial competition from these sources, as well as from new market entrants and emerging technologies. Intensified competition could result in lower prices and margins for Aspect products, which could materially adversely affect the Company's business, operating results, and financial condition. The market for Aspect products and services is subject to rapid technological change and new product introductions. Current competitors or new market entrants may develop new, proprietary products with features that could adversely affect the competitive position of the Company's products. There can be no assurance that the Company will be successful in accurately anticipating market demand for products being developed; in developing, manufacturing, or marketing new products or services in a timely manner; or in enhancing existing products and services. Sales and installations of Aspect ACD Systems account for a substantial portion of net revenues. Any factor adversely affecting demand or the failure of any Aspect product or service to meet customer specifications, including system performance, system availability, installation or service delivery commitments, or other requirements, could have a material adverse effect on the Company's business, operating results, and financial condition. INTELLECTUAL PROPERTY The Company's success depends in part upon its internally developed technology. The Company generally enters into confidentiality or license agreements with its employees, consultants, and vendors, and generally controls access to and distribution of its software, documentation, and other proprietary information. Despite these precautions, unauthorized third parties may copy or otherwise obtain and use the Company's technology. In addition, third parties may develop similar technology independently. The Company files patent applications to protect inventions and improvements that are significant to the development of its business. In October 1997, the Company acquired two intellectual property portfolios by paying $9,750,000 in cash and issuing $10,000,000 in notes payable. Including these portfolios, the Company currently holds 31 issued United States patents and a lesser number of issued foreign patents and has pending 29 United States patent applications and a lesser number of corresponding foreign patent applications that cover various aspects of its technology. The Company's issued United States patents expire on dates ranging from 2004 through at least 2015. There can be no assurance that any of the claims in the pending applications will be allowed, or that any issued patents will be upheld, or not circumvented by competitors, or that any patents or licenses will provide competitive advantages for the Company's products. The Company maintains as proprietary the software that is delivered to its customers. Under certain circumstances, a limited number of the Company's customers have been granted licenses to use certain of the Company's proprietary rights, primarily to ensure the continued maintenance and supply of certain of the Company's products. The Company holds licenses from multiple third parties regarding engineering and manufacturing rights to certain technology that the Company incorporates in its products. Certain of these technology license rights expire at various 9 10 dates through 2004. The Company has also entered into standard commercial license agreements with several suppliers of operating systems, databases, and other software used for development and implementation of the Company's products. These licenses are ongoing and generally involve the payment of royalties based on the volume of systems the Company ships over periods of time. LITIGATION The telecommunications market has been characterized by extensive litigation regarding patents and other intellectual property rights. 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. For example, in March 1997, Lucent filed a lawsuit in the United States District Court for the Eastern District of Pennsylvania alleging that the Company infringed four of Lucent's U.S. patents. Although the Company attempts to ensure that its products and processes do not infringe 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. Although the Company recently resolved its dispute with Lucent by entering into a cross-license agreement, there can be no assurance that such other future 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. An adverse determination in such litigation or proceeding could prevent the Company from making, using, or selling certain of its products, and subject the Company to damage assessments, any of which could have a material adverse effect on the Company's business, operating results, and financial condition. On March 5, 1997, Lucent filed a lawsuit in the United States District Court for the Eastern District of Pennsylvania alleging that the Company infringed four of Lucent's U.S. patents (the Lucent Patents). In its complaint, Lucent sought to enjoin the Company from allegedly continuing to infringe the Lucent Patents and sought an unspecified amount of compensatory damages; treble damages for alleged willful infringement; and interest, expenses, and attorneys' fees. On February 4, 1998, the Company filed a complaint in the United States District Court, Northern District of California, asserting that Lucent infringed seven Aspect patents. Lucent responded by filing for a declaratory judgment regarding these Aspect patents in the United States District Court, Northern District of Texas. On February 27, 1998, the Company announced that it entered into a patent cross-license agreement with Lucent, under which each party agreed to dismiss their patent lawsuits against each other, released each other from claims of past infringement, and settled their patent disputes. Under the agreement, Aspect paid Lucent a one-time fee and, for the duration of the cross-license agreement, will pay royalties that are not expected to be material to Aspect's future results of operations. As part of the settlement, Aspect recorded a non-recurring charge of $14,000,000 (approximately 17 cents per diluted share) for the quarter and year ended December 31, 1997. In addition, 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. In the future, Aspect 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. Any litigation in which the Company is involved, regardless of merit, source, or outcome, could result in substantial cost to and diversion of effort by the Company, which could have a material adverse effect on the Company's business, operating results, and financial condition. EMPLOYEES As of December 31, 1997, the Company employed approximately 1,600 full-time employees. None of the Company's employees is represented by a collective bargaining unit. The Company believes that its employee relations are good, and has never experienced any work stoppages. Most of the Company's full-time employees have to date been offered the opportunity to participate in the Company's stock option plans. 10 11 The Company depends upon certain key management and technical personnel and on its ability to attract and retain highly qualified personnel in labor markets characterized by high demand for, and limited supply of, qualified people. Failure to attract and retain such personnel could have a material adverse effect on the Company's business, operating results, and financial condition. EXECUTIVE OFFICERS OF THE COMPANY The following sets forth certain information with respect to the executive officers of the Company, and their ages as of March 1, 1998:
NAME AGE POSITION ---- --- -------- James R. Carreker 51 Chairman and Chief Executive Officer Dennis L. Haar 42 President and Chief Operating Officer Kirsten K. Berg-Painter 37 Vice President, Interactive Communication Systems Robert A. Blatt 37 Vice President, Marketing and Business Development Kathleen M. Cruz 48 Vice President, Information Technology and Chief Information Officer Linda F. Johnstone 46 Vice President, Europe, Middle East and Africa Eric J. Keller 45 Vice President, Finance and Chief Financial Officer D. Thompson McCalmont 43 Vice President, Enterprise CTI Mark J. Meltzer 48 Vice President, General Counsel John D. Meyers 52 Principal Engineer, Product Technology and Chief Technical Officer Larry S. Miller 39 Vice President, North America R. Dixon (Dirk) Speas, Jr. 51 Vice President, Asia-Pacific and Latin America David M. Yoffie 38 Vice President, Customer Support and Manufacturing
Executive officers serve at the election of the Board of Directors of the Company. There are no family relationships among any directors or executive officers of the Company. Mr. Carreker, a founder of the Company, has served as Chief Executive Officer and as a director of the Company since its inception in August 1985. He has served as Chairman of the Company's Board of Directors since October 1995 and was President of the Company between August 1985 and October 1995. Since January 1997, Mr. Carreker has also served as a director of Herman Miller, Inc., a company that manufactures and sells office systems products and services. Mr. Haar has been employed by the Company since 1987, and has served as an executive officer since 1989. Mr. Haar currently holds the position of President and Chief Operating Officer and has previously served as the executive leading the functions of North America, Product Development, Marketing and Sales Development. Ms. Berg-Painter has been employed by the Company since November 1989, and has served as an executive officer since August 1997. Ms. Berg-Painter currently holds the position of Vice President, Interactive Communication Systems. Prior to becoming an executive officer, Ms. Berg-Painter was General Manager of Aspect's CallCenter business unit. Mr. Blatt has been employed by the Company since 1986, and has served as an executive officer of the Company since 1994. He currently holds the position of Vice President, Marketing and Business Development, and has previously served as Vice President, Worldwide Products, and as a Product Development Manager. Ms. Cruz has been employed by the Company since June 1996, and has served as an executive officer since that time. Ms. Cruz currently holds the position of Vice President, Information Technology and Chief Information Officer. Prior to joining the Company, Ms. Cruz served as Vice President, MIS and Chief Information Officer, at Verifone, Inc., a global provider of secure payment solutions, from January 1994 to May 1996; and Director, Information Services, at Textainer, Inc., a container leasing company, from January 1992 to December 1993. Ms. Johnstone has been employed by the Company since August 1988, and has served as an executive officer of the Company since June 1997. She currently holds the position of Vice President, Europe, Middle East and Africa, and has previously served as Managing Director of the United Kingdom, Director of European Expansion, Director of European Marketing, and Director of Customer Operations. 11 12 Mr. Keller has been employed by the Company since January 1996, and has served as an executive officer since that time. Mr. Keller currently holds the position of Vice President, Finance and Chief Financial Officer. Prior to joining the Company, Mr. Keller served as Vice President and Chief Financial Officer of Ventritex, Inc., a manufacturer of implantable medical devices, from June 1993 to January 1996; and previously held a similar position with Dionex Corporation, a manufacturer of scientific instruments, from December 1985 to June 1993. Mr. McCalmont has been employed by the Company since February 1996, and has served as an executive officer of the Company since August 1997. Mr. McCalmont currently holds the position of Vice President, Enterprise CTI. Prior to becoming an executive of the Company, Mr. McCalmont was General Manager of Aspect's CTI business unit. Prior to joining the Company, Mr. McCalmont served as a Vice President and General Manager for Teknekron Infoswitch, a call center and CTI software and systems company from January 1991 until January 1996. Mr. Meltzer has been employed by the Company since June 1997, and has served as an executive officer of the Company since that time. He currently holds the position of Vice President, General Counsel. Prior to joining the Company, Mr. Meltzer served as Vice President, General Counsel, at Ventritex, Inc., a manufacturer of implantable medical devices, from May 1992 until June 1997. Mr. Meyers, a founder of the Company, has been employed by the Company since 1985, and has served as an executive officer since that time. Mr. Meyers currently holds the position of Principal Engineer, Product Technology and Chief Technical Officer. Mr. Miller has been employed by the Company since January 1995, and has served as an executive officer since July 1995. Mr. Miller currently holds the position of Vice President, North America, and has previously served as Vice President, Worldwide Operations, and Director of Channel Support. Prior to joining the Company, Mr. Miller served in various positions at IBM from September 1977 to January 1995, most recently as a business unit executive for IBM's Marketing and Services Organization. Mr. Speas has been employed by the Company since 1989, and has served as an executive officer since that time. Mr. Speas currently holds the position of Vice President, Asia-Pacific and Latin America, and has previously served as the executive leading the functions of International, Customer Operations, Manufacturing, and Product Development. Prior to joining the Company, Mr. Speas was Director of Field Operations at ROLM Corporation. Mr. Yoffie has been employed by the Company since March 1996, and has served as an executive officer since that time. Mr. Yoffie currently holds the position of Vice President, Customer Support and Manufacturing. Prior to joining the Company, Mr. Yoffie served as Senior Vice President, Operations, at AG Associates, Inc., a semiconductor equipment manufacturer, from July 1993 to May 1996. ITEM 2. PROPERTIES Aspect's headquarters facility consists of four office and manufacturing buildings, totaling approximately 290,000 square feet, in San Jose, California. The Company owns one of the buildings, which is approximately 100,000 square feet on 10 acres of land, and occupies the remaining buildings totaling approximately 190,000 square feet under coterminous leases expiring in 2001, with options for five-year extensions. Aspect also has several facilities to support its European operations. The principal UK operations are located near London in facilities totaling approximately 63,000 square feet, which are leased under long-term agreements expiring through 2013. In addition, other significant European facilities are located near Amsterdam, The Netherlands, and Frankfurt and Dusseldorf, Germany. In Asia, the Company occupies sales and support offices in Japan, Singapore, Australia, and Hong Kong. Aspect also occupies several U.S. regional centers for sales and support, totaling approximately 53,000 square feet under leases expiring through 2003. TCS occupies approximately 97,000 square feet in facilities located near Nashville, Tennessee, that are leased through 2006. Other North America and international sales and support functions operate from various leased multi-tenant offices nationwide. 12 13 The Company believes its existing facilities are adequate to meet current requirements and that suitable additional or alternative space will be available as needed on commercially reasonable terms. See Note 9 to "Notes to Consolidated Financial Statements," incorporated by reference from the 1997 Annual Financial Report to Shareholders, an appendix to the 1998 Proxy Statement. As noted above, Aspect's headquarters facility is located in San Jose, California. In the event of a natural disaster, such as an earthquake or flood, or in localized extended outages in critical utilities or transportation systems, the Company could experience a business interruption that could have a material adverse effect on the Company's business, operating results, and financial condition. ITEM 3. LEGAL PROCEEDINGS The telecommunications market has been characterized by extensive litigation regarding patents and other intellectual property rights. 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. For example, in March 1997, Lucent filed a lawsuit in the United States District Court for the Eastern District of Pennsylvania alleging that the Company infringed four of Lucent's U.S. patents. Although the Company attempts to ensure that its products and processes do not infringe 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. Although the Company recently resolved its dispute with Lucent by entering into a cross-license agreement, there can be no assurance that such other future 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. An adverse determination in such litigation or proceeding could prevent the Company from making, using, or selling certain of its products, and subject the Company to damage assessments, any of which could have a material adverse effect on the Company's business, operating results, and financial condition. On March 5, 1997, Lucent filed a lawsuit in the United States District Court for the Eastern District of Pennsylvania alleging that the Company infringed four of Lucent's U.S. patents (the Lucent Patents). In its complaint, Lucent sought to enjoin the Company from allegedly continuing to infringe the Lucent Patents and sought an unspecified amount of compensatory damages; treble damages for alleged willful infringement; and interest, expenses, and attorneys' fees. On February 4, 1998, the Company filed a complaint in the United States District Court, Northern District of California, asserting that Lucent infringed seven Aspect patents. Lucent responded by filing for a declaratory judgment regarding these Aspect patents in the United States District Court, Northern District of Texas. On February 27, 1998, the Company announced that it entered into a patent cross-license agreement with Lucent, under which each party agreed to dismiss their patent lawsuits against each other, released each other from claims of past infringement, and settled their patent disputes. Under the agreement, Aspect paid Lucent a one-time fee and, for the duration of the cross-license agreement, will pay royalties that are not expected to be material to Aspect's future results of operations. As part of the settlement, Aspect recorded a non-recurring charge of $14,000,000 (approximately 17 cents per diluted share) for the quarter and year ended December 31, 1997. In addition, 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. In the future, Aspect 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. Any litigation in which the Company is involved, regardless of merit, source, or outcome, could result in substantial cost to and diversion of effort by the Company, which could have a material adverse effect on the Company's business, operating results, and financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the quarter ended December 31, 1997. 13 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Reference is made to the information regarding market price range, market, and dividend information appearing under the captions "Quarterly stock price," "Stock Listing," and "Dividend Policy" on pages F-25 and F-26 of the Registrant's 1997 Annual Financial Report to Shareholders attached as an appendix to the Registrant's 1998 Proxy Statement, which information is hereby incorporated by reference. (b) Reference is made to the information regarding holders of common stock appearing under the caption "Stock Listing" on page F-26 of the Registrant's 1997 Annual Financial Report to Shareholders attached as an appendix to the Registrant's 1998 Proxy Statement, which information is hereby incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA Reference is made to the Consolidated Statement of Income Data and Consolidated Balance Sheet Data for fiscal years 1993 through 1997, appearing under the caption "Selected Consolidated Financial Data" on page F-1 of the Registrant's 1997 Annual Financial Report to Shareholders attached as an appendix to the Registrant's 1998 Proxy Statement, which information is hereby incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to the information appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages F-2 through F-7 of the Registrant's 1997 Annual Financial Report to Shareholders attached as an appendix to the Registrant's 1998 Proxy Statement, which information is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the following information appearing in the Registrant's 1997 Annual Financial Report to Shareholders attached as an appendix to the Registrant's 1998 Proxy Statement, which information is hereby incorporated by reference:
DESCRIPTION PAGE(S) ----------- ------- Consolidated Financial Statements F-8 to F-23 Independent Auditors' Report F-24 Quarterly Financial Data for the 1997 and and 1996 Quarters (unaudited) F-25
14 15 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III Certain information required by Part III is omitted from this report because the Registrant filed a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A for its annual meeting of shareholders to be held May 14, 1998, and the information included therein is incorporated herein by reference to the extent detailed below. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to directors of the Registrant is incorporated by reference to the information under the caption "Election of Directors" in the Registrant's Proxy Statement. Information with respect to executive officers of the Registrant is set forth in "Item 1. Business--Executive Officers of the Company" of this Annual Report on Form 10-K. Information required by Item 405 of Regulation S-K is incorporated by reference to the information under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Registrant's Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the information under the caption "Executive Compensation" contained in the Registrant's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the information under the caption "Security Ownership of Principal Shareholders and Management" contained in the Registrant's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The financial statements listed in the accompanying index to financial statements and financial statement schedule are incorporated by reference as part of this Annual Report on Form 10-K. 2. Financial Statement Schedule The financial statement schedule listed in the accompanying index to financial statements and financial statement schedule is filed as part of this Annual Report on Form 10-K. 3. Exhibits The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K. 15 16 (b) Reports on Form 8-K Form 8-K dated October 15, 1997: Item 5. Other Events--Announcement of earnings and results of operations for the quarter ended September 30, 1997. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits--Aspect Telecommunications Corporation Press Release dated October 15, 1997. 16 17 ASPECT TELECOMMUNICATIONS CORPORATION INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE (ITEM 14 (A))
REFERENCE PAGE(S) --------------------- 1997 ANNUAL FORM REPORT TO 10-K SHAREHOLDERS ---- ------------ Consolidated Balance Sheets as of December 31, 1997 and 1996 - F-8 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 - F-9 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 - F-10 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 - F-11 Notes to Consolidated Financial Statements - F-12 to F-23 Independent Auditors' Report - F-24 Selected Consolidated Financial Data - F-1 Quarterly Financial Data for the 1997 and 1996 Quarters (unaudited) - F-25 Consolidated Financial Statements Schedule for the years ended December 31, 1997, 1996 and 1995: II - Valuation and Qualifying Accounts and Reserves 19 -
All other schedules have been omitted, since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto. 17 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on March 24, 1998 on its behalf by the undersigned, thereunto duly authorized. ASPECT TELECOMMUNICATIONS CORPORATION By: /s/ James R. Carreker ------------------------------------ James R. Carreker, Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints jointly and severally James R. Carreker and Eric J. Keller, and each one of them, his or her attorneys in fact, each with the power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Report on Form 10-K and to file the same, with exhibits thereunto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ James R. Carreker Chairman, Chief Executive March 24, 1998 - --------------------------------- Officer, and Director (Principal James R. Carreker Executive Officer) /s/ Eric J. Keller Vice President, Finance and March 24, 1998 - --------------------------------- Chief Financial Officer Eric J. Keller (Principal Financial and Accounting Officer) /s/ Norman A. Fogelsong Director March 24, 1998 - --------------------------------- Norman A. Fogelsong /s/ James L. Patterson Director March 24, 1998 - --------------------------------- James L. Patterson /s/ John W. Peth Director March 24, 1998 - --------------------------------- John W. Peth /s/ Debra J. Engel Director March 24, 1998 - --------------------------------- Debra J. Engel
18 19 ASPECT TELECOMMUNICATIONS CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
ADDITIONS BALANCE BALANCE AT CHARGED TO AT END BEGINNING COSTS AND OF OF PERIOD EXPENSES DEDUCTIONS PERIOD --------- -------- ---------- ------ 1997 Allowance for doubtful accounts $1,202 $1,354 $ 840(1) $1,716 Warranty reserve $3,778 $6,825 $6,655(2) $3,948 1996 Allowance for doubtful accounts $ 825 $ 938 $ 561(1) $1,202 Warranty reserve $2,397 $5,797 $4,416(2) $3,778 1995 Allowance for doubtful accounts $ 401 $ 436 $ 12(1) $ 825 Warranty reserve $1,738 $3,851 $3,192(2) $2,397
- ---------- (1) Accounts written off. (2) Warranty costs incurred. 19 20 ASPECT TELECOMMUNICATIONS CORPORATION INDEX TO EXHIBITS (Item 14 (a))
EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.3 Amended and Restated Articles of Incorporation of the Registrant, as amended to date. (1) 3.4 Bylaws of the Registrant, as amended to date. (1) 10.2a 1989 Stock Option Plan and forms of option agreements thereunder, as amended, effective January 22, 1991. (2) 10.2b 1989 Stock Option Plan and forms of option agreements thereunder, as amended, effective May 20, 1993. (2) 10.3 1989 Directors' Stock Option Plan and forms of option agreements thereunder. (1) 10.4a 1990 Employee Stock Purchase Plan and form of subscription agreement thereunder, as amended, effective July 1, 1991. (2) 10.6 Form of Stock Bonus Agreement for the Registrant's Newborn Stock Bonus Program. (1) 10.7 Form of Indemnification Agreement. (1) 10.39 Lease Agreement between the Registrant and Spieker Partners, dated October 1, 1990, as amended. (2) 10.39a Amendment Number One to the Lease Agreement between the Registrant and Spieker Partners, dated October 1, 1990. (2) 10.39b Amendment to the Lease Agreement between the Registrant and Spieker Partners, dated August 1, 1993. (2) 10.39c Amendment to the Lease Agreement between the Registrant and Spieker Partners, dated October 1, 1993. (2) 10.39d Amendment to the Lease Agreement between the Registrant and Spieker Properties, L.P., dated July 12, 1995. (2) 10.39e Amendment to the Lease Agreement between the Registrant and Spieker 10.54 Acquisition Agreement by and among the Registrant, Next plc, Callscan, Inc., and TCS Management Group, Inc., dated October 5, 1995. (3) 10.55 Agreement of Purchase and Sale between the Registrant and Arrow Electronics, Inc., dated April 22, 1996. (2) 10.56 Patent License Agreement and Mutual Release with Lucent Technologies Inc., effective as of January 1, 1998. (4) 13.1 Excerpts from the appendix to the 1998 Proxy Statement. 21.1 Subsidiaries of the Registrant - Jurisdiction of Incorporation. 23.1 Independent Auditors' Consent and Report on Schedule. 24.1 Power of Attorney (see page 18). 27 Financial Data Schedule: 1997 Annual Data. 27.1 Financial Data Schedule: 1997 Quarterly Data. 27.2 Financial Data Schedule: 1996 Annual, and Quarterly Data for periods ending June 30, and September 30, 1996.
- ---------- (1) Incorporated by reference to identically numbered exhibits to the Registrant's Registration Statement on Form S-1 and Amendment No. 1 and Amendment No. 2 thereto (File No. 33-33994), which became effective on April 30, 1990. (2) Incorporated by reference to identically numbered exhibits to the Registrant's previously filed Form 10-K's or Form 10-Q's. (3) Incorporated by reference to the Registrant's Current Report on Form 8-K, dated October 19, 1995. (4) Confidential treatment has been requested with respect to this exhibit. EX-10.56 2 PATENT LICENSE AGREEMENT AND MUTUAL RELEASE 1 EXHIBIT 10.56 PATENT LICENSE AGREEMENT AND MUTUAL RELEASE between LUCENT TECHNOLOGIES INC. and ASPECT TELECOMMUNICATIONS CORPORATION Effective as of January 1, 1998 Relating to [*] - ------------ [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 2 PATENT LICENSE AGREEMENT TABLE OF CONTENTS ARTICLE I - GRANTS OF LICENSES 1.01 Grant 1.02 Duration and Extent 1.03 Scope 1.04 Ability to Provide Licenses 1.05 Joint Inventions 1.06 Publicity 1.07 Pending Patent Litigation ARTICLE II - ROYALTY AND PAYMENTS 2.01 Royalty Calculation ARTICLE III - TERMINATION 3.01 Breach 3.02 Voluntary Termination 3.03 Survival ARTICLE IV - MISCELLANEOUS PROVISIONS 4.01 Disclaimer 4.02 Limited Assignability; Mergers and Acquisitions 4.03 Addresses 4.04 Taxes 4.05 Choice of Law 4.06 Integration 4.07 Outside the United States 4.08 Dispute Resolution 4.09 Releases 4.10 Existing License Agreements DEFINITIONS APPENDIX 3 PATENT LICENSE AGREEMENT Effective as of January 1, 1998 (the "Effective Date"), LUCENT TECHNOLOGIES INC., a Delaware corporation ("LUCENT"), having an office at 600 Mountain Avenue, Murray Hill, New Jersey 07974, and ASPECT TELECOMMUNICATIONS CORPORATION, a California corporation ("ASPECT"), having an office at 1730 Fox Drive, San Jose, California 95131-2312, agree as follows:* ARTICLE I GRANTS OF LICENSES 1.01 GRANT (a) LUCENT hereby grants to ASPECT under LUCENT's PATENTS personal, nonexclusive and non-transferable worldwide licenses for: [*] (b) ASPECT hereby grants to LUCENT under ASPECT's PATENTS personal, nonexclusive, royalty-free and non-transferable worldwide licenses for: [*] 1.02 DURATION AND EXTENT All licenses granted herein by either party under any patent shall terminate on the earlier of such patent's expiration or the end of the LIMITED PERIOD. At the end of the LIMITED PERIOD, the cross-licenses for future use of the patents shall expire unless renewed, but the parties and their customers, acting within the scope of the license, shall be immune from infringement claims for activities during the LIMITED PERIOD, and such protection shall extend to the parties and their customers, acting within the scope of the license, for all transactions during the LIMITED PERIOD. For example, manufacture, sale or lease of LICENSED PRODUCTS during the LIMITED PERIOD would not be subject to a retroactive claim for damages after the LIMITED PERIOD ends, and no parties or customers, acting within the scope of the license, would be subject to claims for infringement at any time for LICENSED PRODUCTS initially sold or leased during the LIMITED PERIOD. - -------- * Any term in capital letters which is defined in the Definitions Appendix shall have the meaning specified therein. [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 1 4 1.03 SCOPE (a) The licenses granted herein are licenses to (i) make, have made, use, lease, offer to sell, sell and import LICENSED PRODUCTS; (ii) make, have made, use and import machines, tools, materials and other instrumentalities, insofar as such machines, tools, materials and other instrumentalities are involved in or incidental to the development, manufacture, testing or repair of LICENSED PRODUCTS which are or have been made, used, leased, owned, sold or imported by the grantee of such license; and (iii) convey to any customer of the grantee, with respect to any LICENSED PRODUCT which is sold or leased by such grantee to such customer, rights to use and resell such LICENSED PRODUCT as sold or leased by such grantee (whether or not as part of a larger combination); provided, however, that no rights may be conveyed to customers with respect to any invention which is directed to (1) a combination of such LICENSED PRODUCT (as sold or leased) with any other product not furnished by grantee, (2) a method or process which is other than the method of operation carried out by the LICENSED PRODUCT in the form furnished by grantee, or (3) a method or process involving the use of a LICENSED PRODUCT to manufacture (including associated testing) any other product. (b) The licenses granted herein are not to be construed either (i) as consent by the grantor to any act which may be performed by the grantee, except to the extent impacted by a patent licensed herein to the grantee, or (ii) to include licenses to contributorily infringe or induce infringement under U.S. law or a foreign equivalent thereof for products not manufactured and sold (or leased) by ASPECT and its SUBSIDIARIES, licensed pursuant to the provisions of this Agreement, or LUCENT and its SUBSIDIARIES, licensed pursuant to the provisions of this Agreement. (c) Until an event specified in Section 4.02(c) occurs, the grant of each license hereunder includes the right to grant sublicenses within the scope of such license to a party's SUBSIDIARIES for so long as they remain its SUBSIDIARIES. Any such sublicense may be made effective retroactively, but not prior to the effective date hereof, nor prior to the sublicensee's becoming a SUBSIDIARY of such party. When an event specified in Section 4.02(c) occurs, only the party acquired is precluded from granting sublicenses to its SUBSIDIARIES. (d) The "have-made" right of ASPECT and LUCENT to sell LICENSED PRODUCTS does not include the right to distribute products or offer services of a third party for the purpose of shielding such products and/or services from the patents of the other party. 1.04 ABILITY TO PROVIDE LICENSES (a) It is recognized that certain actions of the parties to this Agreement may limit their ability to provide licenses hereunder without constituting a breach. In particular, (i) prior to the actual or constructive reduction to practice of an invention disclosed in a patent application of a party or its SUBSIDIARY, such party or SUBSIDIARY may assign to a third party the title to patents on such invention, or (ii) prior to the execution of this Agreement, a party or its SUBSIDIARY may have limited by contract its ability to provide licenses hereunder with respect to certain patents or technologies. 2 5 (b) Each party agrees to disclose to the other party, promptly upon receipt of a written request for such disclosure, any such assignment or other contractual limitation with respect to any patent and/or technology which is specifically identified in such request. (c) Each party represents that it has already disclosed to the other party any such assignment or other contractual limitation currently in effect with respect to any patent and/or technology specifically identified in any such disclosure request received by it prior to execution of this Agreement. (d) A party's failure to meet any obligation hereunder, due to the assignment of title to any invention or patent, or the granting of any licenses, to the United States Government or any agency or designee thereof pursuant to a statute or regulation of, or contract with, such Government or agency, shall not constitute a breach of this Agreement. (e) LUCENT represents and warrants that, except for its patents (and applications) relating to the following areas of technology, LUCENT has the right and ability to grant under LUCENT's PATENTS the licenses and releases in this Agreement: optical tweezers, connector system products, optical traps, insecticide dispensers, printed circuit boards and backplanes, scalpel machines, locator devices, near field scanning optical instruments, undersea surveillance, manufacture of copper wire, fingerprint identification systems and fifty telecommunications services patents that are jointly owned by AT&T Corp. and LUCENT. Telecommunications services is defined as the operation of a communications network to provide communication services to customers, including the processing of information, to the extent needed to transfer information between locations. Except as limited by a confidential agreement with AT&T regarding the grant of rights for telecommunication services under the fifty patents, LUCENT grants rights herein to ASPECT under the fifty patents in accordance with ARTICLE 1 of this Agreement. (f) ASPECT represents and warrants that, except for its patents (and applications) relating to the following areas of technology, ASPECT has the right and ability to grant for ASPECT's PATENTS the licenses and releases in this Agreement: automatic warranty registration outside the field of hardware, software or peripheral equipment principally used in commercial telecommunications systems. 1.05 JOINT INVENTIONS (a) There are countries (not including the United States) which require the express consent of all inventors or their assignees to the grant of licenses or rights under patents issued in such countries for joint inventions. (b) Each party shall give such consent, or shall obtain such consent from its SUBSIDIARIES, its employees or employees of any of its SUBSIDIARIES, as required to make 3 6 full and effective any such licenses and rights respecting any joint invention granted to the grantee hereunder by such party and by another licensor of such grantee. (c) Each party shall take steps which are reasonable under the circumstances to obtain from third parties whatever other consents are necessary to make full and effective such licenses and rights respecting any joint invention purported to be granted by it hereunder. If, in spite of such reasonable steps, such party is unable to obtain the requisite consents from such third parties, the resulting inability of such party to make full and effective its purported grant of such licenses and rights shall not be considered to be a breach of this Agreement provided, however, that such party shall afford the grantee the opportunity to obtain such consents itself. 1.06 PUBLICITY (a) Nothing in this Agreement shall be construed as conferring upon either party or its SUBSIDIARIES any right to include in advertising, packaging or other commercial activities related to a LICENSED PRODUCT, any reference to the other party (or any of its SUBSIDIARIES), its trade names, trademarks or service marks. (b) Neither party shall disclose any of the terms and conditions (including but not limited to payments) of this Agreement without the written consent of the other party, unless such disclosure is: (i) in response to a valid order of a court or other governmental body of the United States or any political subdivision thereof; provided, however, that the disclosing party shall have given prior notice to the other party and made a reasonable effort to obtain a protective order requiring that the information so disclosed be used only for the purposes for which the order was issued; or (ii) otherwise required by law, including but not limited to disclosures required by securities laws or regulations; or (iii) necessary to establish rights under this Agreement; or necessary for use by outside accountants and legal counsel Notwithstanding (ii) and (iii), each party shall take reasonable steps to preclude the release of the financial terms of this Agreement such as, for example, filing this Agreement in confidence with the Securities and Exchange Commission (SEC), and deleting the financial terms therefrom in any copy, if any, made available to the public. (c) The parties will issue a joint press release, either prior to the stock market opening or after its close, reciting that the parties have dismissed their respective lawsuits, released one another for claims of past infringement, settled their disputes, and that Aspect will pay an undisclosed sum to Lucent in connection with the settlement and cross license. In accordance with Section 1.06(b), except as required by the securities laws or similar governmental regulations, reporting to auditors and legal process, the terms of the agreement shall remain confidential. 4 7 1.07 PENDING PATENT LITIGATION (a) The parties agree that the following pending patent litigations will be dismissed with prejudice within ten (10) days after execution of this Agreement: (i) LUCENT v. ASPECT, Civil Action No. 97-1618 in the U.S. District Court for the Eastern District of Pennsylvania ("Allentown Action"); (ii) LUCENT v. ASPECT, Civil Action No. 3-98CV0280-G in the U.S. District Court for the Northern District of Texas; and (iii) ASPECT v. LUCENT, Civil Action No. C98-0422 in the U.S. District Court for the Northern District of California ("California Action"). (b) The parties also agree not to pursue any arbitration proceedings involving Aspect, Lucent, Octel, Syntellect or STC concerning the interpretation of any contract that relates to patents acquired by Aspect. (c) Each party shall bear its own costs and attorneys' fees in all litigations and arbitrations. (d) The parties represent that there are no other pending lawsuits or arbitrations against the other involving intellectual property. (e) With respect to the pending litigation set forth in Section 1.07(a), each of the parties represents and warrants to the other that it has not heretofore assigned or transferred or purported to assign or transfer any of the claims in such suits, or any part or portion thereof, and agrees to indemnify and hold harmless the other from and against any claim, demand, damage, debt, liability, account, reckoning, obligation, cost, expense, lien, action and cause of action (including the payment of attorneys' fees and cost actually incurred, whether or not litigation is commenced) based on, in connection with or arising out of any such assignment or transfer or purported or claimed assignment or transfer. (f) LUCENT warrants that it owns the four patents asserted in the Allentown Action; that the term LUCENT's PATENTS includes each of these patents; that licenses and releases are granted herein to ASPECT with respect to each of the four patents; and that LUCENT has the right to grant such licenses and releases. (g) ASPECT warrants that it owns the seven patents asserted in the California Action; that the term ASPECT's PATENTS includes each of these patents; that licenses and releases are granted herein to LUCENT with respect to each of the seven patents;. and that ASPECT has the right to grant such licenses and releases. 5 8 ARTICLE II ROYALTY AND PAYMENTS 2.01 ROYALTY CALCULATION (a) [*] U.S. dollars ($[*]), payable to LUCENT by wire transfer within ten business days after execution of this Agreement representing fourteen million U.S. dollars ($14,000,000) for the releases granted in Section 4.09(a) and [*] U.S. dollars ($[*]) for royalties for calendar year 1998. (b) Four annual payments to LUCENT as follows: [*] U.S. dollars ($[*]) royalty for calendar year 1999 payable on March 15, 1999; [*] U.S. dollars ($[*]) royalty for calendar year 2000 payable on March 15, 2000; [*] U.S. dollars ($[*]) royalty for calendar year 2001 payable on March 15, 2001; and [*] U.S. dollars ($[*]) royalty for calendar year 2002 payable on March 15, 2002. (c) Two annual payments payable to LUCENT as follows: [*] U.S. dollars ($[*]) royalty for calendar year 2003 payable on March 15, 2003; and [*] U.S. dollars ($[*]) royalty for calendar year 2004 payable on March 15, 2004. (d) ASPECT shall have the option to extend or not extend the LIMITED PERIOD on a year-by-year basis as follows: (1) On or before November 1, 2004, ASPECT shall notify LUCENT if ASPECT elects not to extend the LIMITED PERIOD for calendar year 2005. In the absence of such a notification, the one-year extension shall be automatic and, on or before March 15, 2005, ASPECT shall pay LUCENT the sum of [*] U.S. Dollars ($[*]). This is a minimum payment for the calendar year 2005. The amount actually owed for calendar year 2005 is the higher of [*] U.S. dollars ($[*]) or [*] U.S. dollars ($[*]) plus [*]% of the amount, if any, by which ASPECT's publicly reported "Product" revenues for calendar year 2005 exceed [*] U.S. dollars ($[*]). For example, if ASPECT's Product revenues for 2005 were $[*], the total royalty due would be [*] U.S. dollars ($[*]), i.e., [*] plus [*]. - --------------- [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 6 9 Any royalty due above the minimum payment (e.g., [*] dollars in the example) is payable March 15, 2006. (2) On or before November 1, 2005, ASPECT shall notify LUCENT if ASPECT elects not to extend the LIMITED PERIOD for calendar year 2006. In the absence of such a notification, the one year extension shall be automatic and, on or before March 15, 2006, ASPECT shall pay LUCENT the sum of [*] U.S. dollars ($[*]). This is a minimum payment for the calendar year 2006. The amount actually owed for calendar year 2006 is the higher of [*] ($[*]) or [*] U.S. dollars ($[*]) plus [*]% of the amount, if any, by which ASPECT's publicly reported Product revenues for calendar year 2006 exceed [*] U.S. dollars ($[*]). Any royalty due above the minimum payment is payable March 15, 2007. (3) On or before November 1, 2006, ASPECT shall notify LUCENT if ASPECT elects not to extend the LIMITED PERIOD from January 1, 2007 through February 28, 2008. In the absence of such a notification, the fourteen month extension shall be automatic and, on or before March 15, 2007, ASPECT shall pay LUCENT the sum of [*] U.S. Dollars ($[*]). This is a minimum payment for the period from January 1, 2007 and February 28, 2008. The amount actually owed for this period is the higher of [*] U.S. dollars or [*] U.S. dollars plus [*]% of the amount, if any, by which ASPECT's publicly reported Product revenues for calendar year 2007 exceed [*] U.S. dollars ($[*]). Any royalty due above the minimum payment is payable March 15, 2008. An election by ASPECT not to extend the LIMITED PERIOD shall operate to preclude any extension of the LIMITED PERIOD for subsequent years as well. (e) Overdue payments hereunder shall be subject to a late payment charge calculated at an annual rate of three percentage points (3%) over the prime rate or successive prime rates (as posted in New York City) during delinquency. If the amount of such charge exceeds the maximum permitted by law, such charge shall be reduced to such maximum. ARTICLE III TERMINATION 3.01 BREACH In the event of a breach of this Agreement by either party, the other party may, in addition to any other remedies that it may have, at any time terminate all licenses and rights granted by it hereunder by not less than two (2) months written notice specifying such breach, unless within the period of such notice all breaches specified therein shall have been remedied. - --------------- [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 7 10 3.02 VOLUNTARY TERMINATION (a) By written notice to the other party, either party may voluntarily terminate all or a specified portion of the licenses and rights granted to it hereunder. Such notice shall specify the effective date (not more than six (6) months prior to the giving of said notice) of such termination and shall clearly specify any affected patent, invention or product. (b) In the event of an acquisition/merger as specified in Section 4.02(c), if the acquired company fails to remain a separately identifiable business for a period of one month, this shall be deemed a voluntary termination of this Agreement by the acquired company. 3.03 SURVIVAL (a) If a company ceases to be a SUBSIDIARY of a party, licenses and rights granted hereunder with respect to patents of such SUBSIDIARY on applications filed prior to the date of such cessation, shall not be affected by such cessation. (b) Any termination of licenses and rights of a party under the provisions of this Article III shall not affect such party's licenses, rights and obligations with respect to any LICENSED PRODUCT made prior to such termination, shall not affect the licenses and rights of CUSTOMERS of such party with respect to past and future use of LICENSED PRODUCTS initially sold or leased prior to such termination, and shall not affect the other party's licenses and rights (and obligations related thereto) during the LIMITED PERIOD. ARTICLE IV MISCELLANEOUS PROVISIONS 4.01 DISCLAIMER NEITHER PARTY NOR ANY OF ITS SUBSIDIARIES MAKES ANY REPRESENTATIONS, EXTENDS ANY WARRANTIES OF ANY KIND, ASSUMES ANY RESPONSIBILITY OR OBLIGATIONS WHATEVER, OR CONFERS ANY RIGHT BY IMPLICATION, ESTOPPEL OR OTHERWISE, OTHER THAN THE LICENSES, RIGHTS AND WARRANTIES HEREIN EXPRESSLY GRANTED. 4.02 LIMITED ASSIGNABILITY; MERGERS AND ACQUISITIONS (a) The licenses granted hereunder to LUCENT shall extend to the products or services of any business LUCENT acquires during the license term without the payment of any additional royalties for so long as that business is a part of LUCENT or is a SUBSIDIARY of LUCENT. (b) The licenses granted hereunder to ASPECT shall extend to [*] - ----------- [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 8 11 [*] (c) [*] 4.03 ADDRESSES (a) Any notice or other communication hereunder shall be sufficiently given to ASPECT when sent by certified mail addressed to General Counsel, Aspect Telecommunications Corporation, 1730 Fox Drive, San Jose, California 95131-2312, or to LUCENT when sent by certified mail addressed to Contract Administrator, Intellectual Property Organization, Lucent - --------------- [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 9 12 Technologies, Inc., Suite 105, 14645 N.W. 77th Avenue, Miami Lakes, Florida 33014, United States of America. Changes in such addresses may be specified by written notice. (b) Payments by ASPECT shall be made to LUCENT at Sun Trust, P.O. Box 913021, Orlando, Florida, 32891-3021, United States of America. Alternatively, payments to LUCENT may be made by bank wire transfers to LUCENT's account: Lucent Technologies Licensing, Account No. 910-2-568475, Swift Code: CHASUS33, ABA Code: 021000021, at Chase Manhattan Bank, N.A., 55 Water Street, New York, New York 10041, United States of America. Changes in such address or account may be specified by written notice. If any date specified herein for the payment of royalties falls on a weekend or holiday, the payment will be timely if made on the next business day following said date. All payments shall be made in U.S. dollars. 4.04 TAXES Each party shall bear the tax, duty, levy, customs fee, or similar charge ("taxes"), including interest and penalties thereon, however designated, imposed on it as a result of the operation or existence of this Agreement. More specifically, Lucent shall pay (i) net income taxes imposed upon LUCENT by any governmental entity within the United States (the fifty (50) states and the District of Columbia), and (ii) net income taxes imposed upon LUCENT by jurisdictions outside the United States which are allowable as a credit against the United States Federal income tax of LUCENT or any of its SUBSIDIARIES. In order for the exception in (ii) to be effective, ASPECT must furnish to LUCENT evidence sufficient to satisfy the United States taxing authorities that such taxes have been paid. Such evidence must be furnished to LUCENT within thirty (30) days of issuance by the local taxing authority. 4.05 CHOICE OF LAW The parties are familiar with the principles of New York commercial law, and desire and agree that the law of New York shall apply in any dispute arising with respect to this Agreement. 4.06 INTEGRATION This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof and merges all prior discussions between them. Neither of the parties shall be bound by any warranties, understandings or representations with respect to such subject matter other than as expressly provided herein or in a writing signed with or subsequent to execution hereof by an authorized representative of the party to be bound thereby. 4.07 OUTSIDE THE UNITED STATES (a) There are countries in which the owner of an invention is entitled to compensation, damages or other monetary award for another's unlicensed manufacture, sale, lease, use or importation involving such invention prior to the date of issuance of a patent for such invention but on or after a certain earlier date, hereinafter referred to as the invention's "protection commencement date" (e.g., the date of publication of allowed claims or the date of publication or 10 13 "laying open" of the filed patent application). In some instances, other conditions precedent must also be fulfilled (e.g., knowledge or actual notification of the filed patent application). The parties agree that (i) an invention which has a protection commencement date in any such country may be used in such country pursuant to the terms of this Agreement on and after any such date, and (ii) all such conditions precedent are deemed satisfied by this Agreement. (b) There may be countries in which a party hereto may have, as a consequence of this Agreement, rights against infringers of the other party's patents licensed hereunder. Each party hereby waives any such right it may have by reason of any third party's infringement or alleged infringement of any such patents. (c) Each party hereby agrees to register or cause to be registered, to the extent required by applicable law, and without expense to the other party or any of its SUBSIDIARIES, any agreements wherein sublicenses are granted by it under the granting party's patents. Each party hereby waives any and all claims or defenses, arising by virtue of the absence of such registration, that might otherwise limit or affect its obligations to the other party. 4.08 DISPUTE RESOLUTION (a) If a dispute arises out of or relates to this Agreement, or the breach, termination or validity thereof, the parties agree to submit the dispute to a sole mediator selected by the parties or, at any time at the option of a party, to mediation by the American Arbitration Association ("AAA"). If not thus resolved, it shall be referred to a sole arbitrator selected by the parties within thirty (30) days of the mediation, or in the absence of such selection, to AAA arbitration which shall be governed by the United States Arbitration Act. (b) Any award made (i) shall be a bare award limited to a holding for or against a party and affording such remedy as is deemed equitable, just and within the scope of the agreement; (ii) shall be without findings as to issues (including but not limited to patent validity and/or infringement) or a statement of the reasoning on which the award rests; (iii) may in appropriate circumstances (other than patent disputes) include injunctive relief; (iv) shall be made within four (4) months of the appointment of the arbitrator; and (v) may be entered in any court. (c) The requirement for mediation and arbitration shall not be deemed a waiver of any right of termination under this Agreement and the arbitrator is not empowered to act or make any award other than based solely on the rights and obligations of the parties prior to any such termination. (d) The arbitrator shall be knowledgeable in the legal and technical aspects of this Agreement and shall determine issues of arbitrability but may not limit, expand or otherwise modify the terms of the agreement. (e) The agreement shall be interpreted in accordance with the laws of the State of New York exclusive of its conflict of laws provisions and the place of mediation and arbitration shall be New York City. 11 14 (f) Each party shall bear its own expenses but those related to the compensation and expenses of the mediator and arbitrator shall be borne equally. (g) A request by a party to a court for interim measures shall not be deemed a waiver of the obligation to mediate and arbitrate. (h) The arbitrator shall not have authority to award punitive or other damages in excess of compensatory damages and each party irrevocably waives any claim thereto. (i) The parties, their representatives, other participants and the mediator and arbitrator shall hold the existence, content and result of mediation and arbitration in confidence. 4.09 RELEASES (a) In consideration of the sum of fourteen million United States dollars (U.S.$14,000,000.00) and other good and valuable consideration paid by ASPECT to LUCENT, and subject to the receipt thereof, LUCENT, for itself and for its present SUBSIDIARIES, hereby releases ASPECT, its present SUBSIDIARIES, and all customers (but only for and to the extent of the products furnished by ASPECT) and all suppliers (but only for and to the extent of the products sold to ASPECT) of products of the kinds herein licensed as of the effective date hereof to ASPECT, only from all claims, demands and rights of action which LUCENT or any of its present SUBSIDIARIES may have on account of any infringement or alleged infringement of any patent issued in any country of the world, or any other alleged misappropriation of intellectual property rights, by reason of the manufacture or any past or future use, lease, sale or importation of any of such products which, prior to the effective date hereof, were used or furnished by ASPECT or any of its present SUBSIDIARIES. (b) ASPECT, for itself and for its present SUBSIDIARIES, hereby releases LUCENT, its present SUBSIDIARIES, and all customers (but only for and to the extent of the products furnished by LUCENT) and all suppliers (but only for and to the extent of the products sold to LUCENT) of products of the kinds herein licensed as of the effective date hereof to LUCENT, only from all claims, demands and rights of action which ASPECT or any of its present SUBSIDIARIES may have on account of any infringement or alleged infringement of any patent issued in any country of the world, or any other alleged misappropriation of intellectual property rights, by reason of the manufacture or any past or future use, lease, sale or importation of any of such products which, prior to the effective date hereof, were used or furnished by LUCENT or any of its present SUBSIDIARIES. 4.10 EXISTING LICENSE AGREEMENTS Any preexisting patent license agreements between ASPECT (or its SUBSIDIARIES or any third party previously owning any patent now licensed by ASPECT hereunder) and LUCENT (or its SUBSIDIARIES or any third party previously owning any patent now licensed by LUCENT hereunder) shall remain in full force and effect notwithstanding this Agreement. ASPECT hereby consents to any assignment, dated after the lawsuits referenced herein have been 12 15 dismissed, from Octel to LUCENT of the Aspect-Octel Patent License Agreement dated as of December 30, 1993 and amended as of May 7, 1996. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed in duplicate originals by its duly authorized representatives on the respective dates entered below. LUCENT TECHNOLOGIES INC. By: /s/ M.R. GREENE ----------------------------------- M.R. Greene Acting President - Intellectual Property Date: 2/27/98 ----------------------------------- ASPECT TELECOMMUNICATIONS CORPORATION By: /s/ MARK MELTZER ----------------------------------- Mark Meltzer Vice President, General Counsel Date: 2/27/98 ----------------------------------- THIS AGREEMENT DOES NOT BIND OR OBLIGATE EITHER PARTY IN ANY MANNER UNLESS DULY EXECUTED BY AUTHORIZED REPRESENTATIVES OF BOTH PARTIES. 13 16 DEFINITIONS APPENDIX GENERAL DEFINITIONS: ASPECT's PATENTS means every patent (including utility models but excluding design patents and design registrations) issued in any country of the world which claims or is otherwise directed to an invention disclosed in any patent application filed in that country or in any other country prior to the end of the LIMITED PERIOD, provided that, at any time after the actual or constructive reduction to practice of such invention disclosed in any such application and after the effective date of this Agreement, ASPECT (or any SUBSIDIARY of ASPECT) has the right to grant any licenses of the type herein granted by ASPECT under such patent. LICENSED PRODUCT means, as to any grantee, any product (including any specified combination of other products) listed for such grantee in Section 1.01. LIMITED PERIOD means the period commencing on the effective date of this Agreement and ending on December 31, 2004. This period shall automatically be extended, year-by-year, for years 2005, 2006 and 2007, respectively, unless ASPECT provides timely notice to LUCENT, pursuant to Section 2.01(d), that ASPECT does not wish to extend the period., If ASPECT provides timely notice to LUCENT that ASPECT does not wish to extend the period for year 2005, the LIMITED PERIOD shall end on December 31, 2004 otherwise it shall automatically be extended to December 31, 2005. Assuming the LIMITED PERIOD has been extended for 2005, if ASPECT provides timely notice to LUCENT that ASPECT does not wish to extend the period for year 2006, the LIMITED PERIOD shall end on December 31, 2005 otherwise it shall automatically be extended to December 31, 2006. Assuming the LIMITED PERIOD has been extended for 2005 and 2006, if ASPECT provides timely notice to LUCENT that ASPECT does not wish to extend the period for year 2007, the LIMITED PERIOD shall end on December 31, 2006, otherwise the LIMITED PERIOD shall automatically be extended through and including February 28, 2008. LUCENT's PATENTS means every patent (including utility models but excluding design patents and design registrations) issued in any country of the world which claims or is otherwise directed to an invention disclosed in any patent application filed in that country or in any other country prior to the end of the LIMITED PERIOD, provided that, at any time after the actual or constructive reduction to practice of such invention disclosed in any such application and after the effective date of this Agreement, LUCENT (or any SUBSIDIARY of LUCENT) has the right to grant any licenses of the type herein granted by LUCENT under such patent. Provided, however, that in any case "LUCENT's PATENTS" shall be deemed to exclude all patent claims (including extensions and reissues thereof) issuing in any country of the world which claim or are otherwise directed to dispersion compensated fiber or non-zero dispersion fiber (NZDF), or to a process for manufacturing SEMICONDUCTIVE DEVICES utilizing spatially patterned masks in conjunction with an electron beam. SUBSIDIARY of a company means a corporation or other legal entity (i) the majority of whose shares or other securities entitled to vote for election of directors (or other managing authority) is now or hereafter controlled by such company either directly or indirectly; or (ii) which does not have outstanding shares or securities but the majority of whose ownership interest representing the right to manage such corporation or other legal entity is now or hereafter owned and controlled by such company either directly or indirectly; but any such corporation or other legal entity shall be 14 17 deemed to be a SUBSIDIARY of such company only as long as such control or ownership and control exists. 15 18 TECHNICAL DEFINITIONS: [*] - ---------- [*] = OMITTED PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST. THE MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 16 EX-13.1 3 EXCERPTS FROM THE APPENDIX TO 1998 PROXY STATEMENT 1 ASPECT TELECOMMUNICATIONS CORPORATION ANNUAL FINANCIAL REPORT TO SHAREHOLDERS SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31, 1997 (a);(b) 1996 (a) 1995 (a) 1994 1993 ------------ -------- ------- ------- -------- (in thousand, except per share and employee data) Net revenues $390,642 $308,703 $198,972 $147,239 $106,473 Gross margin 221,669 174,781 111,596 81,561 58,812 (% of net revenues) 57% 57% 56% 55% 55% Research and development 45,723 34,585 23,450 15,774 11,491 (% of net revenues) 12% 11% 12% 11% 11% Selling, general and administrative 104,431 82,478 50,726 37,662 29,273 (% of net revenues) 27% 27% 25% 26% 27% Income from operations 52,605 57,718 35,620 28,125 18,048 (% of net revenues) 13% 19% 18% 19% 17% Net income $ 35,182 $ 37,633 $ 23,991 $ 17,573 $ 11,475 (% of net revenues) 9% 12% 12% 12% 11% Basic earnings per share $ 0.71 $ 0.86 $ 0.58 $ 0.43 $ 0.29 Weighted average shares outstanding (c) 49,302 43,917 41,314 40,708 40,232 Diluted earnings per share $ 0.67 $ 0.75 $ 0.52 $ 0.40 $ 0.27 Weighted average shares outstanding -- assuming dilution 52,307 52,163 49,352 48,373 43,664 AS OF DECEMBER 31 Cash, cash equivalents, and short-term investments $146,216 $115,797 $ 93,633 $102,597 $ 93,105 Working capital 169,814 140,079 108,588 113,128 103,632 Total assets 370,343 283,093 215,871 166,035 138,326 Long-term debt (c) 6,531 4,500 59,500 55,000 55,000 Shareholders' equity (c) $267,795 $219,448 $112,285 $ 80,813 $ 64,333 Shares outstanding (c) 49,997 48,807 41,753 40,652 40,642 Capital spending $ 24,922 $ 33,210 $ 16,627 $ 13,112 $ 8,853 Regular full-time employees 1,610 1,330 950 640 500
(a) September 1997, the Company acquired Commerce Soft Inc. The transaction was accounted for as a purchase, and a charge of $4.9 million, or approximately $0.09 per share on a diluted basis, was recorded for purchased in-process technology. During 1997, the Company recorded a gain on the sale of appreciated equity securities of $2.1 million, or $0.02 per share on a diluted basis. During 1996, the Company acquired Envoy Holdings Limited and Prospect Software, Inc. The transactions were accounted for as pooling of interests. Results for years prior to 1996 have not been restated since the adjustments would not be material. In October 1995, the Company acquired TCS Management Group, Inc. The transaction was accounted for as a purchase, and a charge of $1.8 million, or $0.02 per share on a diluted basis, was recorded for purchased in-process technology. See Note 2 to the Consolidated Financial Statements. (b) In February 1998, the Company entered into a litigation settlement and patent cross-license agreement with Lucent Technologies Inc. The transaction resulted in a charge of $14 million, or $0.17 per share on a diluted basis. See Note 15 to the Consolidated Financial Statements. (c) Amount reflects the October 1996 conversion of $55 million of 5% convertible subordinated debentures into approximately 5.7 million shares of common stock. F-1 2 Aspect Telecommunications Corporation Annual Financial Report to Shareholders MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND Aspect Telecommunications Corporation (Aspect or the Company) is a worldwide provider of comprehensive business solutions for companies that generate revenue, serve customers, and handle inquiries. The Company's solutions include automatic call distributor (ACD) systems and software; computer-telephony integration (CTI) application software and tools; interactive voice response (IVR) systems; Web response systems; management information and reporting tools; and planning and forecasting packages. The Company also delivers consulting, training, and systems integration services that help companies plan, integrate, staff, and manage call centers effectively. In September 1997, the Company acquired Commerce Soft Inc. (Commerce Soft), 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 that resulted in a one-time charge of $4.9 million in 1997 related to in-process technology. The Company completed the acquisitions of Envoy Holdings Limited (Envoy) in September 1996 and Prospect Software, Inc. (Prospect), in October 1996, both of which were accounted for as pooling of interests. In October 1995, the Company acquired TCS Management Group, Inc. (TCS), which was accounted for as a purchase. (See Note 2 to the Consolidated Financial Statements.) On February 27, 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. (See Note 15 to the Consolidated Financial Statements.) 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 32E 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" below. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. Aspect undertakes no obligation to publicly release any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof. RESULTS OF OPERATIONS Net revenues increased by 27% to $391 million in 1997 from $309 million in 1996, and 1996 revenues increased by 55% from $199 million in 1995. Net revenues for 1995 include results for TCS for the two-month period ending December 31, 1995, and net revenues for 1996 and 1997 each include a full year of results for Envoy and Prospect. Product revenues grew by 20% to $276 million in 1997 from $231 million in 1996, and 1996 product revenues increased by 55% from $148 million in 1995. The increases in product revenues for both periods were primarily attributable to increased market demand for the Company's products, as the volume of new systems and add-ons increased from year to year, and the impact of TCS's product revenues in 1996 and 1997. Growth in product revenues for 1997 was higher in international markets than in North America. There were no significant changes in average selling prices for new systems across the periods presented. Customer support revenues increased by 46% to $114 million in 1997 from $78 million in 1996, and 1996 customer support revenues increased 55% from $51 million in 1995. Growth in customer support revenues for both periods resulted primarily from increases in maintenance revenues as a result of the growth in the Company's installed base and the impact of TCS's customer support revenues in 1996 and 1997. In addition, growth from 1996 to 1997 reflects expansion of the Company's Consulting and Systems Integration (C&SI) business unit established in 1996. Customer support revenues include charges 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); charges to install products; consulting and systems integration revenues; and other support services. F-2 3 Aspect Telecommunications Corporation Annual Financial Report to Shareholders No single customer accounted for 10% or more of net revenues in any of the years presented. Net revenues outside North America as a percentage of total net revenues over the periods presented were 28% in 1997, 25% in 1996, and 24% in 1995. Revenues generated from international operations are generally denominated in foreign currencies. The Company enters into forward exchange contracts to reduce the impact of foreign currency fluctuations on the results of operations. Gross margin on product revenues increased to 68% in 1997 from 66% in 1996 and 65% in 1995. The increase between 1997 and 1996 primarily reflects growth in add-on revenues, which generally carry higher margins, and other factors. The increase between 1996 and 1995 primarily reflects the inclusion of TCS's product revenues, which typically carry higher margins than the Company's other product revenues. 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 cross-licensing or royalty arrangements with third parties. Gross margin on customer support revenues was 30% in 1997, 28% in 1996, and 30% in 1995. The improvement in customer support gross margins between 1997 and 1996 was primarily attributable to increases in maintenance revenues, with lower increases in costs associated with providing customer support. The decrease in customer support margins between 1996 and 1995 reflects customer support revenues not growing proportionately with the costs associated with providing the related services. 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 Company's ability to build a successful C&SI business unit. Research and development (R&D) expenses increased by 32% to $46 million in 1997 from $35 million in 1996, and 1996 R&D expenses increased 47% from $23 million in 1995, reflecting 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, associated infrastructure costs, and the impact of TCS's R&D expenses in 1996 and 1997. As a percentage of net revenues, R&D expenses were 12% in 1997, 11% in 1996, and 12% in 1995. 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 1998 will increase in absolute dollars, although such expenses as a percentage of net revenues may fluctuate between periods. Selling, general and administrative (SG&A) expenses increased by 27% to $104 million in 1997 from $82 million in 1996, and 1996 SG&A expenses increased by 63% from $51 million in 1995. The increases across the periods presented were primarily caused by increased staffing, infrastructure, and other costs related to expansion of the Company's business; the impact of TCS's SG&A expenses in 1996 and 1997; amortization of intangible assets; and, in 1997, increased legal expenses. Increases in SG&A expenses in 1997 were partially offset by the donation of appreciated equity securities in lieu of cash to fund the Company's corporate giving program. SG&A expenses as a percentage of net revenues were 27% in 1997 and 1996, and 25% in 1995. The Company anticipates, on a forward-looking basis, that SG&A expenses will continue to increase in absolute dollars for 1998, when compared with 1997, although such expenses as a percentage of net revenues may fluctuate between periods. Purchased in-process technology represents non-recurring charges of $4.9 million and $1.8 million associated with the acquisitions of Commerce Soft and TCS in 1997 and 1995, respectively. The intellectual property settlement represents a non-recurring charge of $14 million related to the resolution of the Company's litigation with Lucent in February 1998, which was recorded as a subsequent event in the fourth quarter of 1997. (See Note 15 to the Consolidated Financial Statements.) Net interest and other income increased to $7.7 million in 1997 from $2.1 million in 1996, and 1996 net interest and other income decreased from $2.5 million in 1995. The increase in net interest and other income during 1997 was due primarily to a $2.1 million gain on the sale of appreciated equity securities, higher interest earning balances, and the conversion of the Company's $55 million of convertible subordinated debentures in October 1996. The decrease from 1995 to 1996 was primarily attributable to lower interest earning balances and lower interest rates. Through October 15, 1996, the Company incurred interest expense related to $55 million of convertible subordinated debentures issued in September 1993. The interest expense related to the debentures was $2.3 million in 1996 and $2.9 million in 1995. On a forward-looking basis, the Company anticipates that net interest income will be reduced by interest expense associated with long-term debt incurred during 1997 in connection with the acquisition of intellectual property, and by an increasing F-3 4 Aspect Telecommunications Corporation Annual Financial Report to Shareholders portion of the Company's investment portfolio invested in tax-advantaged securities, which typically earn lower stated interest rates. The Company's effective tax rate was 41.6% in 1997, 37.1% in 1996, and 37.0% in 1995. The 1997 rate reflects the tax effect of a $4.9 million non-deductible, non-recurring charge for purchased in-process technology associated with the acquisition of Commerce Soft. Without this charge, the Company's effective tax rate for 1997 would have been 38.5%. The remaining increase in the Company's effective tax rate from 1996 to 1997 reflects expanding international operations and other factors. The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which requires the reporting of basic earnings per share (EPS) and diluted EPS. Basic EPS is computed by dividing net income by the weighted average common shares outstanding for the period. Diluted EPS is essentially unchanged from numbers the Company previously reported as fully diluted EPS, and includes the dilutive impact of stock options and, for 1996 and 1995, the incremental shares related to convertible subordinated debentures that were redeemed in October 1996. EPS reported in prior periods have been restated to conform with SFAS 128. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1997, the Company's principal source of liquidity consisted of cash, cash equivalents, and short-term investments totaling $146 million, which represented 39% of total assets. The primary sources of cash during 1997 were cash provided by operating activities of $56 million, proceeds from the issuance of common stock under various stock plans of $10 million, and net sales and maturities of short-term investments of $28 million. The primary uses of cash during 1997 were $25 million for the purchase of property and equipment, and $10 million for the acquisition of intellectual property. As of December 31, 1997, the Company's outstanding borrowings, including current and non-current portions of notes payable, totaled $12.9 million. Borrowings consisted of a $4.5 million note payable incurred in connection with the acquisition of TCS and $8.4 million related to acquisitions of intellectual property during 1997 (see Note 2 to the Consolidated Financial Statements). 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. BUSINESS ENVIRONMENT AND RISK FACTORS The Company operates in a rapidly changing environment that involves a number of risks, some of which are beyond the Company's control. The following discussion highlights some of these risk factors. The Company's revenues, gross margins, and operating results may fluctuate significantly from period to period for many reasons including, without limitation: reduced demand for the Company's products and services; a limited number of large systems or multisystem orders accounting for a significant portion of product revenues in any particular quarter; dependence on new customers for a significant percentage of product revenues; fluctuations in the results of operations of existing operations, recently acquired subsidiaries, newly established business units or distributors of the Company's products or services, or mix of products and services and channels of distribution; or changes in market growth rates for different products and services. In addition, the Company's products typically represent substantial capital commitments by customers, involving a long sales cycle and, as a result, customer purchase decisions have been, and in the future may be, significantly affected by a variety of factors including, without limitation: general economic and financial market conditions; world political events; trends in capital spending for telecommunications products; market competition and the availability or announcement of alternative technologies; and the degree to which call transaction processing is mission critical for customers. The Company's common stock price may be subject to significant volatility. Past financial performance should not be considered a reliable indicator of performance for any future period, and investors should not use historical data to predict future results or trends. For any given quarter, a shortfall in the Company's achieved revenues or earnings from the levels expected by securities analysts or others could have an immediate and adverse effect on the price of the Company's common stock. Additionally, the Company may not learn of such shortfalls until late in a fiscal quarter, which could result in an even more immediate and adverse effect on the Company's common stock price. Such volatility may be exacerbated by the relatively low trading volume of the Company's common stock. Further, the Company operates in F-4 5 Aspect Telecommunications Corporation Annual Financial Report to Shareholders a rapidly changing high-technology industry, which has in the past exhibited significant stock market volatility. Often, when a high-technology company's stock price declines rapidly, that company may become subject to class action securities litigation. Were the Company to become involved in such litigation, it could expend significant financial and management resources, which could have a material adverse effect on the Company's business, operating results, and financial condition. Sales and installations of Aspect ACD Systems account for a substantial portion of net revenues. Any factor adversely affecting demand or the failure of any Aspect product or service to meet customer specifications, including system performance, system availability, installation or service delivery commitments, or other requirements, could have a material adverse effect on the Company's business, operating results, and financial condition. The market for Aspect products and services is subject to rapid technological change and new product introductions. Current competitors or new market entrants may develop new, proprietary products with features that could adversely affect the competitive position of the Company's products. There can be no assurance that the Company will be successful in accurately anticipating market demand for products being developed; in developing, manufacturing, or marketing new products or services in a timely manner; or in enhancing existing products and services. Due to their complexity and sophistication, from time to time the Company's software products contain defects that can be difficult to correct. There can be no assurance that software defects will not cause delays in product introductions and shipments, result in increased costs, require design modifications, impair customer satisfaction with the Company's products, or result in unanticipated downtime and lost revenues. Any such event could materially adversely affect the Company's business, operating results, and financial condition. The Company believes the market for its products and services is highly competitive and that competition is likely to intensify. The Company's principal competitors currently include companies that market ACD systems, private branch exchange systems that include ACD features, and alternative or complementary technologies and services such as CTI software companies and systems integrators. The Company anticipates that telephone operating companies could market ACD functionality. Additional potential competitors include companies with technologies capable of providing call transaction processing, including participants in the problem tracking and resolution software market, pre - network routing companies, and a wide variety of CTI and software companies. As the hardware requirements for a traditional call center diminish due to the emergence of the Internet, local area networks, and other factors, other companies may obtain a significant position in the call transaction processing market. Many current and potential competitors, including but not limited to Lucent, Northern Telecom Limited, Rockwell International Corporation, and Siemens Business Communications Systems, Inc., have longer operating histories, considerably greater resources, and larger customer bases than Aspect. Consequently, the Company expects to encounter substantial competition from these sources, as well as from new market entrants and emerging technologies. Intensified competition could result in lower prices and margins for Aspect products, which could materially adversely affect the Company's business, operating results, and financial condition. The telecommunications market has been characterized by extensive litigation regarding patents and other intellectual property rights. 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. For example, in March 1997, Lucent filed a lawsuit in the United States District Court for the Eastern District of Pennsylvania alleging that the Company infringed four of Lucent's U.S. patents. Although the Company attempts to ensure that its products and processes do not infringe 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. Although the Company recently resolved its dispute with Lucent by entering into a cross-license agreement, there can be no assurance that such other future 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. An adverse determination in such litigation or proceeding could prevent the Company from making, using, or selling certain of its products, and subject the Company to damage assessments, any of which could have a material adverse effect on the Company's business, operating results, and financial condition. In the future, Aspect 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. Any litigation in which the Company is involved, regardless of merit, source, or outcome, could result in substantial cost to and F-5 6 Aspect Telecommunications Corporation Annual Financial Report to Shareholders diversion of effort by the Company, which could have a material adverse effect on the Company's business, operating results, and financial condition. The Company's success depends in part upon its internally developed technology. The Company generally enters into confidentiality or license agreements with its employees, consultants, and vendors, and generally controls access to and distribution of its software, documentation, and other proprietary information. Despite these precautions, unauthorized third parties may copy or otherwise obtain and use the Company's technology. In addition, third parties may develop similar technology independently. The Company has experienced a period of rapid growth that has placed a significant strain on the Company's managerial and operational resources. To manage its growth, the Company must continue to implement and improve its operational and financial systems and to expand, train, and manage its employee base. For example, the Company intends to implement upgrades to its internal integrated business application software systems. There can be no assurance that complications will not arise from these software system transitions, resulting in substantial unanticipated expenses. In addition, the Company must carefully manage accounts receivables to limit credit risk and maintain inventories at levels consistent with product demand and the requirements of new product introductions. Inaccuracies in demand forecasts or disruption in the supply chain could quickly result in insufficient or excessive inventories and obsolescence expense. Certain critical components are presently available only from a single source or from limited sources of supply. Some of these suppliers utilize proprietary technology that could require redesign of the Company's products with a change in vendor. Additionally, there can be no assurance suppliers will not discontinue or modify these components in a manner incompatible with the Company's use. Some manufacturing processes have been contracted to outside vendors, and certain of the tools and processes cannot be easily migrated to other vendors. Any difficulty these vendors have in meeting the Company's requirements for any reason could have a material adverse effect on the Company's business, operating results, and financial condition. The Company manufactures components incorporated into its products pursuant to engineering and manufacturing licenses from third parties. The Company depends upon the licensors to provide technical support and cooperation in optimizing the Company's use of the licensed technologies. Should any of the licensors become unable to provide such technical support, the Company would have to develop internal capabilities or otherwise locate alternative technical support. This in turn could adversely affect the Company's ability to complete timely shipments during the transition. If, due to a breach of a license agreement or otherwise, the Company becomes unable to continue to utilize the applicable licensed technology, the Company's business, operating results, and financial condition could be materially adversely affected. The Company's product development, manufacturing, information technology systems, corporate offices, and support functions are concentrated at a single location in the Silicon Valley area of California. In the event of a natural disaster, such as an earthquake or flood, or in localized extended outages in critical utilities or transportation systems, the Company could experience a business interruption that could have a material adverse effect on the Company's business, operating results, and financial condition. The Company depends upon certain key management and technical personnel and on its ability to attract and retain highly qualified personnel in labor markets characterized by high demand for, and limited supply of, qualified people. Failure to attract and retain such personnel could have a material adverse effect on the Company's business, operating results, and financial condition. Aspect has periodically acquired companies and intellectual property and made minority equity investments in companies with products, services, or technologies that potentially complement the Company's business. In the future, the Company may make further strategic acquisitions and investments or enter into joint ventures or strategic alliances with other companies. Such transactions entail numerous risks, including the following: inability to successfully integrate such companies' personnel and businesses; inability to realize anticipated synergies, economies of scale, or other value associated with such transactions; inability to commercialize acquired technologies successfully or on a timely basis; diversion of management's attention and disruption of the Company's ongoing business; inability to retain key technical and managerial personnel; inability to establish and maintain uniform standards, controls, procedures, and policies; and impairment of relationships with employees, customers, or others. In addition, future acquisitions or investments by the Company may result in the issuance of additional equity or debt securities, significant one-time write-offs, and the creation of goodwill or other intangible assets that result in future charges to earnings. Failure to avoid these or other F-6 7 Aspect Telecommunications Corporation Annual Financial Report to Shareholders risks and costs associated with such business combinations, investments, joint ventures, or strategic alliances could have a material adverse effect on the Company's business, operating results, and financial condition. The Company currently operates in several international markets and anticipates entering additional markets in the future. The financial resources required to enter a new international market may vary substantially, and many countries require multiple governmental approvals prior to allowing a new entrant into the market. The cost and timing of these approvals, which may require the Company to modify its products, are often subject to considerable uncertainty and could result in longer lead times than initially anticipated. The Company's international operations are subject to additional risks, including market acceptance; exchange rate fluctuations; delays in telecommunications deregulation; difficulties in staffing and managing foreign subsidiary operations; political and economic instability; potentially negative tax consequences; and foreign and domestic trade legislation, which could result in the creation of trade barriers such as tariffs, duties, quotas, and other restrictions. Failure to successfully enter certain international markets on a timely basis could impair the Company's competitive position in such markets and prevent the Company from obtaining the scale advantages of global competitors. The Company's products are subject to various regulations that require, among other things, that the Company's products meet certain radio frequency emission standards, be compatible with the public telephone networks, and conform to certain safety and other standards. Sales of products that fail to comply with these regulations may be prohibited by regulatory authorities until appropriate modifications are made. There can be no assurance that the Company will be successful in obtaining or maintaining the necessary regulatory approvals for its products, and failure to do so could have a material adverse effect on the Company's business, operating results, and financial condition. The Company historically has relied primarily on its direct sales force and a limited number of distributors. In the future, the Company may depend increasingly on expanded distributor, electronic, and other alternate distribution channels to accommodate changing customer preferences. As a result, if the Company is unable to successfully expand its channels of distribution to address changes in customer preferences, competitive environment, or other factors, it could have a material adverse effect on the Company's business, operating results, and financial condition. 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. The Company has not yet fully assessed the extent of its exposure, or investigated the plans of its suppliers and vendors to address their exposures to these year 2000 problems, and thus the Company may be adversely impacted should these organizations not successfully address this issue. F-7 8 Aspect Telecommunications Corporation Annual Financial Report to Shareholders CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 1996 - --------------------- --------- --------- (in thousands, except share and per share amounts) ASSETS Current assets: Cash and cash equivalents $ 106,046 $ 47,996 Short-term investments 40,170 67,801 Accounts receivable (net of allowance for doubtful accounts: $1,716 in 1997 and $1,202 in 1996) 86,896 53,211 Inventories 12,306 15,485 Other current assets 20,413 14,731 --------- --------- Total current assets 265,831 199,224 Property and equipment -- net 58,704 51,348 Intangible assets -- net 42,654 28,888 Other assets 3,154 3,633 --------- --------- Total assets $ 370,343 $ 283,093 --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 9,401 $ 10,027 Current portion of notes payable 6,399 -- Accrued compensation and related benefits 14,256 8,896 Accrued intellectual property settlement 14,000 -- Other accrued liabilities 36,335 20,741 Customer deposits and deferred revenue 15,626 19,481 --------- --------- Total current liabilities 96,017 59,145 Note(s) payable 6,531 4,500 Commitments and contingencies Shareholders' equity: Preferred stock, $.01 par value: 2,000,000 shares authorized, none outstanding in 1997 an -- -- Common stock, $.01 par value: 100,000,000 shares authorized, shares outstanding: 49,996,731 in 1997 and 48,806,580 in 1996 144,524 128,186 Net unrealized gain on securities 1,267 2,534 Accumulated translation adjustments (1,951) (45) Retained earnings 123,955 88,773 --------- --------- Total shareholders' equity 267,795 219,448 --------- --------- Total liabilities and shareholders' equity $ 370,343 $ 283,093 --------- ---------
See Notes to Consolidated Financial Statements. F-8 9 Aspect Telecommunications Corporation Annual Financial Report to Shareholders CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 1996 1995 - ------------------------ --------- --------- --------- (in thousands, except per share amounts) Net revenues: Product $ 276,471 $ 230,539 $ 148,436 Customer support 114,171 78,164 50,536 --------- --------- --------- Total net revenues 390,642 308,703 198,972 --------- --------- --------- Cost of revenues: Cost of product revenues 89,529 77,374 52,007 Cost of customer support revenues 79,444 56,548 35,369 --------- --------- --------- Total cost of revenues 168,973 133,922 87,376 --------- --------- --------- Gross margin 221,669 174,781 111,596 Operating expenses: Research and development 45,723 34,585 23,450 Selling, general and administrative 104,431 82,478 50,726 Purchased in-process technology 4,910 -- 1,800 Intellectual property settlement 14,000 -- -- --------- --------- --------- Total operating expenses 169,064 117,063 75,976 --------- --------- --------- Income from operations 52,605 57,718 35,620 Interest and other income 7,966 4,884 5,649 Interest expense (293) (2,774) (3,188) --------- --------- --------- Income before income taxes 60,278 59,828 38,081 Provision for income taxes 25,096 22,195 14,090 --------- --------- --------- Net income $ 35,182 $ 37,633 $ 23,991 --------- --------- --------- Basic earnings per share $ 0.71 $ 0.86 $ 0.58 Weighted average shares outstanding 49,302 43,917 41,314 Diluted earnings per share $ 0.67 $ 0.75 $ 0.52 Weighted average shares outstanding -- assuming dilution 52,307 52,163 49,352
See Notes to Consolidated Financial Statements. F-9 10 Aspect Telecommunications Corporation Annual Financial Report to Shareholders CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NOTES NET RECEIVABLE UNREALIZED FROM SALE GAIN ACCUMULATED COMMON STOCK OF COMMON (LOSS) ON TRANSLATION RETAINED (IN THOUSANDS, EXCEPT SHARE AMOUNTS) SHARES AMOUNT STOCK SECURITIES ADJUSTMENTS EARNINGS TOTAL ---------- ---------- ---------- ---------- ----------- ---------- ---------- BALANCES, DECEMBER 31, 1994 40,652,200 $ 55,226 $ (10) $ (606) $ (344) $ 26,547 $ 80,813 Issuance of common stock under stock purchase plans 344,800 2,524 -- -- -- -- 2,524 Issuance of common stock under other stock plans 755,922 2,911 -- -- -- -- 2,911 Collection of notes receivable -- -- 10 -- -- -- 10 Income tax benefit for employee stock option transactions -- 1,421 -- -- -- -- 1,421 Net unrealized gain on securities -- -- -- 708 -- -- 708 Accumulated translation adjustments -- -- -- -- (93) -- (93) Net income -- -- -- -- -- 23,991 23,991 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCES, DECEMBER 31, 1995 41,752,922 62,082 -- 102 (437) 50,538 112,285 Adjustment in connection with pooling of interests 490,836 378 -- -- -- 602 980 Issuance of common stock under stock purchase plans 178,426 3,149 -- -- -- -- 3,149 Issuance of common stock under other stock plans 725,232 4,633 -- -- -- -- 4,633 Income tax benefit for employee stock option transactions -- 4,177 -- -- -- -- 4,177 Issuance of common stock related to the conversion of the convertible subordinated debentures, net of unamortized debt issuance costs of $1,233 5,659,164 53,767 -- -- -- -- 53,767 Net unrealized gain on securities -- -- -- 2,432 -- -- 2,432 Accumulated translation adjustments -- -- -- -- 392 -- 392 Net income -- -- -- -- -- 37,633 37,633 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCES, DECEMBER 31, 1996 48,806,580 128,186 -- 2,534 (45) 88,773 219,448 Issuance of common stock under stock purchase plans 238,478 4,291 -- -- -- -- 4,291 Issuance of common stock under other stock plans 774,364 5,242 -- -- -- -- 5,242 Income tax benefit for employee stock option transactions -- 2,195 -- -- -- -- 2,195 Issuance of common stock related to acquisition 177,309 4,610 -- -- -- -- 4,610 Net unrealized loss on securities -- -- -- (1,267) -- -- (1,267) Accumulated translation adjustments -- -- -- -- (1,906) -- (1,906) Net income -- -- -- -- -- 35,182 35,182 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCES, DECEMBER 31, 1997 49,996,731 $ 144,524 $ -- $ 1,267 $ (1,951) $ 123,955 $ 267,795 ---------- ---------- ---------- ---------- ---------- ---------- ----------
See Notes to Consolidated Financial Statements. F-10 11 Aspect Telecommunications Corporation Annual Financial Report to Shareholders CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 1996 1995 - ------------------------ --------- --------- --------- (in thousands) Cash flows from operating activities: Net income $ 35,182 $ 37,633 $ 23,991 Reconciliation of net income to cash provided by operating activities: Depreciation and amortization 17,170 16,296 8,687 Purchased in-process technology 4,910 -- 1,800 Gain on the sale of equity securities (2,070) -- -- Changes in assets and liabilities, net of effects from companies acquired in 1997 and 1995: Accounts receivable (34,865) (12,024) (9,764) Inventories 2,904 (4,265) (2,297) Other current assets and other assets (1,821) (4,191) (1,351) Accounts payable (645) (3,966) 3,520 Accrued compensation and related benefits 5,406 67 464 Accrued intellectual property settlement 14,000 -- -- Other accrued liabilities 19,131 9,147 5,593 Customer deposits and deferred revenue (3,624) 10,078 (810) --------- --------- --------- Cash provided by operating activities 55,678 48,775 29,833 Cash flows from financing activities: Other common stock transactions -- net 9,533 7,782 5,445 --------- --------- --------- Cash provided by financing activities 9,533 7,782 5,445 Cash flows from investing activities: Short-term investment purchases (41,936) (93,174) (85,794) Short-term investment sales and maturities 69,781 96,531 89,597 Acquisition of intellectual property (9,750) -- -- Property and equipment purchases (24,922) (33,210) (16,627) Purchase of company, net of cash acquired (278) -- (28,408) --------- --------- --------- Cash used in investing activities (7,105) (29,853) (41,232) Effect of exchange rate changes on cash and cash equivalents (56) (810) 85 --------- --------- --------- Increase (decrease) in cash and cash equivalents 58,050 25,894 (5,869) Cash and cash equivalents: Beginning of year 47,996 22,102 27,971 --------- --------- --------- End of year $ 106,046 $ 47,996 $ 22,102 --------- --------- --------- Supplemental disclosure of cash flow information: Cash paid for interest $ 379 $ 3,127 $ 2,750 Cash paid for income taxes $ 24,047 $ 18,852 $ 11,329 Supplemental schedule of noncash investing and financing activities: Income tax benefit from employee stock transactions $ 2,195 $ 4,177 $ 1,421 Notes payable issued in connection with the acquisition of intellectual property, net of discount of $1,570 $ 8,430 $ -- $ -- Conversion of convertible subordinated debentures into shares of common stock, net of unamortized debt issuance costs of $1,233 $ -- $ 53,767 $ --
See Notes to Consolidated Financial Statements. F-11 12 Aspect Telecommunications Corporation Annual Financial Report to Shareholders NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Aspect Telecommunications Corporation (Aspect or the Company) is a worldwide provider of comprehensive business solutions for companies that generate revenue, serve customers, and handle inquiries. The Company's solutions include automatic call distributor (ACD) systems and software; computer-telephony integration (CTI) application software and tools; interactive voice response (IVR) systems; Web response systems; management information and reporting tools; and planning and forecasting packages. The Company also delivers consulting, training, and systems integration services that help companies plan, integrate, staff, and manage call centers effectively. CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with an original maturity date of three months or less to be cash equivalents. INVESTMENTS The Company has classified all of its investments as available-for-sale securities. While the Company's intent is to hold debt securities to maturity, the Company has classified all debt securities as available-for-sale securities, as the sale of such securities may be required prior to maturity to implement management strategies. The carrying value of all securities is adjusted to fair market value, with unrealized gains and losses, net of deferred taxes, being excluded from earnings and reported as a separate component of shareholders' equity. Cost is based on the specific identification method for purposes of computing realized gains or losses. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of two to thirty years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. INTANGIBLE ASSETS Intangible assets at December 31, 1997, consist of $42,654,000 (net of accumulated amortization of $8,992,000) of purchased existing technology, goodwill, covenants not to compete, and a trademark acquired in the acquisition of TCS Management Group, Inc.; purchased intellectual property; and purchased existing technology associated with the acquisition of Commerce Soft Inc. (see Note 2). These intangible assets are amortized on a straight-line basis over periods of two to ten years. SOFTWARE DEVELOPMENT COSTS The costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Software to be Sold, Leased or Otherwise Marketed." Because the Company believes its current process for developing software is essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date. F-12 13 Aspect Telecommunications Corporation Annual Financial Report to Shareholders NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CUSTOMER DEPOSITS AND DEFERRED REVENUE Customer deposits primarily represent payments received from customers upon product order. Deferred revenue represents payments received from customers for maintenance support or products prior to revenue recognition. REVENUE RECOGNITION The Company generally recognizes revenue from the sale of systems upon installation at the customer site; revenues from add-ons, upgrades, software licenses, and systems sales to distributors are generally recognized upon shipment to the customer or distributor. Customer support revenues consist primarily of revenues from new system installations, which are recognized when the service is provided, and ongoing customer support revenues, which are recognized ratably over the support period. Revenues are recorded net of sales returns and allowances. Product warranty costs and costs related to insignificant vendor obligations for post-contract customer support are accrued when revenue is recognized. STOCK-BASED COMPENSATION The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with APB No. 25, "Accounting for Stock Issued to Employees." PER SHARE INFORMATION The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which requires the reporting of basic earnings per share (EPS) and diluted EPS. Basic EPS is computed by dividing net income by the weighted average common shares outstanding for the period. Diluted EPS is essentially unchanged from numbers the Company previously reported as fully diluted EPS, and includes the dilutive impact of stock options and, for 1996 and 1995, the incremental shares related to convertible subordinated debentures that were redeemed in October 1996. EPS reported in prior periods have been restated to conform with SFAS 128. See Note 12 for the calculation of basic and diluted EPS for all periods presented. FOREIGN CURRENCY TRANSLATION AND FOREIGN EXCHANGE CONTRACTS Operations of the Company's foreign subsidiaries are measured using the local currency as the functional currency for each subsidiary. Assets and liabilities of the foreign subsidiaries are translated into U.S. dollars at the exchange rates in effect as of the balance sheet dates, and results of operations for each subsidiary are translated using average rates in effect for the periods presented. Foreign currency transaction gains and losses, which are included in the consolidated statements of income, have not been material in any of the three years presented. The Company enters into foreign exchange contracts as a hedge against intercompany account balances. Market value gains and losses on these contracts offset foreign exchange gains or losses on the balances being hedged. CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Such management estimates include the allowance for doubtful accounts receivable, the value of intangible assets, and warranty reserves. Actual results could differ from those estimates. The Company sells its products primarily to large organizations in diversified industries in North America and Europe, and generally does not require its customers to provide collateral or other security to support accounts receivable. However, the Company's intention is to mitigate its credit risk on system sales by receiving a portion of the sales price prior to shipping the product. While the Company maintains allowances for potential bad debt losses, such losses to date have not been material. The Company operates in a rapidly changing environment that involves a number of risks, some of which are beyond the Company's control, that could have a material adverse effect on the Company's business, operating results, and financial condition. These risks include variability and uncertainty of revenues and operating results; product concentration, technological change, and new products; competition; intellectual property/litigation; management of growth; dependence on key personnel; limited sources of component supply; licenses from third parties; geographic F-13 14 Aspect Telecommunications Corporation Annual Financial Report to Shareholders NOTES TO CONSOLIDATED FINANCIAL STATEMENTS concentration; acquisitions and investments; international operations; regulatory requirements; expansion of distribution channels; and year 2000 compliance issues. RECLASSIFICATIONS Certain prior-year amounts have been reclassified to conform to the current-year presentation. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement 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 Statement of Financial Accounting Standards 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. Both statements are effective for fiscal years beginning after December 15, 1997, with earlier application permitted. The Company will adopt these pronouncements in 1998. Adoption of these statements will not affect the Company's consolidated financial position, results of operations or cash flows. In October 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2). This statement provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. This statement supersedes Statement of Position 91-1, "Software Revenue Recognition". SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997. While the Company has not completed its evaluation of SOP 97-2, the Company currently believes that the adoption of this statement will not have a material impact on the Company's financial position or results of operations. NOTE 2: BUSINESS COMBINATIONS AND OTHER ACQUISITIONS In October 1997, the Company acquired two intellectual property portfolios by paying $9,750,000 in cash and issuing $10,000,000 in notes payable. These notes are 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. These portfolios were capitalized as intangible assets and are being amortized over periods ranging from six to eight years. The agreements also contain balloon payments at the end of five years that are contingent upon the Company achieving certain financial and other parameters. Liabilities for these contingent amounts will be reflected in the financial statements when these payments become probable. In September 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 that resulted in a one-time charge of $4,910,000 related to in-process technology. The remaining portion of the purchase price that exceeded the net assets of Commerce Soft was recorded as intangible assets and is being amortized over a period of two years. The operating results of Commerce Soft have been included in the consolidated statements of income since the date of acquisition. Pro forma results, as though Commerce Soft were acquired at the beginning of 1996, are not disclosed as they are insignificant to the 1997 and 1996 results of operations. In October 1996, the Company acquired Prospect Software, Inc. (Prospect), by issuing 280,000 shares of common stock for all of the outstanding stock of Prospect. Prospect is a provider of application development tools for building connectivity to a variety of call center systems and network-based computer applications. The acquisition was accounted for as a pooling of interests. In September 1996, the Company acquired Envoy Holdings Limited (Envoy) by issuing approximately 211,000 shares of common stock for all of the outstanding stock of Envoy. Envoy Systems Limited, the primary operating subsidiary of Envoy, provides call center and telebusiness solutions to help improve customer service through consulting services, software, and systems integration. The acquisition was accounted for as a pooling of interests. All financial data for 1996 reflects the acquisitions of Envoy and Prospect, and all material intercompany transactions during such period have been eliminated. As the historical operations of Envoy and Prospect were not significant to any F-14 15 Aspect Telecommunications Corporation Annual Financial Report to Shareholders NOTES TO CONSOLIDATED FINANCIAL STATEMENTS year presented, the Company's financial statements for prior years have not been restated and the financial effect of the prior years' results of operations of Envoy and Prospect has been accounted for as a $602,000 increase to retained earnings in 1996. Summarized results of operations of the separate companies for the nine months ended September 30, 1996, are as follows (in thousands):
NET REVENUES NET INCOME ------------ ---------- Aspect $ 215,613 $ 26,646 Envoy 2,638 157 Envoy acquisition costs -- (374) Prospect 2,378 883 Eliminations (475) (123) --------- --------- $ 220,154 $ 27,189 --------- ---------
In October 1995, the Company acquired TCS Management Group, Inc. (TCS), a company engaged in the business of designing, marketing, and supporting software that automates the tasks associated with managing the workforce in a call center, specifically call forecasting, staff scheduling, and staff performance tracking. The acquisition was accounted for as a purchase. The aggregate purchase price of $37,500,000, consisting of $33,000,000 in cash and a promissory note of $4,500,000, plus costs of approximately $250,000 directly attributable to the acquisition, have been allocated to the assets acquired and liabilities assumed. The promissory note is due October 31, 1998, and bears interest at the prime rate (8.50% at December 31, 1997). Approximately $1,800,000 of the total purchase price represented the value of in-process technology that had not reached technological feasibility and that had no alternative future use and was charged to research and development expense in the fourth quarter of 1995. The fair value of assets acquired, excluding the $1,800,000 of purchased in-process technology charged to operations, was $42,214,000 and liabilities of $6,514,000 were assumed. The operating results of TCS have been included in the consolidated statements of income since the date of acquisition. Had the acquisition taken place at the beginning of 1995, unaudited pro forma results of operations would have been as follows for the year ended December 31 (in thousands, except per share data):
1995 --------- Net revenues $211,852 Net income 24,204 Diluted earnings per share 0.53
The pro forma results of operations give effect to certain adjustments, including amortization of purchased intangibles and goodwill, interest expense on the promissory note, the elimination of certain non-recurring expenses, and interest income associated with funding the acquisition. The $1,800,000 charge for purchased in-process technology has been excluded from the pro forma results as it is a non-recurring charge. F-15 16 Aspect Telecommunications Corporation Annual Financial Report to Shareholders NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3: INVESTMENTS Short-term investments at December 31 consist of the following (in thousands):
1997 ----------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ------- ------- ------- ------- Municipal obligations $32,760 $ 29 $ (13) $32,776 Corporate notes and bonds 2,946 2 (4) 2,944 Treasury bills 2,455 2 -- 2,457 Foreign debt issues 1,991 2 -- 1,993 ------- ------- ------- ------- Total $40,152 $ 35 $ (17) $40,170 ------- ------- ------- -------
1996 ----------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ------- ------- ------- ------- Municipal obligations $34,680 $ 105 $ (320) $34,465 Corporate notes and bonds 26,804 63 (38) 26,829 Treasury bills 3,506 -- (7) 3,499 Foreign debt issues 3,009 -- (1) 3,008 ------- ------- ------- ------- Total $67,999 $ 168 $ (366) $67,801 ------- ------- ------- -------
The maturity of short-term investments at December 31, 1997, was as follows (in thousands):
MARKET VALUE ------------------- WITHIN ONE TO ONE YEAR TWO YEARS -------- --------- Municipal obligations $29,636 $ 3,140 Corporate notes and bonds 2,944 -- Treasury bills 2,457 -- Foreign debt issues 1,993 -- ------- ------- Total $37,030 $ 3,140 ------- -------
Included in other current assets at December 31, 1997, is an investment in equity securities with a market value of $2,261,000 (cost of $169,000). The Company realized a gain of $2,070,000 from the sale of appreciated equity securities in 1997. Realized gains and losses were not significant in 1996 and 1995. NOTE 4: INVENTORIES Inventories at December 31 consist of (in thousands):
1997 1996 ------- ------- Raw materials $ 5,331 $ 7,058 Work in progress 3,624 3,081 Finished goods 3,351 5,346 ------- ------- Total $12,306 $15,485 ------- -------
F-16 17 Aspect Telecommunications Corporation Annual Financial Report to Shareholders NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: PROPERTY AND EQUIPMENT Property and equipment at December 31 consist of (in thousands):
1997 1996 --------- --------- Land $ 3,912 $ 3,891 Building and improvements 9,820 6,809 Computer and development equipment 55,669 48,107 Field spares 15,034 13,633 Office equipment 23,669 15,393 Leasehold improvements 12,064 8,844 --------- --------- Total 120,168 96,677 Accumulated depreciation and amortization (61,464) (45,329) --------- --------- Property and equipment -- net $ 58,704 $ 51,348 --------- ---------
NOTE 6: OTHER ACCRUED LIABILITIES Other accrued liabilities at December 31 consist of (in thousands):
1997 1996 ------- ------- Income taxes payable $12,048 $ 6,263 Product warranty 3,948 3,778 Other 20,339 10,700 ------- ------- Total $36,335 $20,741 ------- -------
NOTE 7: SHAREHOLDERS' EQUITY STOCK OPTION PLANS Under the Company's stock option plans, incentive and nonqualified stock options may be granted to employees, officers, and directors. All options must be granted at fair market value. Options granted to nondirectors become exercisable as determined by the Board of Directors (generally over four years) and typically expire ten years after the date of grant. Options granted to outside directors become exercisable over four years and currently expire five years after the date of grant. A summary of stock option activity follows:
WEIGHTED- NUMBER OF AVERAGE SHARES EXERCISE PRICE ---------- -------------- Outstanding, December 31, 1994 5,499,756 $ 5.70 Granted 2,788,100 $ 13.03 Canceled (690,412) $ 7.09 Exercised (754,682) $ 3.86 ---------- --------- Outstanding, December 31, 1995 6,842,762 $ 8.75 Granted 2,554,000 $ 25.84 Canceled (525,089) $ 13.05 Exercised (723,724) $ 6.16 ---------- --------- Outstanding, December 31, 1996 8,147,949 $ 14.06 Granted 2,256,584 $ 22.82 Canceled (684,971) $ 19.00 Exercised (771,030) $ 6.77 ---------- --------- Outstanding, December 31, 1997 8,948,532 $ 16.52 ---------- ---------
F-17 18 Aspect Telecommunications Corporation Annual Financial Report to Shareholders NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information about stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- ---------------------------- WEIGHTED-AVERAGE WEIGHTED- WEIGHTED- RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE --------------- ----------- ---------------- -------------- ----------- -------------- $ 0.50 - $ 9.50 2,166,349 4.83 years $ 4.98 1,803,816 $ 4.45 $ 9.88 - $ 17.88 3,082,160 7.64 $ 13.64 1,372,266 $ 12.36 $ 18.25 - $ 32.02 3,700,023 8.50 $ 25.67 805,288 $ 25.52 - ------------------ --------- ----- --------- --------- --------- $ 0.50 - $ 32.02 8,948,532 7.31 $ 16.52 3,981,370 $ 11.44 - ------------------ --------- ----- --------- --------- ---------
At December 31, 1997, 4,107,556 shares were available for future grant under the Company's stock option plans. At December 31, 1996 and 1995, options to purchase 2,814,004 and 1,967,694 shares, respectively, were exercisable at weighted-average exercise prices of $6.91 and $4.43, respectively. EMPLOYEE STOCK PURCHASE PLAN In April 1990, the Board of Directors established the 1990 Employee Stock Purchase Plan, under which 2,100,000 common shares are authorized for sale to qualified employees through payroll withholdings at a price equal to 85% of the lower of the fair market value as of the beginning or end of the offering period. At December 31, 1997, 1,861,507 shares had been issued under this plan. STOCK-BASED COMPENSATION The Company utilizes stock options to attract new employees and retain existing employees. Such options provide the grantee an opportunity to purchase the Company's common stock at the fair market value of such shares as of the date of grant, pursuant to a vesting period. The options expire based on the earlier of the employee's termination date or typically ten years from the grant date. In 1996, the Company was required to adopt Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 requires that the fair value of stock-based awards to employees be calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from the Company's stock-based awards. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated values. Accordingly, management believes that the pro forma amounts below, which are based on the methodology required under SFAS 123, do not necessarily provide a reliable single measure of the fair value of the Company's stock-based awards. SFAS 123 encourages, but does not require, companies to record compensation cost for stock-based awards at fair value. Under this method, compensation cost is measured based on the fair value of the stock award when granted, and is recognized as an expense over the service period, which is usually the vesting period. As discussed in Note 1, the Company has chosen to continue to account for stock-based awards using the intrinsic value method prescribed in APB No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized for its stock option plans and its stock purchase plan. Had the compensation cost for the Company's stock-based awards been determined based on the fair value at the grant dates for awards under those plans in 1997 and 1996 consistent with the method of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share data):
1997 1996 1995 ----------- ----------- ----------- Net income As reported $ 35,182 $ 37,633 $ 23,991 Pro forma $ 21,267 $ 27,849 $ 21,812 Basic earnings per share As reported $ 0.71 $ 0.86 $ 0.58 Pro forma $ 0.43 $ 0.63 $ 0.53 Diluted earnings per share As reported $ 0.67 $ 0.75 $ 0.52 Pro forma $ 0.41 $ 0.56 $ 0.48
F-18 19 Aspect Telecommunications Corporation Annual Financial Report to Shareholders NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The initial impact of adopting SFAS 123 disclosures may not be representative of the effect on pro forma net income and earnings per share in future years because the impact of outstanding nonvested stock options granted prior to 1995 has been excluded from the pro forma calculations, options vest over several years, and additional option grants may be made each year. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: expected life, seven months following vesting; stock volatility, approximately 50%; risk-free interest rate, approximately 6%; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. The weighted-average fair value of options granted during 1997, 1996, and 1995 was approximately $9.50, $10.00, and $5.00, respectively. The fair value of the employees' purchase rights under the Employee Stock Purchase Plan was estimated using the Black-Scholes model with the following weighted-average assumptions: expected life, six months; expected volatility, 72% in 1997, 54% in 1996, and 39% in 1995; risk-free interest rate, approximately 6%; and no dividends during the expected term. The weighted-average fair value of purchase rights granted in 1997, 1996, and 1995 was approximately $9.00, $6.00, and $2.50, respectively. SHARES RESERVED FOR ISSUANCE At December 31, 1997, the Company had reserved shares of common stock for issuance as follows: Stock option plans 13,056,088 Stock purchase plan 238,493 Other stock plans 8,090 ---------- Total 13,302,671 ----------
NOTE 8: INCOME TAXES Tax provisions for the years ended December 31 consist of (in thousands):
1997 1996 1995 -------- -------- -------- Current: Federal $ 27,183 $ 16,303 $ 10,140 State 4,855 2,371 2,300 Foreign 2,342 2,258 3,487 -------- -------- -------- Subtotal 34,380 20,932 15,927 Deferred: Federal (8,217) 1,294 (1,730) State (1,067) (31) (107) -------- -------- -------- Subtotal (9,284) 1,263 (1,837) -------- -------- -------- Total $ 25,096 $ 22,195 $ 14,090 -------- -------- --------
Income before income taxes for the years ended December 31 consists of (in thousands):
1997 1996 1995 ------- ------- ------- Domestic $53,095 $53,707 $27,740 Foreign - net 7,183 6,121 10,341 ------- ------- ------- Total $60,278 $59,828 $38,081 ------- ------- -------
F-19 20 Aspect Telecommunications Corporation Annual Financial Report to Shareholders NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation of the statutory federal income tax rate and the effective tax rate as a percentage of income before income taxes for the years ended December 31 was as follows:
1997 1996 1995 ----- ------ ------ Tax at statutory rate 35.0% 35.0% 35.0% State income taxes -- net of federal effect 4.1 3.8 3.8 Research and development tax credits (1.6) (0.8) (0.6) Tax exempt investment income (1.0) (0.7) (1.3) Foreign sales corporation benefit (0.8) (0.5) (0.4) Other 2.8 0.3 0.5 ---- ---- ---- Subtotal 38.5% 37.1% 37.0% Nondeductible charge for purchased in-process technology 3.1% -- -- ---- ---- ---- Total 41.6% 37.1% 37.0% ---- ---- ----
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss carryforwards. Significant components of the Company's deferred income tax assets and liabilities as of December 31 were as follows (in thousands):
1997 1996 -------- -------- Deferred tax assets: Accruals deductible in different periods $ 12,258 $ 4,976 Depreciation and amortization 2,992 1,495 Overhead in inventory 482 514 Net operating loss of foreign subsidiaries 136 520 Revenue recognized in different periods -- 224 -------- -------- 15,868 7,729 Deferred tax liabilities: Unrealized gains on investments (793) (1,554) Valuation allowance for net operating loss of foreign subsidiaries (136) (520) -------- -------- Net deferred tax asset $ 14,939 $ 5,655 -------- --------
NOTE 9: COMMITMENTS Certain manufacturing and administrative facilities are leased under operating leases through 2013. Certain leases provide for escalating rental payments over the lease period, and rent expense for such leases is recognized on a straight-line basis over the terms of the leases. Rent expense was $6,426,000, $5,613,000, and $3,720,000 in 1997, 1996, and 1995, respectively. Future minimum payments under the Company's operating leases at December 31, 1997, are (in thousands): 1998 $ 8,590 1999 8,429 2000 7,745 2001 6,172 2002 4,809 2003 and thereafter 22,986 ---------- Total $ 58,731 ----------
F-20 21 Aspect Telecommunications Corporation Annual Financial Report to Shareholders NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10: LITIGATION 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. While the Company is not aware that its products or processes infringe any valid 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 managerial personnel. An adverse determination in such litigation or proceeding, 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. (See Note 15.) In addition, 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. NOTE 11: EMPLOYEE BENEFIT PLAN Qualified employees are eligible to participate in the Company's 401(k) tax-deferred savings plan. Participants may contribute up to 17% of their eligible earnings (up to a maximum contribution of $9,500 in 1997) to this plan, for which the Company, at the discretion of the Board of Directors and within certain limitations, may make matching contributions, in addition to discretionary contributions to cover the administrative costs of the plan. Contributions made by the Company to the plan were $2,349,000, $1,811,000, and $799,000 in 1997, 1996, and 1995, respectively. NOTE 12: EARNINGS PER SHARE Basic and diluted EPS for the years ended December 31 are calculated as follows (in thousands, except per share data):
1997 1996 1995 ------- ------- ------- Basic EPS: Weighted average shares outstanding 49,302 43,917 41,314 Net income $35,182 $37,633 $23,991 Basic EPS $ 0.71 $ 0.86 $ 0.58 ------- ------- ------- Diluted EPS: Weighted average shares outstanding 49,302 43,917 41,314 Dilutive effect of options 3,005 3,780 2,378 Weighted average shares issuable upon assumed conversion of debt -- 4,466 5,660 ------- ------- ------- Total 52,307 52,163 49,352 Net income $35,182 $37,633 $23,991 Interest expense during the period on convertible subordinated debentures, net of tax -- 1,460 1,857 ------- ------- ------- Net income adjusted for diluted calculation $35,182 $39,093 $25,848 ------- ------- ------- Diluted EPS $ 0.67 $ 0.75 $ 0.52 ------- ------- -------
F-21 22 Aspect Telecommunications Corporation Annual Financial Report to Shareholders NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13: OPERATIONS BY GEOGRAPHIC AREA AND MAJOR CUSTOMER The Company operates in the telecommunications industry primarily in North America and Europe. The following represents a summary of operations by geographic area for the years ended December 31 (in thousands):
1997 1996 1995 --------- --------- --------- Net revenues: North America $ 288,363 $ 239,412 $ 152,731 Europe 102,279 69,291 46,241 --------- --------- --------- Consolidated $ 390,642 $ 308,703 $ 198,972 --------- --------- --------- North American transfers to other geographic areas $ 50,768 $ 30,647 $ 13,076 --------- --------- --------- Income from operations: North America $ 45,471 $ 52,748 $ 25,256 Europe 6,637 5,968 10,165 Eliminations 497 (998) 199 --------- --------- --------- Consolidated $ 52,605 $ 57,718 $ 35,620 --------- --------- --------- Identifiable assets: North America $ 332,638 $ 247,199 $ 199,690 Europe 44,574 40,421 28,746 Eliminations (6,869) (4,527) (12,565) --------- --------- --------- Consolidated $ 370,343 $ 283,093 $ 215,871 --------- --------- ---------
Intercompany transfers are made at arm's-length prices. No single customer accounted for 10% or more of net revenues in 1997, 1996, or 1995. NOTE 14: FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURE The following summary disclosures are made in accordance with the provisions of Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" (SFAS 107), which requires the disclosure of fair value information about both on- and off-balance sheet financial instruments where it is practicable to estimate the value. Fair value is defined in SFAS 107 as the amount at which an instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale that is not the Company's intent. Because SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company. Amounts at December 31 consist of (in thousands):
1997 1996 ---------------------- ----------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------ ---------- ------ ---------- Assets: Cash and cash equivalents $106,046 $106,046 $ 47,996 $ 47,996 Short-term investments 40,170 40,170 67,801 67,801 Investment in equity securities 2,261 2,261 4,736 4,736 Commitments: Foreign exchange contracts $ 11,063 $ 11,059 $ 14,004 $ 14,070
At December 31, 1997 and 1996, the Company had $30,452,000 and $7,848,000, respectively, of outstanding foreign exchange contracts in which foreign currencies (primarily British pound and German mark) were sold; and $19,389,000 and $6,156,000, respectively, of outstanding foreign exchange contracts (primarily British pounds) were purchased. Unrealized gains or losses on forward exchange contracts were not significant at December 31, 1997 or 1996. Other than the items disclosed in the previous table, the Company has not entered into any other material financial derivative instruments. F-22 23 Aspect Telecommunications Corporation Annual Financial Report to Shareholders NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair value of cash and cash equivalents reported in the balance sheets approximate their carrying value. The fair value of short-term investments, investment in equity securities, and foreign exchange contracts is based on quoted market prices. NOTE 15: SUBSEQUENT EVENTS On March 5, 1997, Lucent filed a lawsuit in the United States District Court for the Eastern District of Pennsylvania alleging that the Company infringed four of Lucent's U.S. patents (the Lucent Patents). In its complaint, Lucent sought to enjoin the Company from allegedly continuing to infringe the Lucent Patents and sought an unspecified amount of compensatory damages; treble damages for alleged willful infringement; and interest, expenses, and attorneys' fees. On February 4, 1998, the Company filed a complaint in the United States District Court, Northern District of California, asserting that Lucent infringed seven Aspect patents. Lucent responded by filing for a declaratory judgment regarding these Aspect patents in the United States District Court, Northern District of Texas. On February 27, 1998, the Company announced that it entered into a patent cross-license agreement with Lucent, under which each party agreed to dismiss their patent lawsuits against each other, released each other from claims of past infringement, and settled their patent disputes. Under the agreement, Aspect paid Lucent a one-time fee and, for the duration of the cross-license agreement, will pay royalties that are not expected to be material to Aspect's future results of operations. As part of the settlement, Aspect recorded a non-recurring charge of $14,000,000 (approximately 17 cents per diluted share) for the quarter and year ended December 31, 1997. F-23 24 Aspect Telecommunications Corporation Annual Financial Report to Shareholders INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Aspect Telecommunications Corporation: We have audited the accompanying consolidated balance sheets of Aspect Telecommunications Corporation and its subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material aspects, the financial position of Aspect Telecommunications Corporation and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP - ------------------------------ San Jose, California January 14, 1998 (February 27, 1998 as to Note 15 of the above-mentioned financial statements) F-24 25 Aspect Telecommunications Corporation Annual Financial Report to Shareholders QUARTERLY FINANCIAL DATA (unaudited)
1997 QUARTERS ENDED 1996 QUARTERS ENDED -------------------------------------------- -------------------------------------------- (in thousands, except per share data) DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31 -------- -------- -------- -------- -------- -------- -------- -------- Net revenues $106,290 $ 99,192 $ 93,542 $ 91,618 $ 88,549 $ 80,224 $ 72,905 $ 67,025 Gross margin 60,882 56,210 53,390 51,187 49,086 45,138 41,873 38,684 (% of net revenues) 57% 57% 57% 56% 55% 56% 57% 58% Income from operations 5,899 12,845 17,020 16,841 15,500 14,948 14,112 13,158 Net income $ 4,371 $ 7,009 $ 12,576 $ 11,226 $ 10,444 $ 9,690 $ 9,074 $ 8,425 (% of net revenues) 4% 7% 13% 12% 12% 12% 12% 13% Diluted earnings per share $ 0.08 $ 0.13 $ 0.24 $ 0.21 $ 0.20 $ 0.19 $ 0.18 $ 0.17 Quarterly stock price: High $ 26.94 $ 26.25 $ 24.63 $ 33.63 $ 32.38 $ 32.75 $ 29.50 $ 26.25 Low $ 18.88 $ 17.88 $ 16.50 $ 18.75 $ 22.38 $ 14.63 $ 22.06 $ 14.88
Income from operations and net income in Q4 1997 include a $14 million (approximately $0.17 per diluted share) non-recurring charge for intellectual property settlement. Income from operations and net income in Q3 1997 include a $4.9 million (approximately $0.09 per diluted share) non-recurring charge for purchased in-process technology. Net income in Q2 1997 includes a non-recurring $2.1 million ($0.02 per diluted share) gain on the sale of appreciated equity securities. The 1996 quarterly information has been restated to reflect the acquisitions of Envoy Holdings Limited in Q3 1996, and Prospect Software, Inc., in Q4 1996. (See Notes 2 and 15 to the Consolidated Financial Statements.)
1997 QUARTERS ENDED 1996 QUARTERS ENDED -------------------------------------------- -------------------------------------------- (in thousands, except per share data) DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31 -------- -------- -------- -------- -------- -------- -------- -------- Net income excluding non-recurring items $ 12,981 $ 11,919 $ 11,303 $ 11,226 $ 10,444 $ 9,690 $ 9,074 $ 8,425 Diluted earnings per share excluding non-recurring items $ 0.25 $ 0.23 $ 0.22 $ 0.21 $ 0.20 $ 0.19 $ 0.18 $ 0.17
F-25 26 Aspect Telecommunications Corporation Annual Financial Report to Shareholders CORPORATE INFORMATION
CORPORATE OFFICERS BOARD OF DIRECTORS STOCK LISTING James R. Carreker James R. Carreker Aspect Telecommunications Corporation's Chairman and Chief Executive Officer Chairman and Chief common stock is traded on the Nasdaq Executive Officer Stock Market under the symbol "ASPT." Dennis L. Haar Aspect Telecommunications As of December 31, 1997, there were President and Chief Operating Officer Corporation approximately 790 shareholders of record of the Company's common stock. Kirsten K. Berg-Painter Debra J. Engel Vice President, Interactive Senior Vice President DIVIDEND POLICY Communication Systems of Corporate Services 3Com Corporation The Company has never paid cash Robert A. Blatt dividends on its capital stock. Vice President, Marketing and Norman A. Fogelsong The Company currently anticipates Business Development General Partner that it will retain all available Institutional Venture Partners funds for use in its business. Kathleen M. Cruz Vice President, Information Technology James L. Patterson ANNUAL MEETING and Chief Information Officer Chairman of the Board Clarify Inc. Aspect Telecommunications Corporation's Linda F. Johnstone annual meeting of shareholders will be Vice President, Europe, Middle East John W. Peth held at 4:00 p.m. on May 14, 1998, at and Africa President and Chief the Company's facilities located at 1160 Executive Officer Ridder Park Drive, San Jose, California. Eric J. Keller Business Resource Group Vice President, Finance ASPECT CORPORATE HEADQUARTERS and Chief Financial Officer SECRETARY Aspect Telecommunications D. Thompson McCalmont Craig W. Johnson 1730 Fox Drive Vice President, Enterprise CTI Director, Venture Law Group San Jose, California 95131-2312 Tel: +1 (408) 325-2200 Mark J. Meltzer INDEPENDENT AUDITORS 1 (800) 226-8441 Vice President, General Counsel Fax: +1 (408) 325-2260 Deloitte & Touche LLP www.aspect.com John D. Meyers San Jose, California Principal Engineer, Product Technology and Chief Technical Officer LEGAL COUNSEL Larry S. Miller Venture Law Group Vice President, North America Menlo Park, California R. Dixon (Dirk) Speas, Jr. TRANSFER AGENT Vice President, Asia-Pacific (C) 1998 Aspect Telecommunications. and Latin America Boston EquiServe, L.P. Aspect and the Aspect logo are Boston, Massachusetts trademarks or registered trademarks David M. Yoffie of Aspect Telecommunications Vice President, Customer Support INVESTOR RELATIONS Corporation in the United States and Manufacturing and/or other countries. All other Additional copies of this product or service names mentioned Annual Report and other in this document may be trademarks financial information are of the companies with which they available without charge are associated. upon request to: Investor Relations Department Aspect Telecommunications 1730 Fox Drive San Jose, California 95131-2312 Telephone: +1 (408) 325-2629 E-mail: invest@aspect.com
F-26 EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT-JURISDICTION OF INCORPORATION Aspect Telecommunications AG Switzerland Aspect Telecommunications A/S Denmark Aspect Telecommunications B.V. The Netherlands Aspect Telecommunications Canada Company Canada Aspect Telecommunications GmbH Germany Aspect Telecommunications Japan, Ltd. Japan Aspect Telecommunications Ltd. Hong Kong Aspect Telecommunications Ltd. United Kingdom Aspect Telecommunications N.V. Belgium Aspect Telecommunications PTE (S) Ltd. Singapore Aspect Telecommunications Pty. Ltd. Australia Commerce Soft, Inc. United States TCS Management Group United States EX-23.1 5 INDEPENDENT AUDITORS' CONSENT & REPORT ON SCHEDULE 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE ASPECT TELECOMMUNICATIONS CORPORATION: We consent to the incorporation by reference in Registration Statement Nos. 33-36437, 33-36438, 33-39243, 33-69010, 33-50048, 33-94810, 333-07407, 333-24315, and 333-38041 of Aspect Telecommunications Corporation on Form S-8 of our report dated January 14, 1998 (February 27, 1998 as to Note 15), incorporated by reference in this Annual Report on Form 10-K of Aspect Telecommunications Corporation for the year ended December 31, 1997. Our audits of the financial statements referred to in our aforementioned report also included the financial statement schedule of Aspect Telecommunications Corporation, listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP San Jose, California March 24, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME INCLUDED IN THE COMPANY'S FORM 10-K FOR THE PERIOD ENDING DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 106,046 40,170 88,612 1,716 12,306 265,831 120,168 61,464 370,343 96,017 6,531 0 0 144,524 123,271 370,343 276,471 390,642 89,529 168,973 169,064 0 293 60,278 25,096 0 0 0 0 35,182 0.71 0.67 For Purposes of This Exhibit, Primary means Basis.
EX-27.1 7 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME INCLUDING IN THE COMPANY'S FORM 10-Q FOR THE PERIODS ENDING MARCH 31, 1997; JUNE 30, 1997; AND SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS. 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 58,820 76,751 97,759 68,086 57,438 50,197 64,886 69,242 73,749 1,614 1,618 1,660 13,311 11,403 10,367 216,742 227,064 242,069 101,557 109,499 114,893 48,232 52,978 56,696 301,676 314,067 329,836 67,250 64,256 67,308 4,500 4,500 4,500 0 0 0 0 0 0 129,211 132,546 138,701 100,715 112,495 119,327 301,676 314,067 329,836 67,552 133,484 202,042 91,618 185,160 284,352 23,205 43,684 68,215 40,431 80,853 123,563 34,346 70,716 114,081 0 0 0 27 77 199 18,254 38,702 53,173 7,028 14,900 22,362 11,226 23,802 30,811 0 0 0 0 0 0 0 0 0 11,226 23,802 30,811 0.23 0.49 0.63 0.21 0.46 0.59 For Purposes of This Exhibit, Primary means Basis.
EX-27.2 8 RESTATED FINANCIAL DATA SCHEDULE
5 6-MOS 9-MOS 12-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 35,499 32,058 47,996 74,515 76,027 67,801 44,538 48,797 54,413 825 825 1,202 11,888 15,462 15,485 9,600 9,467 199,224 71,835 89,118 96,677 37,484 40,930 45,329 244,085 262,686 283,093 50,382 58,637 59,145 59,500 59,500 4,500 0 0 0 0 0 0 66,390 67,469 128,186 67,813 77,080 91,262 244,085 262,686 283,093 105,501 165,572 230,539 139,930 220,154 308,703 34,634 54,847 77,374 59,373 94,459 133,922 53,287 83,477 117,063 0 0 0 1,714 2,576 2,774 27,821 43,250 59,828 10,322 16,061 22,195 17,499 27,189 37,633 0 0 0 0 0 0 0 0 0 17,499 27,189 37,633 0.41 0.64 0.86 0.35 0.55 0.75 For Purposes of This Exhibit, Primary means Basis.
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