-----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, Rc+VTDuCBfQwr9jWaWf5IlKtvddgXOQO8jx9DNhp3LNxxPjRTSQtPp9CNaeSs0WL 8ePkvS1+r/9bDTkEeq/94w== 0001012870-02-001536.txt : 20020415 0001012870-02-001536.hdr.sgml : 20020415 ACCESSION NUMBER: 0001012870-02-001536 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASPECT COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000779390 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942974062 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-18391 FILM NUMBER: 02592063 BUSINESS ADDRESS: STREET 1: 1310 RIDDER PARK DRIVE CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 4083252200 MAIL ADDRESS: STREET 1: 1310 RIDDER PARK DRIVE CITY: SAN JOSE STATE: CA ZIP: 95131 FORMER COMPANY: FORMER CONFORMED NAME: ASPECT TELECOMMUNICATIONS CORP DATE OF NAME CHANGE: 19940218 10-K405 1 d10k405.txt FORM 10-K405 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ----------------- Form 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 0-18391 ----------------- ASPECT COMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) California 94-2974062 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1310 Ridder Park Drive, San Jose, California 95131-2312 (Address of principal executive offices and zip code) (408) 325-2200 (Registrant's telephone number) 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 21, 2002, was $199,351,591 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 21, 2002 was 52,460,945. DOCUMENTS INCORPORATED BY REFERENCE Parts of the Proxy Statement for the 2002 Annual Meeting of Shareholders are incorporated by reference into items 10,11,12,and 13 hereof. ================================================================================ ASPECT COMMUNICATIONS CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 PART I Page ---- Item 1 Business....................................................................... 4 Item 2 Properties..................................................................... 8 Item 3 Legal Proceedings.............................................................. 8 Item 4 Submission of Matters to a Vote of Security Holders............................ 9 PART II Item 5 Market for Registrant's Common Stock and Related Stockholder Matters........... 10 Item 6 Selected Financial Data........................................................ 11 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation.................................................................... 12 Item 7A Quantitative and Qualitative Disclosures About Market Risk..................... 28 Item 8 Financial Statements and Supplementary Data.................................... 29 Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosures.................................................................. 54 PART III Item 10 Directors and Executive Officers of the Registrant............................. 55 Item 11 Executive Compensation......................................................... 56 Item 12 Security Ownership of Certain Beneficial Owners and Management................. 56 Item 13 Certain Relationships and Related Transactions................................. 56 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on 8-K..................... 56
2 Forward-Looking Statements The matters discussed in this report including, but not limited to, statements relating to anticipated revenue and gross margin levels, anticipated spending levels for capital equipment, research and development, and selling, general and administrative expenses, adequacy of our financial resources to meet currently anticipated cash flow requirements for the next twelve months, lack of significant changes in financial market risk exposures to the Company, and general economic conditions are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended; Section 21E of the Securities and Exchange Act of 1934, as amended; and the Private Securities Litigation Reform Act of 1995; and are made under the safe-harbor provisions thereof. Such forward-looking statements, which may be identified by phrases such as "we anticipate," "we believe," and "on a forward-looking basis," are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Specific factors that may cause actual revenue and earnings per share results to differ include the significant percentage of Aspect's quarterly sales consummated in the last few days of the quarter, making financial predictions especially difficult and raising a substantial risk of variance in actual results; fluctuations in our North American and International business levels and/or economic conditions; the hiring and retention of key employees; changes in product line revenues; insufficient, excess, or obsolete inventory and variations in valuation; and foreign exchange rate fluctuations. For a discussion of additional risks, see "Business Environment and Risk Factors," appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report on Form 10-K. 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. 3 PART I Item 1. Business Background Aspect Communications Corporation (Aspect or the Company) is a leading provider of business communications solutions that help companies improve customer satisfaction, reduce operating costs, gather market intelligence and increase revenue. Aspect is the trusted mission-critical partner of 76 percent of the Fortune 50, daily managing more than 3 million customer sales and service professionals worldwide. Aspect provides the mission-critical software platform, development environment and applications that seamlessly integrate traditional telephony, e-mail, voicemail, web, fax, wireless business communications and voice-over-IP, while providing investment protection in a company's existing data and telephony infrastructures. Aspect's leadership in business communications solutions is based on more than 16 years of experience and over 7,600 implementations deployed worldwide. Aspect was incorporated on August 16, 1985, in California and is headquartered in San Jose, California. Aspect has offices around the world, as well as an extensive global network of systems integrators, independent software vendors and distribution partners. During 1999, the Company initiated a transformation of its business from a telecommunication equipment supplier to a provider of software solutions. The transformation included repackaging and repricing Aspect's products and services, developing and launching new software based products and services, changing the Company's internal processes and systems, establishing key systems integration and technology partnerships, enhancing the Company's senior management team, and retaining key employees. During 2001, due to the drastic changes in the economic environment, Aspect took action to right-size the Company, and at the same time, realigned the organization to better leverage the relationships with existing as well as new partners. Acquisitions On February 18, 2000, the Company acquired privately held PakNetX Corporation (PakNetX), an eBusiness software provider based in Salem, New Hampshire. The transaction enables Aspect to integrate multimedia-over-IP technology into its flagship Contact Server platform and strengthen the Company's market position. The Company paid $55 million in cash for all the outstanding common and preferred shares and warrants of PakNetX. In addition, Aspect assumed the existing PakNetX stock option plan and converted PakNetX stock options into options to purchase 160,000 shares of Aspect common stock with a fair value of $10 million, and incurred transaction costs of $2 million. The transaction was accounted for as a purchase and resulted in a one-time charge of $5 million related to in-process technology that had not reached technological feasibility in the quarter ended March 31, 2000. The historical operations of PakNetX are not material to the financial position or results of operations of the Company. Industry Background and Market Trends Many companies today are recognizing that a Customer Relationship Management (CRM) strategy is key to continued attraction and retention of customers. With more enterprises having a global presence, providing a consistent level of customer interaction becomes increasingly important, with customers wanting the same service regardless of their location, the time of day, the medium they are using (voice, e-mail, fax or the web), the location from which the assistance is being supplied, or the individual providing the service. Call and contact centers are the most demanding enterprise business communications environments. In these environments, massive customer interaction volumes need to be blended across a universal queue to handle voice, e-mail and web interactions. Key to a solution is an open business communications platform with mature tool sets, open APIs, real-time interfaces, and an intuitive graphical user interface for creating routing scenarios based on business rules. This business communications platform integrates multiple communication channels with front and backoffice systems and provides central control of multiple contact center sites. 4 Voice over Internet Protocol (VoIP), working in concert with other Internet technologies, is anticipated to be the next major communications advance. Going forward, CRM solutions will be based increasingly on IP technology, and as contact centers move into the IP world--handling VoIP calls, e-mail, web chat, and Customer Service Relationship (CSR)-assisted browsing--businesses will have new opportunities to better serve their customers and build more lasting customer relationships. In IP contact centers, the entire operation is run by a software-based switching application that blends voice, e-mail, and Web communications into a unified queue, then routes them cost-effectively over a single data network to any destination in the enterprise. Products Aspect's integrated applications and customer services are developed around the Aspect Contact Server platform and can be installed in tandem with legacy technology which includes both software and hardware products. The Aspect Contact Server is at the center of Aspect's solutions architecture and can integrate a company's CRM and business communications resources. The Aspect Enterprise Contact Server handles multichannel queuing and management and centralized administration of multi-site contact centers. Aspect's integrated applications are developed around the Aspect Contact Server and Enterprise Contact Server and can be installed in tandem with legacy technology. These applications include: Intelligence--Aspect Customer DataMart consolidates information from enterprise resources in multiple contact centers and enables customers to analyze multisite operations as a single, virtual contact center. Routing--Contact routing lets a business route data with voice to the appropriate desktop. Enterprise routing makes it possible to route contacts based on a combination of customer information, business rules, and multiple agent skills, and enables centralized management and administration of multiple contact center sites. Multichannel routing enables a business to view telephone, e-mail, and interactive web contact channels as components of a single multichannel contact center. Aspect Carrier Routing reduces PSTN charges by making routing decisions while the call is in a carrier network. Collaboration Aspect Customer Self-Service allows customers to conduct self-service transactions conveniently and around-the-clock with options such as interactive voice response (IVR), speech recognition and text-to-speech. Aspect Web Interaction is Web-collaboration software that makes the Web an integral part of a contact center by allowing customers to interact directly with Customer Service Representative (CSRs). It incorporates shared browsing, page markup, text chat, and collaborative form completion. Aspect Call Center processes and routes both inbound and outbound calls and permits multisite integration, outbound call management, and remote staffing across both PSTN and VoIP networks. Wireless solutions give customers the choice of using wireless access for their interactions and the freedom to transact business anytime, anyplace, and on any device. Relationship Effectiveness Aspect eWorkforce Management enables efficient management of contact center agent resources across multiple channels, including e-mail, web, and voice. It allows managers to forecast workloads and develop employee schedules, thus optimizing service levels and minimizing labor costs. 5 Aspect IP Contact Suite Aspect IP Contact Suite can move all communications to a single data network, which streamlines processes and provides significant cost saving opportunities. IP-enabled contact centers reduce expenses by eliminating expensive PSTN switch equipment and long-distance costs for home-based CSRs. Traditional voice-routing capabilities are easily carried forward and blended with e-mail and web channels. Customer Services Aspect offers technical support and maintenance, consulting, and education services to ensure the Company's customers' continued growth and success. To enhance all of Aspect's software solutions, Aspect Customer Services offers complete end-to-end strategy, design, development, implementation, training, and ongoing technical support for all Aspect solutions. Aspect's technical support and maintenance services include on-site and remote access to support personnel, which are provided primarily by Aspect support centers located around the world. Pricing of support services is generally based on the level of support contracted and the number of users authorized to access the products. These contracts generally include update rights for licensed products. Aspect's consulting services include professional services, project management, and installation which are provided by employees, consultants or partners and are primarily based on time and material contracts. Aspect's education services include training courses which are provided in the Company's training centers around the world. 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 lines and to reach a larger segment of the CRM market. During the past three years, the Company has made significant investments in its product development efforts, spending $96 million on research and development in 2001, $109 million in 2000 and $87 million in 1999. Manufacturing The Company's manufacturing operations consist primarily of configuration, final assembly and testing of customer contact hardware platforms and software replication. Substantial elements of the Company's manufacturing operations are outsourced to third parties. The Company believes that its approach to design and development 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. The Company orders materials with different lead times, generally 30 to 120 days ahead of required date of delivery. Because this is a longer time frame 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 performs a number of tests before shipment. The Company's manufacturing procedures are designed to achieve rapid response to customer orders. During the fourth quarter of 2001, the Company engaged with a third party to outsource its remaining configuration, final assembly and testing activities. These activities should be completed by mid 2002. 6 Markets, Segments, and Customers The Company's operations are reported as two operating segments, which are product and services. The complete financial segment information, as well as geographical information, can be found in the consolidated financial statements and notes thereto in this Annual Report on Form 10-K and is incorporated by reference herein. The Company markets and sells its products and services primarily to large organizations in diversified industries worldwide. Aspect markets its products in the United States largely through its direct sales force and internationally has a direct sales force supplemented through distribution partners and value-added resellers in various countries. The Company anticipates that an increased portion of sales will need to be generated through third party resellers to achieve targeted market share goals. A key part of Aspect's overall strategy is to increase sales through indirect channels including Value Added Resellers (VARs), Technology Alliances (TAs), and System Integrators (SIs). The Company plans to continue to develop alliances with key technology players who integrate their products or services with Aspect products or services thereby enabling the customer to purchase a complete solution. Backlog The Company's backlog at December 31, 2001 was approximately $3 million compared with a backlog of approximately $24 million at December 31, 2000. The Company includes in its backlog only orders confirmed with a purchase order for products to be shipped within 90 days to customers with approved credit status. While the Company believes that all of the orders included in its backlog are firm, the Company may determine that it is in its best interest to allow orders to be cancelled without penalty. In addition, as a result of the deterioration of a customer's financial condition, a customer may be unable to pay for its purchases. Competition The market for Aspect's products is intensely competitive, and competition is likely to intensify as companies in Aspect's industry consolidate to offer integrated solutions. Aspect's principal competitors currently include companies in the CRM contact center market and companies that market traditional telephony products and services. As the hardware requirements for a traditional call center diminish due to the emergence of the Internet, local area networks, and other factors, companies in these markets are merging and obtaining significant positions in the CRM and traditional telephony products market. Many current and potential competitors, including Avaya Inc., Nortel Networks Corporation, Rockwell International Corporation, Alcatel SA, Siemens AG, Cisco Systems Inc., Siebel Systems Inc., and Oracle Corporation, have considerably greater resources, larger customer bases and broader international presence than Aspect. Consequently, the Company expects to encounter substantial competition from these companies and other sources. The Company believes that the principal competitive factors in its market include: the quality, performance, reliability, price and market acceptance of the Company's products; the Company's level of customer support and reputation with its customers; the timeliness and quality of new products; and the Company's market presence. Intellectual Property and Related Matters 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. 7 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 certain rights to two intellectual property portfolios by paying $9.8 million in cash and issuing $10 million in notes payable. In July and September 1998, the Company acquired the remaining rights under these intellectual portfolios by making additional payments of $7.5 million and $3.8 million, respectively. Including these portfolios, the Company currently holds approximately 104 issued United States patents and a lesser number of issued foreign patents and has pending approximately 65 United States patent applications and a lesser number of corresponding foreign patent applications that cover various components of its technology. The Company's issued United States patents expire on dates ranging from 2004 through at least 2017. 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 that competitors will not circumvent the Company's patents, or that any patents or licenses will provide competitive advantages for the Company's products. The Company develops and maintains proprietary software that is licensed to its customers. 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 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. Employees As of December 31, 2001, the Company employed 1,842 full-time employees. Item 2. Properties Aspect's headquarters currently occupies three office buildings, totaling approximately 285,000 square feet, in San Jose, California. The Company owns two of the three buildings on 10 acres acquired in 1996, one of which is approximately 104,000 square feet, with the other being a newly constructed building of approximately 105,000 square feet. The Company occupies approximately 90,000 square feet in facilities located in Tennessee that are leased through 2006. The Company also occupies 80,000 square feet in Massachusetts that are leased through 2009. Other North American sales and support functions operate from various leased multi-tenant offices nationwide covering a total of 75,000 square feet with leases expiring as late as 2010. Aspect has several facilities to support its European operations. The principal UK operations are located in and near London in facilities totaling approximately 30,000 square feet and are leased through 2023. Other significant European facilities are located in France, the Netherlands, and Germany. In Asia, the Company occupies sales and support offices in Japan, Singapore, Hong Kong and Australia. 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 13 to "Notes to Consolidated Financial Statements," in item 8 of this Annual Report on Form 10-K. Item 3. Legal Proceedings The Company is subject to various legal proceedings and claims that arise in the normal course of business. The Company does not believe that any current litigation or claims will have a material adverse effect on the Company's business, operating results or financial condition. The Company is currently in an arbitration proceeding in the United Kingdom which relates to a dispute between the Company and Universities Superannuation Scheme Limited (USS) regarding an Agreement to 8 Lease between the Company and USS. USS is seeking specific performance by the Company of the Agreement to Lease and damages in excess of 50,000 British pounds (approximately US $75,000 at December 31, 2001). In July 2001, the High Court of Justice, Chancery Division in the United Kingdom granted a stay of the proceedings and the dispute was referred to arbitration. In February 2002, the arbitrator ordered the Company to specifically perform the Agreement to Lease and to pay currently outstanding rent, service charges and the rent deposit. The amount of the rent deposit is approximately $6 million. On February 28, 2002, the Company filed an appeal of the arbitrator's order with the High Court of Justice, Queen's Bench Division, Commercial Court in the United Kingdom. The Company's current estimate of its obligation relating to the lease is $9.4 million through the second quarter of 2006 which has been included in its restructuring accrual at December 31, 2001. The maximum obligation under the lease is estimated to be $31.5 million payable over 15 years. The Company will have to provide up a deposit of $6 million in the event that it cannot secure a guarantee with a financial institution in the United Kingdom. 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, 2001. 9 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Dec. 31 Sept. 30 June 30 Mar. 31 -------- -------- ------- ------- (in thousands, except per share amounts) 2001 Quarters Ended Quarterly per share stock price: High......................... $ 3.92 $ 6.57 $ 6.99 $14.00 Low.......................... $ 1.52 $ 1.51 $ 3.56 $ 4.25 Dec. 31 Sept. 30 June 30 Mar. 31 -------- -------- ------- ------- (in thousands, except per share amounts) 2000 Quarters Ended Quarterly per share stock price: High......................... $22.44 $43.88 $49.25 $67.97 Low.......................... $ 7.53 $16.00 $28.25 $33.88
Stock Listing: Aspect Communications Corporation's common stock is traded on the Nasdaq Stock Market under the symbol "ASPT." As of December 31, 2001, there were approximately 1,020 shareholders of record of Aspect's common stock. Dividend Policy: Aspect has never paid cash dividends on our capital stock. We currently anticipate that we will retain all available funds for use in our business. 10 Item 6. Selected Financial Data SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31, (a) ---------------------------------------------------- 2001 2000 1999 1998 1997 --------- -------- -------- -------- -------- (in thousands, except per share and employee data) Net revenues................................... $ 449,388 $590,521 $489,112 $512,316 $390,642 Gross margin................................... 210,728 306,296 245,943 284,132 221,669 (% of net revenues)........................... 47% 52% 50% 55% 57% Research and development....................... 96,003 109,427 86,890 67,877 45,723 (% of net revenues)........................... 21% 18% 18% 13% 12% Selling, general and administrative............ 224,408 235,390 199,050 150,118 104,431 (% of net revenues)........................... 50% 40% 40% 29% 27% Income (loss) from operations.................. (153,634) (43,539) (39,997) 56,238 52,605 (% of net revenues)........................... (34%) (7%) (8%) 11% 13% Net income (loss).............................. (151,827) $(35,321) $(28,851) $ 32,490 $ 35,182 (% of net revenues)........................... (34%) (6%) (6%) 6% 9% Earnings (loss) per share: Basic......................................... $ (2.95) $ (0.69) $ (0.60) $ 0.64 $ 0.71 Diluted....................................... $ (2.95) $ (0.69) $ (0.60) $ 0.61 $ 0.67 As of December 31, ---------------------------------------------------- 2001 2000 1999 1998 1997 --------- -------- -------- -------- -------- Cash, cash equivalents, short-term investments, and marketable equity securities............. $ 135,149 $180,958 $338,805 $196,111 $146,216 Working capital................................ 111,492 188,380 313,262 258,177 169,814 Total assets................................... 502,425 635,498 636,212 560,659 370,343 Long-term debt (b)............................. 209,367 173,893 163,107 153,744 6,531 Shareholders' equity........................... $ 132,967 $283,525 $331,199 $298,157 $267,795 Shares outstanding............................. 51,890 51,125 49,462 49,309 49,997 Capital spending............................... $ 50,230 $ 66,584 $ 33,292 $ 28,884 $ 24,922 Regular full-time employees.................... 1,842 2,740 2,360 2,280 1,610
- -------- (a) In February 2000, Aspect acquired PakNetX Corporation. The transaction was accounted for as a purchase, and a charge of $5 million, or $0.10 per share on a diluted basis, was recorded for purchased in-process technology. During 2000, Aspect recorded a gain on the sale of appreciated equity securities of $20 million, or $0.39 per share on a diluted basis. In May 1998, Aspect acquired Voicetek Corporation. The transaction was accounted for as a purchase, and a charge of $10 million, or $0.19 per share on a diluted basis, was recorded for purchased in-process technology. In February 1998, Aspect entered into a litigation settlement and patent cross-license agreement with Lucent Technologies Inc. The transaction resulted in a charge in fiscal 1997 of $14 million, or $0.17 per share on a diluted basis. In September 1997, Aspect acquired CommerceSoft Inc. The transaction was accounted for as a purchase, and a charge of $5 million, or $0.09 per share on a diluted basis, was recorded for purchased in-process technology. During 1997, Aspect recorded a gain on the sale of appreciated equity securities of $2 million, or $0.02 per share on a diluted basis. (b) Long-term debt at December 31, 2001 included the 1998 convertible subordinated debentures of $184 million, long term borrowings of $25 million and the long term portion of capital lease obligations of $299,000. Amounts in other years include the convertible subordinated debentures and in 2000, capital lease obligations of $852,000. In August 1998, Aspect completed a private placement of approximately $150 million ($490 million principal amount at maturity) of zero coupon convertible subordinated debentures due 2018. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Aspect is a leading provider of business communications solutions that help companies improve customer satisfaction, reduce operating costs, gather market intelligence and increase revenue. Aspect provides the mission-critical software platform, development environment and applications that seamlessly integrate traditional telephony, e-mail, voicemail, web, fax, wireless business communications and voice-over-IP, while providing investment protection in a company's existing data and telephony infrastructures. During fiscal 2001, in response to dramatic changes in the global economy, Aspect reorganized the company to more effectively leverage the Company's relationships with existing as well as new partners and maximize the Company's ability capitalize on market opportunities. In February 2001, April 2001 and October 2001 the Company reduced its workforce by 6%, 11% and 10% respectively. In addition, the Company consolidated selected facilities in its continuing effort to better optimize operations. These actions resulted in restructuring charges of $7 million, $13 million and $24 million respectively. Critical Accounting Policies The Securities and Exchange Commission ("SEC") recently released Financial Reporting Release No. 60, which requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 1 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of Company's Consolidated Financial Statements. The preparation of financial statements in conformity with accounting standards generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to the allowance for doubtful accounts, excess inventory and obsolescence, impairment of long lived assets, valuation allowance and realization of deferred income taxes, and restructuring reserve. Actual amounts could differ significantly from these estimates. Aspect's critical accounting policies include revenue recognition, allowance for doubtful accounts, accounting for income taxes, inventories and allowance for excess and obsolete inventory impairment of long lived assets and loss contingencies. The following is a brief discussion of the critical accounting policies and methods used by the Company. Revenue recognition: The Company derives its revenue primarily from two sources (i) product revenues, which include software licenses and hardware, and (ii) service revenues, which include support and maintenance, consulting and training revenue. The Company applies the provisions of Statement of Position 97-2, "Software Revenue Recognition," as amended by Statement of Position 98-9 "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" and provisions of Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements" to all transactions involving the sale of software products and hardware. The Company recognizes revenue from the sale of software licenses when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. Delivery generally occurs when product is delivered to a common carrier. 12 At the time of the transaction, the Company assesses whether the fee associated with its revenue transactions is fixed or determinable and whether or not collection is probable. The assessment whether the fee is fixed or determinable is based on the payment terms associated with the transaction. If a significant portion of a fee is due after its normal payment terms, which are 30 to 90 days from invoice date, the Company accounts for the fee as not being fixed or determinable, in which case, the Company recognizes revenue as the fees become due. The Company assesses collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company does not typically request collateral from its customers. If the Company determines that collection of a fee is not probable, then the Company will defer the fee and recognize revenue upon receipt of cash. For arrangements with multiple elements, the Company allocates revenue to each component of the arrangement using the residual value method based on vendor specific objective evidence of the undelivered elements. This means that the Company defers the arrangement fee equivalent to the fair value of the undelivered elements until these elements are delivered. The Company recognizes revenue for maintenance services ratably over the contract term. The training and consulting services are billed based on hourly rates, and the Company generally recognizes revenue as these services are performed. However, at the time of entering into a transaction, the Company assesses whether or not any services included within the arrangement are essential to the functionality of other elements of the arrangement. If services are determined to be essential to other elements of the arrangement, the Company recognizes the license, consulting and training revenue using the percentage of completion method. The Company estimates the percentage of completion based on its estimate of the total costs estimated to complete the project as a percentage of the costs incurred to date and the estimated costs to complete. In December 1999, the SEC issued SAB No. 101, which summarizes certain views of the SEC staff in applying generally accepted accounting principles to revenue recognition in financial statements. SAB No. 101 clarified delivery criteria, which affected the Company's revenue recognition policy. The Company applied the provisions of SAB No. 101 in the quarter ended December 31, 2000, retroactive as of the beginning of the fiscal year. Accordingly, the accompanying consolidated statement of operations for the years ended December 31, 2001 and 2000, are reflected in accordance with SAB No. 101. Had the Company applied the provisions of SAB No. 101 at the beginning of 1999, unaudited pro forma results of operations for 1999 would have been as follows (in thousands, except per share amounts):
1999 -------- Net loss as reported................................................... $(28,851) Adjustment for the change in accounting principle applied retroactively 2,044 -------- Net loss as adjusted................................................... $(26,807) ======== Basic and diluted net loss per share as reported....................... $ (0.60) Effect of change per share............................................. 0.05 -------- Basic and diluted net loss per share as adjusted....................... $ (0.55) ========
The impact of adoption of SAB No. 101 in fiscal 2000 resulted in approximately $4 million of revenue being deferred to future periods. As such, the Company's net loss for the year ended December 31, 2000, under its revenue recognition policies prior to SAB No. 101 would have been approximately $32 million, and its basic and diluted loss per share would have been $0.63. There was no cumulative effect of this change in accounting principle at the beginning of fiscal 2000. Allowance for doubtful accounts: Company's management must make estimates of the uncollectability of accounts receivables. Management specifically analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. The accounts receivable balance was $84 million, net of allowance for doubtful accounts of $7 million as of December 31, 2001. 13 Accounting for income taxes: As part of the process of preparing its consolidated financial statements the Company is required to estimate its income taxes in each of the tax jurisdictions in which the Company operates. This process involves management's estimation of the Company's actual current tax exposure together with an assessment of temporary differences resulting from differing tax and accounting treatment of items. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. The Company must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent the Company believes that recovery is not likely, the Company must establish a valuation allowance. To the extent the Company establishes a valuation allowance or adjusts this allowance in a period, the Company must include a tax benefit or expense within the tax provision in the statement of operations. Significant management judgment is required in determination of the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. The Company has a valuation allowance of $73 million as of December 31, 2001, due to uncertainties related to the Company's ability to utilize some of its deferred tax assets, primarily consisting of certain net operating losses carried forward and research tax credits, before they expire. The valuation allowance is based on estimates of taxable income by jurisdiction in which the Company operates and the period over which the deferred tax assets will be recoverable. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods the Company may need to adjust its valuation allowance which could materially impact its financial position and results of operations. Inventories and allowance for excess and obsolete inventory: The Company values inventory at the lower of the actual cost or the current estimated market value of the inventory. Management regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on the estimated forecast of product demand and production requirements. Management's estimates of future product demand may prove to be inaccurate, in which case the allowance for excess and obsolete inventory may be understated or overstated. In the future, if inventory is determined to be overvalued, the Company would be required to recognize such costs in cost of goods sold at the time of such determination. Although management makes every effort to ensure the accuracy of its forecast of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results. Impairment of long lived assets: The Company's long lived assets include property and equipment, long term investments, goodwill and other intangible assets. The fair value of the long term investments is dependent on the performance of the companies in which the Company has invested, as well as volatility inherent in the external markets for these investments. In assessing potential impairment for these investments the Company considers these factors as well as the forecasted financial performance of its investees. The Company records an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary. During the year ended December 31, 2001, the Company recognized $2 million of impairment losses related to its long term investments. In assessing the recoverability of the Company's goodwill and other intangibles the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded. The Company will adopt Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets" for its fiscal year beginning January 1, 2002 and will be required to analyze its goodwill for impairment issues within the first six months of fiscal 2002 and then on a periodic basis thereafter. The Company has not yet determined whether adoption of SFAS No. 142 will have an impact on its financial results Loss contingencies: The Company is subject to the possibility of various loss contingencies arising in the ordinary course of business. The Company considers the likelihood of the incurrence of a liability as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. The Company regularly evaluates current information available to us to determine whether such accruals should be adjusted. 14 Results of Operations The following table sets forth statement of operations data for the three years ended December 31, 2001 expressed as a percentage of total revenues:
Years Ended December 31, --------------- 2001 2000 1999 ---- ---- ---- Net revenues: License....................................... 24 % 35 % 15 % Services...................................... 59 43 42 Other......................................... 17 22 43 --- --- --- Total net revenues........................ 100 100 100 --- --- --- Cost of revenues: Cost of license revenues...................... 3 3 2 Cost of services revenues..................... 34 28 31 Cost of other revenues........................ 16 17 17 --- --- --- Total cost of revenues.................... 53 48 50 --- --- --- Gross margin..................................... 47 52 50 Operating expenses: Research and development...................... 21 18 18 Selling, general and administrative........... 50 40 40 Purchased in-process technology............... -- 1 -- Restructuring charges......................... 10 -- -- --- --- --- Total operating expenses.................. 81 59 58 --- --- --- Loss from operations............................. (34) (7) (8) Interest and other income........................ 2 5 2 Interest and other expense....................... (3) (2) (2) --- --- --- Loss before income taxes......................... (35) (4) (8) Provision (benefit) for income taxes............. (1) 2 (2) --- --- --- Net Loss......................................... (34)% (6)% (6)% === === ===
Year ended December 31, 2001 Compared to Year ended December 31, 2000 Revenues The Company markets its products in the United States primarily through its direct sales force and internationally through a direct sales force supplemented by distribution partners in various countries. Net revenues outside of North America as a percentage of total net revenues over the periods presented were 23% in 2001 and 31% in 2000. The decrease in international net revenues as a percentage of total net revenues was primarily due to the global economic downturn. Net revenues decreased by 24% to $449 million in 2001, from $591 million in 2000. The decrease primarily resulted from the decrease in license and other revenues. License revenues decreased by 49% to $107 million in 2001, from $209 million in 2000. The decrease in license revenues was primarily due to a global economic downturn resulting in an overall decrease in capital spending by customers. On a forward-looking basis, the Company anticipates that software license revenue will remain relatively flat as a percentage of license and other revenues. 15 Services revenues increased by 4% to $266 million in 2001, from $256 million in 2000. Service revenues consist primarily of support and maintenance fees, consulting services, and education fees. The increase in services revenues resulted primarily from support and maintenance revenues due to the growth in the installed customer base. On a forward-looking basis, the Company anticipates that service revenue will increase primarily in base support. Other revenues consisting primarily of hardware revenues, decreased by 38% to $77 million in 2001 from $125 million in 2000. The decrease in other revenues was due in part to the decrease in related license revenues and also to a declining demand in the US for hardware products. On a forward-looking basis, the Company anticipates that other revenue will remain relatively flat in absolute dollars. Gross Margin Gross margin on license revenues decreased by 5% points to 87% in 2001 from 92% in 2000. Cost of license revenues includes third party software royalties, product packaging, and documentation. The decrease in license margins is due to a slight increase in third party software purchases. The company expects overall product margins to slightly increase. Gross margin on services revenues increased by 8% points to 43% in 2001 from 35% in 2000. Cost of service revenues consists primarily of employee salaries and benefits, facilities, systems costs to support maintenance, consulting and education. The increase in services margins in 2001 was primarily due to the increase in support and maintenance revenue and decrease in employee salaries and benefits as a result of workforce adjustments made during 2001. On a forward-looking basis, the Company anticipates that services margins will increase as cost reductions take affect and infrastructure investment decisions are postponed. Gross margin on other revenues decreased by 16% points to 4% in 2001 from 20% in 2000. Cost of other revenues includes labor, materials, overhead, and other directly allocated costs involved in the manufacture and delivery of the products. The decrease in other revenues margins from 2000 to 2001 was primarily due to the decline in hardware margins resulting from the lower overall volume of hardware revenues and the Company's decision to outsource its manufacturing activities. The Company expects other revenue gross margin to increase. Operating Expenses Research and development ("R&D") expenses relate to the development of new products, enhancements of existing products and quality assurance activities. These costs consist primarily of employee salaries and benefits, facilities, systems costs, and consulting expenses. R&D expenses decreased by 12% to $96 million in 2001, from $109 million in 2000. R&D expenditures reflect the Company's ongoing efforts to remain competitive through both new product development and expanding capabilities for existing products. The decrease was primarily caused by the decrease in employee salaries and benefits resulted from workforce adjustments during 2001 and by the decrease in consulting expenses resulting from savings in costs related to outside services. As a percentage of net revenues, R&D expenses were 21% in 2001 and 18% in 2000. Excluding amortization of intangible assets, R&D expenses were $85 million in 2001, and $100 million in 2000. As a percentage of net revenues, R&D expenses, excluding amortization of intangible assets, were 19% in 2001 and 17% in 2000. The Company anticipates, on a forward-looking basis, that R&D expenses in absolute dollars and as a percentage of revenue will decline due to cost reductions implemented in 2001. Selling, general and administrative ("SG&A") expenses consist primarily of employee salaries and benefits, commissions, facilities, systems costs and administrative support. SG&A decreased by 5% to $224 million in 2001, from $235 million in 2000. The decrease was primarily due to decreases in direct sales headcount, sales training efforts, and sales support infrastructure, which resulted from workforce adjustments throughout 2001. SG&A expenses as a percentage of net revenues were 50% in 2001 and 40% in 2000. Excluding amortization of intangible assets, SG&A expenses were $209 million in 2001 and $220 million in 2000. As a percentage of net 16 revenues, SG&A expenses, excluding amortization of intangible assets, were 46% in 2001 and 37% in 2000. The Company anticipates, on a forward-looking basis, that SG&A expenses will decline in absolute dollars and as a percentage of revenues, based on the cost reductions implemented in 2001. Purchased in-process technology represented a non-recurring charge of $5 million in 2000, or $0.10 per share, related to the acquisition of PakNetX. The purchased in-process technology related to the development of Version 4.0 of PakNetX's integrated contact center solution that had not reached technological feasibility, and therefore successful development was uncertain. During 2000, some components of this technology were incorporated into Aspect products. The development of the remaining components was completed in 2001 and incorporated into additional Aspect products. During 2001 and 2000, we incurred $5 million and $4 million, respectively, in the development of this technology. Significant assumptions used to determine the value of in-process technology included: (i) projected net cash flows that the Company expected to result from development efforts; (ii) an estimate of the percentage completion of the project; and (iii) a discount rate of approximately 25%. Restructuring charges occurred in February 2001, April 2001 and October 2001, resulting in the Company reducing its workforce by 6%, 11% and 10%, respectively, and consolidated selected facilities in its continuing efforts to better optimize operations. This resulted in restructuring charges of $7 million, $13 million and $24 million, respectively. Interest and Other Income/Expense Interest and other income decreased to $9 million in 2001, from $31 million in 2000. Interest and other income of $9 million in 2001 included insurance recoveries. The higher income in 2000 was due to a pretax gain of $20 million on the sale of marketable equity securities. Interest and other expense increased to $11 million in 2001 from $10 million in 2000 due primarily to an increased loss on foreign currency transactions of $1 million in 2001. Provision (Benefit) for Income Taxes In 2001, the Company recorded an income tax benefit at an effective tax rate of 3%, compared with a provision of 56% in 2000. The Company's 2001 tax rate varies from the statutory rate of 35% due to a valuation allowance being imposed on the current year operating loss. The 2000 tax rate varies from the statutory rate of 35% due to the initial establishment of a full valuation allowance against the Company's deferred tax assets due to the uncertainty surrounding the eventual realization of such assets. The tax rate in 2000 also reflects the tax effect of nondeductible purchased in-process technology charges from the acquisition of PakNetX Corporation and the amortization of goodwill. Year ended December 31, 2000 Compared to Year ended December 31, 1999 Revenues Net revenues outside of North America as a percentage of total net revenues over the periods presented were 31% in 2000 and 34% in 1999. Net revenues increased by 21% to $591 million in 2000, from $489 million in 1999. License revenues increased by 180% to $209 million in 2000, from $75 million in 1999. The increase in license revenues for 2000 was primarily due to the growth in software license revenues in North America and large system purchases from government customers. 17 Services revenues increased by 24% to $256 million in 2000, from $207 million in 1999. Service revenues consist primarily of maintenance and support revenues, consulting services, and educational fees. Growth in services revenues for both periods resulted primarily from the Company's business model transformation as mentioned above and increases in first year support revenues due to growth in the installed base and the implementation of first year software support. Other revenues decreased by 40% to $125 million in 2000 from $208 million in 1999. The decrease in other revenues for 2000 was primarily due to the Company's focus on software solutions. Gross Margins Gross margin on license revenues increased by 3% points to 92% in 2000 from 89% in 1999. The increase in license margins from 1999 to 2000 was primarily due to increased demand for the Company's software products in North America. Gross margin on services revenues increased by 8% points to 35% in 2000 from 27% in 1999. The increase in services margins in 2000 was primarily due to growth in services revenues, while the costs associated with providing the related services, in particular costs associated with consulting services did not grow proportionately with service revenues. Gross margins on other revenues decreased by 39% points to 20% in 2000 from 59% in 1999. The decrease in other margins from 1999 to 2000 was primarily due to the decline in hardware margins from the lower overall volume of hardware revenues. Operating Expenses Research and development ("R&D") expenses increased by 26% to $109 million in 2000 from $87 million in 1999. R&D expenditures reflect the Company's ongoing efforts to remain competitive through both new product development and expanding capabilities for existing products. The increases across the periods presented primarily reflect the impact of amortization of purchased intangible assets in connection with the acquisitions of PakNetX, Voicetek, and various intellectual property portfolios; and increases in outside services and overall salary expenses. As a percentage of net revenues, R&D expenses were 18% in 2000 and 1999. Excluding amortization of intangible assets, R&D expenses were $100 million in 2000 and $83 million in 1999. As a percentage of net revenues, R&D expenses, excluding amortization of intangible assets, were 17% in 2000 and 1999. Selling, general and administrative ("SG&A") expenses increased by 18% to $235 million in 2000, from $199 million in 1999. The increase across the periods was primarily due to increases in direct sales headcount, sales training efforts, and sales support infrastructure. The increase was required primarily to support the Company's transformation initiative. Additionally, the increase in SG&A expenses resulted from the impact of amortization of purchased intangible assets in connection with the PakNetX and Voicetek acquisitions. SG&A expenses as a percentage of net revenues were 40% in 2000 and 40% in 1999. Excluding amortization of intangible assets, SG&A expenses were $220 million in 2000 and $188 million in 1999. As a percentage of net revenues, SG&A expenses, excluding amortization of intangible assets, were 37% in 2000 and 38% in 1999. Interest and Other Income/Expense Interest and other income increased to $31 million in 2000, from $9 million in 1999. The increase resulted primarily from a pretax gain of $20 million on the sale of marketable equity securities. Interest and other expense remained virtually unchanged in 2000 from 1999. 18 Provision (Benefit) for Income Taxes In 2000, the Company recorded an income tax provision at an effective tax rate of 56%, compared with an income tax benefit at an effective rate of 30% in 1999. The tax rate in 2000 reflects a charge for the establishment of a full valuation allowance against the Company's deferred tax assets due to the uncertainty surrounding the eventual realization of the benefits of such assets. Additionally, the 2000 and 1999 tax rates vary from the statutory rate of 35% due to nondeductible expenses related to acquisitions (primarily goodwill amortization) and research credits. The tax rate in 2000 also reflects the tax effect of nondeductible purchased in-process technology charges from the acquisition of PakNetX Corporation; and, in 2000 and 1999; the tax rates reflect the tax effect of foreign losses on which no tax benefit can be realized. Liquidity and Capital Resources As of December 31, 2001, cash, cash equivalents, and short-term investments totaled $135 million, which represented 27% of total assets, as the Company's principal source of liquidity. In addition, the Company had restricted cash of $8 million. The net cash used in operating activities was $35 million in 2001, while net cash provided by operating activities was $3 million in 2000. Net cash used in operating activities in 2001 related primarily to the net loss of $152 million offset by $71 million of depreciation and amortization of goodwill and intangible assets, a $2 million write-down for impairment of short-term investments, a $7 million charge for losses on disposal of property, and a net $23 million cash provided from working capital. The main contributors to the $23 million cash provided through working capital were the $49 million decrease in accounts receivable resulting from improved collection efforts, which was offset by $26 million resulting from an increased level of payments to vendors. Non-cash interest expense on convertible subordinated debentures of $11 million and an additional $3 million of non cash changes in deferred taxes were reported as offsets to the net cash used. The net cash used in investing activities was $25 million in 2001 compared to $17 million in 2000. Net cash used in investing activities in 2001 related primarily to property and equipment purchases of $50 million, specifically the Company's new San Jose headquarters building, which were offset by net proceeds from maturities of short-term investments of $26 million. The Company currently anticipates lower spending levels for capital equipment in 2002. The net cash provided by financing activities was $48 million in 2001 compared to $12 million in 2000. Net cash provided by financing activities in 2001 resulted from net borrowings of $43 million and common stock issuances of $5 million, relating to exercises of stock options and common stock issuances. At December 31, 2000, the principal source of liquidity consisted of cash, cash equivalents, short-term investments, and marketable equity securities totaling $181 million, which represented 28% of total assets. The fair market value of the marketable equity securities was $10 million. These securities were subsequently sold in 2001 for less than the fair market value at December 31, 2000. The primary sources of cash during 2000 were net sales of short-term investments of $105 million, proceeds from the issuance of common stock under various stock plans of $39 million, and $3 million generated from operating activities. The primary uses of cash during 2000 were $67 million for the purchase of property and equipment, $55 million paid to acquire PakNetX and $25 million for repurchase of our common stock. In August 2000, the Company's Board of Directors approved a stock repurchase program to acquire up to 5 million shares of its common stock. Through December 31, 2001, 1,350,000 shares have been repurchased at a weighted average price of $18.56 per share. All shares repurchased have been retired. No additional shares were repurchased in 2001. The Company incurred $150 million of principal indebtedness ($490 million principal at maturity) from the sale of convertible subordinated debentures in August 1998. The fair market value of these zero coupon convertible subordinated debentures at December 31, 2001 was approximately $137 million as compared to an 19 accreted value or book value of $184 million. The convertible subordinated debentures can be put to the Company on August 10, 2003, the exercise of this put could require the Company to pay for the then accreted value of approximately $201 million in stock, cash or any combination thereof, at the Company's discretion. On June 19, 2001, the Company obtained a secured line of credit with a US commercial bank in the amount of $20 million, which bears interest at the Company's choice of either the bank's prime rate (4.75% at December 31, 2001) or LIBOR (1.93% at December 31, 2001) + 1.75%. The Company also obtained a secured equipment line of $5 million with the same bank, which bears interest at the Company's choice of either the bank's prime rate or LIBOR + 2.00%. Both credit facilities are secured by a general lien on all Company assets, excluding real estate property. Borrowings under the $20 million line of credit are available for one year from the date of the agreement. Borrowings under the equipment line were available through December 2001, at which time all borrowings thereunder became term notes, which are payable in equal monthly installments, including interest, over three years. At December 31, 2001, the Company had $15 million outstanding under the credit facility and $5 million outstanding under the equipment line. The Company was in compliance with all related covenants and restrictions at December 31, 2001. The financial covenants include adjusted tangible net worth, quick ratio, earnings before interest expense, income taxes, depreciation and amortization (EBITDA), unrestricted cash, and leverage ratio. Additionally, there is a covenant that requires the Company to obtain the written consent of the lender prior to repurchasing any convertible subordinated debentures. In October 2001, the Company entered into a 5-year loan with an investment bank in the amount of $25 million which bears interest at an initial rate of 8% which is then re-measured semi-annually beginning May 2002 at the rate of LIBOR + 3.75% subject to a floor of 8% and a ceiling of 14%. The loan is secured by a security interest in the Company owned buildings in San Jose. Borrowings are payable in equal monthly installments including interest computed on a 20 year amortization schedule until November 1, 2006, at which time the outstanding loan balance will become payable. At December 31, 2001, the Company had $23 million outstanding. The bank also required that the Company supply a $3 million letter of credit which is recorded as restricted cash on the balance sheet at December 31, 2001. 20 In addition to the line of credit, the Company has utilized a fully collateralized (110%), line of credit with a European banking partner used for securing letters of credit or bank guarantees which are required for daily operations such as payroll, duty and facilities. At December 31, 2001, approximately $5 million was outstanding and $0 was available for future use under this credit line.
Payments Due by Period ---------------------------------------------- Less than 1 After 5 Contractual Obligations Total year 1-3 years 4-5 years years ----------------------- --------- ------- --------- --------- -------- (in thousands) Lines of Credit....................... $ 15,004 $15,004 $ -- $ -- $ -- Long Term Debt........................ 27,682 2,191 4,079 1,238 20,174 Capital Lease Obligations............. 1,027 719 308 -- -- Operating Leases...................... 150,324 20,027 37,208 30,774 62,315 -------- ------- ------- ------- -------- Total Contractual Cash Obligations. $194,037 $37,941 $41,595 $32,012 $ 82,489 ======== ======= ======= ======= ======== Amount of Commitment Expiration per Period ---------------------------------------------- Total Less Amounts than 1 After 5 Other Commercial Commitments Committed year 1-3 years 4-5 years years ---------------------------- --------- ------- --------- --------- -------- (in thousands) Standby Letters of Credit............. $ 7,800 $ 4,800 $ 3,000 $ -- $ -- Other Commercial Commitments.......... 342,232 52,943 84,322 74,108 130,859 -------- ------- ------- ------- -------- Total Commercial Commitments....... $350,032 $57,743 $87,322 $74,108 $130,859 ======== ======= ======= ======= ========
We believe that cash, cash equivalents, and short-term investments will be sufficient to meet our operating cash needs for at least the next twelve months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. We continually evaluate opportunities to sell additional equity or debt securities, obtain and re-negotiate credit facilities from lenders, or restructure our long-term debt for strategic reasons or to further strengthen our financial position. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. In addition, we will, from time to time, consider the acquisition of or investment in complementary businesses, products, services and technologies, and the repurchase and retirement of debt, which might affect our liquidity requirements or cause us to issue additional equity or debt securities. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. Recent Developments In January 2002, the Company paid $10 million to repurchase convertible subordinated debentures in the open market. The Company's carrying value of these securities at the date of repurchase was $12 million, thereby resulting in an extraordinary gain on debt extinguishment of approximately $2 million for the first quarter of 2002. This purchase reduced the principal amount of the Company's outstanding face value of the convertible subordinated debentures from $490 million to $458 million. The Company is currently in an arbitration proceeding in the United Kingdom which relates to a dispute between the Company and Universities Superannuation Scheme Limited ("USS") regarding an Agreement to Lease between the Company and USS. USS is seeking specific performance by the Company of the Agreement to Lease and damages in excess of 50,000 British pounds (approximately US $75,000 at December 31, 2001). In July 2001, the High Court of Justice, Chancery Division in the United Kingdom granted a stay of the proceedings and the dispute was referred to arbitration. In February 2002, the arbitrator ordered the Company to specifically perform the Agreement to Lease and to pay currently outstanding rent, service charges and the rent deposit. The amount of the rent deposit is approximately $6 million. On February 28, 2002, the Company filed an appeal of the arbitrator's order with the High Court of Justice, Queen's Bench Division, Commercial Court in the 21 United Kingdom. The Company's current estimate of its obligation relating to the lease is $9.4 million through the second quarter of 2006 which has been included in its restructuring accrual at December 31, 2001. The maximum obligation under the lease is estimated to be $31.5 million payable over 15 years. The Company will have to provide a deposit of $6 million in the event that it cannot secure a guarantee with a financial institution in the United Kingdom. On March 9, 2002, the President signed into law the Job Creation and Worker Assistance Act of 2002. A provision of this law extends the net operating loss carryback period for income tax purposes from 2 years to 5 years for losses incurred in 2001 and 2002. As a result of this change, the Company will record in the first quarter of 2002 an income tax benefit and corresponding income tax receivable of approximately $20 million from tax losses generated in 2001. The Company is still in the process of evaluating the effect of this change in tax law which could affect the actual amount realized and reported by the Company as required in its first quarter operating results for 2002, the year the tax law changed. New Accounting Pronouncements SFAS 133 SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS No. 133 effective January 1, 2001. Adoption of SFAS 133 did not have a material impact on the consolidated financial position, results of operations, or cash flows of the Company. SFAS 141 In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Business combinations originally accounted for under the pooling of interest method will not be changed. The adoption of SFAS No. 141 did not have a material impact on the financial position, results of operations or cash flows of the Company. SFAS 142 In June 2001, FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. Aspect will adopt SFAS No. 142 for its fiscal year beginning January 1, 2002. Upon adoption of SFAS No. 142, the Company will no longer amortize goodwill, and assembled workforce with a net carrying value of approximately $54 million at December 31, 2001 and the annual amortization of $14 million that resulted from business combinations initiated prior to the adoption of SFAS No. 141. The Company will evaluate goodwill under the SFAS No. 142 transitional impairment test to determine the impact. Any transitional impairment loss will be recognized as a change in accounting principle on the date of adoption. The Company has not determined whether adoption of SFAS No. 142 will have an impact on its financial results. 22 SFAS 144 In August 2001, FASB issued SFAS No.144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company will adopt SFAS No. 144 for its fiscal year beginning January 1, 2002. The Company has not determined whether adoption of SFAS No. 144 will have an impact on its financial results. RISK FACTORS We operate in a rapidly changing environment that involves a number of risks, some of which are beyond the Company's control. You should read the cautionary statements in this document, wherever they appear, as applying to all related forward-looking statements. Our actual results may differ materially from our projections due to, among other things, the occurrence of the risks described in detail below: Business Environment Risks The Overall Economic Climate Continues to Be Weak: Our products typically represent substantial capital commitments by customers, involving a potentially long sales cycle. As a result, customer purchase decisions may be significantly affected by a variety of factors including trends in capital spending for telecommunications, enterprise software, market competition, and the availability or announcement of alternative technologies. Continued recent weakness in global economic conditions has resulted in many of our customers delaying and/or reducing their capital spending related to information systems. Further, the recent September 11/th events in the United States have caused increased instability in the global economic environment. If the economy continues to be weak, demand for the Company's products could decrease resulting in lower revenues and a decline in the overall rate of the Company's revenue levels. / Our Company's Business Focus Continues to Evolve: Historically, we have supplied the hardware, software, and associated support services for implementing call center solutions. Our shift to an enterprise software business model has required and will continue to require substantial change, potentially resulting in some disruption to our business. Our inability to successfully continue or complete this transition in a timely manner could materially affect our business, operating results, or financial condition. These changes may include the following: . Changes in management and technical personnel; . Modifications to the pricing and positioning of our products which could impact revenues and operating results; . Expanded or differing competition resulting from entry into the enterprise software market; . More revenues being deferred to future periods under software revenue recognition rules; and/or . An increased reliance on systems integrators to develop, deploy, and/or manage our applications. Our Revenues Are Dependent on a Small Number of Products: Historically, sales and installations of a small number of our products accounted for a substantial portion of net revenues. Demand for our products could be adversely affected by not meeting customer specifications and/or by problems with system performance, system availability, installation or service delivery commitments, or market acceptance. Our Gross Margins Are Very Substantially Dependent on Our Product Mix: It is difficult to predict the exact blended mix of products. Our Market Is Intensely Competitive: The market for our products is intensely competitive, and competition is likely to intensify as companies in our industry consolidate to offer integrated solutions. Our principal competitors currently include companies in the CRM market and companies that market traditional telephony products and services. 23 As the market develops for converged voice data networks and products and the demand for PSTN based call centers diminishes, companies in these markets are merging and obtaining significant positions in the CRM and traditional telephony products market. Many current and potential competitors, including Avaya Inc., Nortel Networks Corporation, Cisco Systems Inc. and Genesys SA (Alcatel), have considerably greater resources, larger customer bases and broader international presence than Aspect. Consequently, the Company expects to encounter substantial competition from these and other sources. We May Be Involved in Litigation: We may be involved in litigation for a variety of matters. Any claim brought against us would likely have a financial impact, both because of the effect on our common stock performance and because of the disruption, costs, and diversion of management attention such a claim would cause. In our industry, there has been extensive litigation regarding patents and other intellectual property rights, and we are periodically notified of such claims by third parties. In the past, we have been sued for alleged patent infringement. Organizations in our industry may intend to use intellectual property litigation to generate revenues. In the future, claims asserting infringement of intellectual property rights may be asserted or prosecuted against us. Although we periodically negotiate with third parties to establish intellectual property license or cross-license agreements, such as our patent cross-license agreement with Lucent Technologies, Inc., such negotiations may not yield a settlement. Moreover, even if we negotiate license agreements with a third party, future disputes with such parties are possible. If we are unable to resolve an intellectual property dispute through a license, settlement, or successful litigation, we could be subject to damage assessments and be prevented from making, using, or selling certain products or services. In the future, we could become involved in other types of litigation, such as shareholder lawsuits for alleged violations of securities laws, claims by employees, and product liability claims. Any litigation could result in substantial cost to us and diversion of management resources. Doing Business Globally Involves Significant Risk: We market our products and services worldwide and anticipate entering additional countries in the future. If we fail to enter certain major international markets successfully, our competitive position could be impaired and we may be unable to compete on a global scale. The financial resources required to enter, establish, and grow new and existing international markets may be substantial, and international operations are subject to additional risks including: . The cost and timing of the multiple governmental approvals and product modifications required by many countries; . Market acceptance; . Exchange rate fluctuations; . Delays in market deregulation; and . Difficulties in staffing and managing foreign subsidiary operations; and/or . Global economic climate considerations including potentially negative tax and foreign and domestic trade legislation, which could result in the creation of trade barriers such as tariffs, duties, quotas, and other restrictions. Regulatory Changes and Changes Made to Generally Accepted Accounting Practices Principles May Impact Our Business: The electronic communications industry in general is subject to a wide range of regulations throughout various markets and throughout various countries in which we currently operate or may wish to operate in the future. In addition, new products and services may involve entering into different or newly regulated areas. Changes in these environments may impact our business and could affect our ability to operate in certain markets or certain regions from time to time. 24 Required revisions to generally accepted accounting principles will require us to review our accounting and financial reporting procedures in order to ensure continued compliance with required policies. From time to time such changes may have a short-term impact in the reporting that we do, and these changes may impact market perception of our financial condition. . legislation may lead to an increase in our costs related to audits in particular and regulatory compliance generally . legislation may force us to seek other service providers for non-audit-related services, which may raise costs . liability fears may further increase insurance costs Technology Risks Our Intellectual Property May Be Copied, Obtained, or Developed by Third Parties: Our success depends in part upon our internally developed technology. Despite the precautions we take to protect our intellectual property, unauthorized third parties may copy or otherwise obtain and use our technology. In addition, third parties may develop similar technology independently. Technology Is Rapidly Changing: The market for our 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 our products. We may not successfully anticipate market demand for new products or services, or introduce them in a timely manner. The convergence of voice and data networks, and wired and wireless communications could require substantial modification and customization of our current products and business models, as well as the introduction of new products. Further, customer acceptance of these new technologies may be slower than we anticipate. We may not be able to compete effectively in these markets. In addition, Aspect's products must readily integrate with major third-party security, telephony, front-office, and back-office systems. Any changes to these third-party systems could require us to redesign our products, and any such redesign might not be possible on a timely basis or achieve market acceptance. Transaction Risks Acquisitions and Investments May Be Difficult and Disruptive: We have made a number of acquisitions and have made minority equity investments in other companies. Acquisitions or investments we make may experience significant fluctuations in market value or may result in significant write-offs, the creation of goodwill, or the issuance of additional equity or debt securities. These acquisitions and investments can, therefore, be costly and disruptive, and we may be unable to successfully integrate a new business or technology into our business. We may continue to make such acquisitions and investments, and there are a number of risks that future transactions could entail. These risks include the inability to successfully integrate or commercialize acquired technologies or otherwise realize anticipated synergies or economies of scale on a timely basis; diversion of management attention; adverse impact on our annual effective tax rate; dilution of existing equity holders; disruption of our ongoing business; inability to assimilate and/or retain key technical and managerial personnel for both companies; inability to establish and maintain uniform standards, controls, procedures, and processes; potential legal liability for pre-acquisition activities; permanent impairment of our equity investments; governmental, regulatory, or competitive responses to the proposed transactions; and/or impairment of relationships with employees, vendors, and/or customers including, in particular, acquired original equipment manufacturer and value-added reseller relationships. 25 Operations/Performance Risks Our Revenues and Operating Results Are Uncertain and May Fluctuate: Our revenues may fluctuate significantly from period to period. There are many reasons for this variability, including the shift in our focus from supplying telecommunications equipment to becoming a provider of business communications software, and associated software applications; reduced demand for some of our products and services; a limited number of large orders accounting for a significant portion of product revenues in any particular quarter; the timing of consulting projects and completion of project milestones; the size and timing of individual software license transactions; dependence on new customers for a significant percentage of product revenues; the ability of our sales force to achieve quarterly revenue objectives; fluctuations in the results of existing operations, recently acquired subsidiaries, or distributors of our products or services; seasonality and mix of products and services and channels of distribution; our ability to sell support agreements and subsequent renewal agreements for support of our products; our ability to develop and market new products and control costs; and/or changes in market growth rates for different products and services. In addition, our products typically represent substantial capital commitments by customers, involving a potentially long sales cycle. As a result, customer purchase decisions may be significantly affected by a variety of factors including trends in capital spending. Recent changes in general economic conditions resulted in many of our customers delaying and/or reducing their capital spending related to information systems. We May Experience Difficulty Managing Changes in Our Business: The changes in our business may place a significant strain on our operational and financial resources. We may experience substantial disruption from changes and could incur significant expenses and write-offs. We must carefully manage accounts receivables to limit credit risk. We must also maintain inventories at levels consistent with product demand. Inaccurate data (for example, credit histories or supply/demand forecasts) could quickly result in excessive balances or insufficient reserves. We May Experience Difficulty Expanding Our Distribution Channels: We have historically sold our products and services through our direct sales force and a limited number of distributors. Changes in customer preferences, the competitive environment, or other factors may require us to expand third-party distributor, value added resellers, systems integrator, technology alliances, electronic, and other alternative distribution channels. We may not be successful in expanding these distribution channels. We Are Dependent on Key Personnel: We depend on certain key management and technical personnel and on our ability to attract and retain highly qualified personnel in labor markets characterized by high turnover among, high demand for, and limited supply of, qualified people; and we have recently experienced increased levels of turnover among such personnel. We have recently undergone significant changes in senior management and technical personnel and may experience additional changes as a result of our shift from supplying telecommunications equipment to becoming a provider contact server software, and associated software applications. We Are Dependent on Third Parties: We outsource substantial elements of our manufacturing to third parties. We depend on certain critical components in the production of our products and services. Certain of these components are obtained only from a single supplier and only in limited quantities. In addition, some of our major suppliers use proprietary technology and software code that could require significant redesign of our products in the case of a change in vendor. Further, suppliers could discontinue their products, or modify them in manners incompatible with our current use, or use manufacturing processes and tools that could not be easily migrated to other vendors. We also outsource our information technology activities to third parties. We rely heavily on these vendors to provide day-to-day support. We may experience disruption in our business if any of these vendors have difficulty meeting our requirements. 26 Our Operations Are Geographically Concentrated: Significant elements of our product development, manufacturing, information technology systems, corporate offices, and support functions are concentrated at a single location in the Silicon Valley area of California. We also concentrate sales, administrative, and support functions and related infrastructure to support our international operations at our U.K. offices. In the event of a natural disaster, such as an earthquake or flood, or localized extended outages of critical utilities or transportation systems, we could experience a significant business interruption. Financial/Capital Market Risks Our Debt and Debt Service Obligations Are Significant: We incurred $150 million of principal indebtedness ($490 million principal at maturity) from the sale of convertible subordinated debentures in August 1998. The fair market value of our zero coupon convertible subordinated debentures at December 31, 2001 was approximately $134 million as compared to an accreted value or book value of $184 million. The convertible subordinated debentures can be put to the Company on August 10, 2003, the exercise of this put could require the Company to pay the then accreted value of approximately $201 million in stock, cash or any combination thereof, at the Company's discretion. If the Company had to convert these debentures using equity as of the end of fiscal 2001, using the closing price of the Company's common stock on December 31, 2001, this conversion would require the Company to issue approximately 51.8 million shares of its common stock, resulting in significant dilution to the Company's stockholders. We obtained a secured line of credit and an equipment line totaling $25 million in June 2001. We had $15 million outstanding under the credit facility and $5 million under the equipment line at December 31, 2001. We obtained a loan totaling $25 million in October 2001 secured by our buildings in San Jose. We had $23 million outstanding under the loan at December 31, 2001. This debt resulted in a ratio of long-term debt to total shareholders' equity of approximately 157% at December 31, 2001. As a result of these transactions, we have substantially increased our principal and interest obligations. The degree to which we are leveraged could materially and adversely affect our ability to obtain additional financing or renew existing financing and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will depend on our future performance, which will be subject to financial, business, and other factors affecting our operations, many of which are beyond our control. We Are Exposed to Fluctuations in Foreign Currency Exchange Rates, Interest and Investment Income, and Debt Interest Rate Expense: We perform sensitivity analysis studies on portions of our foreign currency exchange rate exposure, and on our interest and investment income exposure to U.S. interest rates, both using a 10% threshold. Further, we evaluate the impact on the value of our zero coupon convertible subordinated debentures from a plus or minus 50-basis-point change and the effect this would have on our long-term debt. All of these factors, as well as combinations of these risks, could impact our financial performance. For further details, you should refer to the full detailed discussion in the "Quantitative and Qualitative Disclosures About Financial Market Risk" section. The Prices of Our Common Stock and Convertible Subordinated Debentures Are Volatile: We operate in a rapidly changing high-technology industry that exhibits significant stock market volatility. Accordingly, the price of our common stock and our convertible subordinated debentures may be subject to significant volatility. You cannot consider our past financial performance as a reliable indicator of performance for any future period, and should not use historical data to predict future results or trends. For any given quarter, a shortfall in our operating results from the levels expected by securities analysts or others could immediately and adversely affect the price of the convertible subordinated debentures and our common stock. If we do not learn of such shortfalls until late in a fiscal quarter, there could be an even more immediate and adverse effect on the price of the convertible subordinated debentures and our common stock. In addition, the relatively low trading volume of our common stock and debentures could exacerbate this volatility. 27 Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to financial market risk from fluctuations in foreign currency exchange rates and interest rates. We manage our exposure to these and other risks through our regular operating and financing activities and, when appropriate, through our hedging activities. Our policy is not to use hedges or other derivative financial instruments for speculative purposes. We deal with a diversified group of major financial institutions to limit the risk of non-performance by any one institution on any financial instrument. Separate from our financial hedging activities, material changes in foreign exchange rates, interest rates, and, to a lesser extent, commodity prices could cause significant changes. These changes could affects costs to manufacture and deliver our products and in our customers' buying practices. We have not substantially changed our risk management practices during 2001 and do not currently anticipate significant changes in financial market risk exposures in the near future that would require us to change our risk management practices. Debt and Interest Expense: The fair market value of our zero coupon convertible subordinated debentures is sensitive to changes in interest rates and to the prices of our common stock into which it can be converted as well as the financial stability of the Company. Because the yield to maturity on the debentures is fixed, our interest expense on the debt does not fluctuate with market rates. Based upon a hypothetical immediate 50-basis-point increase in interest rates at December 31, 2001, the market value of our fixed-rate long-term debt would decrease by approximately 1%. Conversely, a 50-basis-point decrease in interest rates at December 31, 2001, would increase the market value of our fixed-rate long-term debt outstanding by approximately 1%. Based upon a hypothetical immediate 50-basis-point increase in interest rates at December 31, 2000, the market value of our fixed-rate long-term debt would decrease by approximately 0.4%. Conversely, a 50-basis-point decrease in interest rates at December 31, 2000, would result in an increase in the market value of our fixed-rate long-term debt outstanding of approximately 1.1%. Actual gains or losses in the future may differ materially from this analysis, depending on changes in the timing and amount of interest rate movements. A sensitivity analysis assuming a hypothetical 10% movement in interest rates applied to our outstanding capital lease principal balance at December 31, 2001 and 2000, indicated that such market movement would not have a material effect on our business, operating results or financial condition. Foreign Currency Exchange: Revenues generated from international operations are generally denominated in foreign currencies. We enter into outright forward foreign exchange contracts to hedge against fluctuations of intercompany account balances. Market value gains and losses on these hedge contracts are substantially offset by fluctuations in the underlying balances being hedged, and the net financial impact has not been material in any of the three years presented. At December 31, 2001, our primary net foreign currency market exposures included British pounds, Australian dollars, and Euros. At December 31, 2000, our primary net foreign currency market exposures included Euros and British pounds. A sensitivity analysis assuming a hypothetical 10% movement in foreign exchange rates applied to our hedging contracts and underlying balances being hedged at December 31, 2001 and 2000, indicated that these market movements would not have a material effect on our business, operating results, or financial condition. Actual gains or losses in the future may differ materially from this analysis, depending on actual changes in the timing and amount of interest rate and foreign currency exchange rate movements and our actual balances and hedges. Foreign currency rate fluctuations can impact the U.S. dollar translation of our foreign operations in our consolidated financial statements. In 2001 and 2000, these fluctuations have not been material to our operating results. Interest and Investment Income: Our interest and investment income is subject to changes in the general level of U.S. interest rates. Changes in U.S. interest rates affect the interest earned on our cash equivalents and short-term investments. A sensitivity analysis assuming a hypothetical 10% movement in interest rates applied to our investment balances at December 31, 2001 and 2000, indicated that such market movement would not have a material effect on our business, operating results, or financial condition. Actual gains or losses in the future may differ materially from this analysis, depending on our actual balances and changes in the timing and amount of interest rate movements. 28 Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report......................................... 30 Consolidated Balance Sheets.......................................... 31 Consolidated Statements of Operations................................ 32 Consolidated Statements of Shareholders' Equity...................... 33 Consolidated Statements of Cash Flows................................ 34 Notes to Consolidated Financial Statements........................... 35
29 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Aspect Communications Corporation: We have audited the accompanying consolidated balance sheets of Aspect Communications Corporation and its subsidiaries (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. 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 respects, the financial position of Aspect Communications Corporation and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Our audits of the financial statements referred to in our aforementioned report also included the financial statement schedule of Aspect Communications Corporation, listed in Item 14(a)(2). This consolidated 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 consolidated 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 January 21, 2002 (March 9, 2002 as to Note 20) 30 ASPECT COMMUNICATIONS CORPORATION CONSOLIDATED BALANCE SHEETS
December 31, -------------------- 2001 2000 -------- -------- (in thousands, excep share amounts) ASSETS Current assets: Cash and cash equivalents........................................................ $ 72,564 $ 84,544 Short-term investments........................................................... 62,585 86,869 Marketable equity securities..................................................... -- 9,545 Accounts receivable (net of allowance for doubtful accounts: $6,567 in 2001 and $9,059 in 2000)............................................. 83,762 135,243 Inventories...................................................................... 12,044 19,940 Other current assets............................................................. 23,360 26,925 -------- -------- Total current assets......................................................... 254,315 363,066 Property and equipment, net......................................................... 112,090 108,780 Intangible assets, net.............................................................. 115,369 146,394 Other assets........................................................................ 20,651 17,258 -------- -------- Total assets................................................................. $502,425 $635,498 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short term borrowings............................................................ $ 17,851 $ 499 Accounts payable................................................................. 5,988 33,553 Accrued compensation and related benefits........................................ 18,916 28,483 Other accrued liabilities........................................................ 70,292 67,110 Deferred revenue................................................................. 29,776 45,041 -------- -------- Total current liabilities.................................................... 142,823 174,686 Long term borrowings................................................................ 25,790 852 Deferred taxes...................................................................... 3,944 3,394 Other long term liabilities......................................................... 13,324 -- Convertible subordinated debentures................................................. 183,577 173,041 Commitments (Note 13) Shareholders' equity: Preferred stock, $.01 par value: 2,000,000 shares authorized, none outstanding... -- -- Common stock, $.01 par value: 100,000,000 shares authorized, shares outstanding: 51,889,454 in 2001 and 51,125,114 in 2000...................................... 195,663 190,947 Deferred stock compensation...................................................... (1,147) (2,421) Accumulated other comprehensive income (loss).................................... (1,995) 2,726 Retained earnings (accumulated deficit).......................................... (59,554) 92,273 -------- -------- Total shareholders' equity................................................... 132,967 283,525 -------- -------- Total liabilities and shareholders' equity................................... $502,425 $635,498 ======== ========
See Notes to Consolidated Financial Statements 31 ASPECT COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31 ------------------------------ 2001 2000 1999 --------- -------- -------- (in thousands, except per share amounts) Net revenues: License............................................ $ 106,531 $209,497 $ 74,789 Services........................................... 265,563 255,951 206,770 Other.............................................. 77,294 125,073 207,553 --------- -------- -------- Total net revenues............................. 449,388 590,521 489,112 --------- -------- -------- Cost of revenues: Cost of license revenues........................... 13,721 17,555 7,999 Cost of services revenues.......................... 150,959 166,323 150,178 Cost of other revenues............................. 73,980 100,347 84,992 --------- -------- -------- Total cost of revenues......................... 238,660 284,225 243,169 --------- -------- -------- Gross margin.......................................... 210,728 306,296 245,943 Operating expenses: Research and development........................... 96,003 109,427 86,890 Selling, general and administrative................ 224,408 235,390 199,050 Purchased in-process technology.................... -- 5,018 -- Restructuring charges.............................. 43,951 -- -- --------- -------- -------- Total operating expenses....................... 364,362 349,835 285,940 --------- -------- -------- Loss from operations.................................. (153,634) (43,539) (39,997) Interest and other income............................. 8,715 31,247 8,877 Interest and other expense............................ (11,406) (10,339) (10,095) --------- -------- -------- Loss before income taxes.............................. (156,325) (22,631) (41,215) Provision (benefit) for income taxes.................. (4,498) 12,690 (12,364) --------- -------- -------- Net loss.............................................. $(151,827) $(35,321) $(28,851) ========= ======== ======== Basic and diluted net loss per share.................. $ (2.95) $ (0.69) $ (0.60) Weighted average shares outstanding, basic and diluted 51,530 51,166 48,375
See Notes to Consolidated Financial Statements 32 ASPECT COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Retained Common Stock Other Earnings -------------------- Deferred Stock Comprehensive (Accumulated Shares Amount Compensation Income (Loss) Deficit) Total ---------- -------- -------------- ------------- ------------ --------- (in thousands, except share amounts) Balances, January 1, 1999............................ 49,309,383 $142,132 $ -- $ (420) $ 156,445 $ 298,157 ---------- -------- ------- -------- --------- --------- Comprehensive income: Net loss.......................................... -- -- -- -- (28,851) (28,851) Net unrealized gain on securities (net of tax of $32,076)......................................... -- -- -- 50,170 -- 50,170 Accumulated translation adjustments (net of tax of $909)..................................... -- -- -- (1,422) -- (1,422) --------- Comprehensive income........................... 19,897 --------- Issuance of common stock under various stock purchase and option plans........................... 3,142,920 26,850 -- -- -- 26,850 Income tax benefit for employee stock option transactions........................................ -- 8,003 -- -- -- 8,003 Stock repurchased under stock repurchase program..... (2,990,000) (21,708) -- -- -- (21,708) ---------- -------- ------- -------- --------- --------- Balances, December 31, 1999.......................... 49,462,303 155,277 -- 48,328 127,594 331,199 ---------- -------- ------- -------- --------- --------- Comprehensive loss: Net loss.......................................... -- -- -- -- (35,321) (35,321) Net unrealized loss on securities (net of tax of $28,926)......................................... -- -- -- (45,244) -- (45,244) Accumulated translation adjustments (net of tax of $218)..................................... -- -- -- (358) -- (358) --------- Comprehensive loss............................. -- -- -- -- -- (80,923) --------- Issuance of common stock under various stock purchase and option plans........................... 2,860,811 39,097 -- -- -- 39,097 Issuance of restricted stock, net of forfeitures..... 152,000 2,812 (2,812) -- -- -- Value of stock options issued in PakNetX acquisition......................................... -- 10,422 -- -- -- 10,422 Amortization of deferred stock compensation.......... -- -- 391 -- -- 391 Income tax benefit for employee stock option transactions........................................ 8,396 -- -- -- 8,396 Stock repurchased under stock repurchase program............................................. (1,350,000) (25,057) -- -- -- (25,057) ---------- -------- ------- -------- --------- --------- Balances, December 31, 2000.......................... 51,125,114 190,947 (2,421) 2,726 92,273 283,525 ---------- -------- ------- -------- --------- --------- Comprehensive income: Net loss.......................................... -- -- -- -- (151,827) (151,827) Net unrealized loss on securities (net of tax of $3,016).......................................... -- -- -- (4,717) -- (4,717) Accumulated translation adjustments (net of tax of $2)....................................... -- -- -- (4) -- (4) --------- Comprehensive loss............................. -- -- -- -- -- (156,548) --------- Issuance of common stock under various stock purchase and option plans........................... 798,890 5,355 -- -- -- 5,355 Forfeitures of restricted stock, net of issuances.... (34,550) (639) 639 -- -- -- Amortization of deferred stock compensation.......... -- -- 635 -- -- 635 ---------- -------- ------- -------- --------- --------- Balances, December 31, 2001.......................... 51,889,454 $195,663 $(1,147) $ (1,995) $ (59,554) $ 132,967 ========== ======== ======= ======== ========= =========
See Notes to Consolidated Financial Statements 33 ASPECT COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 ------------------------------- 2001 2000 1999 --------- --------- --------- (in thousands) Cash flows from operating activities: Net loss............................................................................. $(151,827) $ (35,321) $ (28,851) Reconciliation of net loss to cash provided by (used in) operating activities: Depreciation........................................................................ 39,357 35,893 23,087 Amortization of intangible assets................................................... 31,034 29,360 20,341 Amortization of deferred stock compensation......................................... 635 391 -- Purchased in-process technology..................................................... -- 5,018 -- Gain on the sale of equity securities............................................... (563) (20,402) -- Impairment of short-term investments................................................ 2,441 -- -- Loss on disposal of property........................................................ 6,859 -- -- Noncash interest expense on debentures.............................................. 10,536 9,934 9,363 Deferred taxes...................................................................... 3,016 (4,387) (5,749) Changes in assets and liabilities; net of effects from companies acquired in 2000: Accounts receivable................................................................. 49,471 (60,238) 52,405 Inventories......................................................................... 8,282 (3,479) 2,129 Other current assets and other assets............................................... 5,003 (4,801) 5,119 Accounts payable.................................................................... (26,192) 18,651 (3,749) Accrued compensation and related benefits........................................... (9,419) 2,110 12,688 Other accrued liabilities........................................................... 11,334 21,205 (10,352) Deferred revenue.................................................................... (15,034) 8,609 9,539 --------- --------- --------- Cash provided by (used in) operating activities................................... (35,067) 2,543 85,970 --------- --------- --------- Cash flows from investing activities: Short-term investment purchases...................................................... (133,032) (273,941) (279,513) Short-term investment sales and maturities........................................... 158,690 378,591 239,615 Acquisition of intellectual property................................................. -- (200) -- Property and equipment purchases..................................................... (50,230) (66,584) (33,292) Purchase of company, net of cash acquired............................................ -- (55,203) -- --------- --------- --------- Cash used in investing activities................................................. (24,572) (17,337) (73,190) --------- --------- --------- Cash flows from financing activities: Repurchase of common stock........................................................... -- (25,057) (21,708) Other common stock transactions, net................................................. 5,355 39,097 26,849 Payments on capital lease obligations................................................ (396) (245) -- Payments on notes payable............................................................ -- (1,676) (1,624) Net proceeds from issuance of debt obligations....................................... 42,674 -- -- --------- --------- --------- Cash provided by financing activities............................................. 47,633 12,119 3,517 --------- --------- --------- Effect of exchange rate changes on cash and cash equivalents............................. 26 2,393 1,458 --------- --------- --------- Increase (decrease) in cash and cash equivalents......................................... (11,980) (282) 17,755 --------- --------- --------- Cash and cash equivalents: Beginning of year.................................................................... 84,544 84,826 67,071 --------- --------- --------- End of year.......................................................................... $ 72,564 $ 84,544 $ 84,826 ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid for income taxes........................................................... $ 1,443 $ 3,708 $ 2,529 Cash paid for interest............................................................... $ 741 $ 93 -- Supplemental schedule of noncash investing and financing activities: Stock options issued in conjunction with acquisitions................................ $ -- $ 10,422 $ -- Property acquired under capital lease................................................ $ -- $ 1,596 $ --
See Notes to Consolidated Financial Statements 34 ASPECT COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Organization and Significant Accounting Policies Organization Aspect Communications Corporation (Aspect or the Company) is a leading provider of business communications solutions that help companies improve customer satisfaction, reduce operating costs, gather market intelligence and increase revenue. Aspect provides the mission-critical software platform, development environment and applications that seamlessly integrate traditional telephony, e-mail, voicemail, web, fax, wireless business communications, and voice-over-IP while providing investment protection in a company's data and telephony infrastructures. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have been eliminated. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. The most significant estimates and assumptions relate to the allowance for doubtful accounts, excess inventory and obsolescence, impairment of long lived assets, valuation allowance and realization of deferred income taxes, and restructuring reserve. Actual amounts could differ significantly from these estimates and assumptions. Reclassifications Certain prior-year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year presentation. Cash and 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. Restricted Cash Restricted cash consists of corporate notes and bonds, government obligations and interest bearing deposit accounts, which are restricted from use pursuant to certain loan and letter of credit agreements and line of credit arrangements. The Company has restricted cash of $5 million included within current other assets and $3 million included within non-current other assets. Investments The Company has classified all of its marketable equity securities as available-for-sale. While the Company may hold debt securities to maturity, the Company has classified all debt securities as available-for-sale, as the sale of such securities may be required prior to maturity to implement management's strategies. The carrying value of all securities is adjusted to fair market value, with unrealized gains and losses, net of deferred taxes, 35 being excluded from earnings and reported as a separate component of accumulated other comprehensive income (loss) in the consolidated statements of shareholders' equity. Cost is based on the specific identification method for purposes of computing realized gains or losses. At December 31, 2001, the Company had no investments in marketable equity securities. The Company has investments in certain privately held companies, which it accounts for under the cost method. The carrying amount of such investments was $9 million and $10 million at December 31, 2001 and 2000, respectively. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Cost includes the purchase price of parts, assembly costs, and overhead. Property and Equipment Property and equipment are stated at cost. Depreciation is computed once assets are placed into service, using the straight-line method over their estimated useful lives as follows: Machinery and Equipment................ 2-7 years Buildings and Improvements............. 15-30 years
Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the assets. Intangible Assets Goodwill and other intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from two to ten years. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, the Company will no longer amortize goodwill and assembled workforce beginning in 2002 and will periodically assess these assets for impairment. Long-Lived Assets The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, or whenever management has committed to a plan to dispose of the assets. Assets to be held and used affected by such impairment loss are depreciated or amortized at their new carrying amounts over the remaining estimated life. In determining whether an impairment exists, the Company uses undiscounted future cash flow without interest charges compared to the carrying value of the assets. Revenue Recognition The Company derives its revenue primarily from two sources (i) product revenues, which include software licenses and hardware, and (ii) service revenues, which include support and maintenance, consulting and training revenue. The Company applies the provisions of Statement of Position 97-2, "Software Revenue Recognition," as amended by Statement of Position 98-9 "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" and provisions of Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements" to all transactions involving the sale of software products and hardware. 36 The Company recognizes revenue from the sale of software licenses when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. Delivery generally occurs when product is delivered to a common carrier. At the time of the transaction, the Company assesses whether the fee associated with its revenue transactions is fixed or determinable and whether or not collection is probable. The assessment whether the fee is fixed or determinable is based on the payment terms associated with the transaction. If a significant portion of a fee is due after its normal payment terms, which are 30 to 90 days from invoice date, the Company accounts for the fee as not being fixed or determinable, in which case, the Company recognizes revenue as the fees become due. The Company assesses collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company does not typically request collateral from its customers. If the Company determines that collection of a fee is not probable, then the Company will defer the fee and recognize revenue upon receipt of cash. For arrangements with multiple elements, the Company allocates revenue to each component of the arrangement using the residual value method based on vendor specific objective evidence of the undelivered elements. This means that the Company defers the arrangement fee equivalent to the fair value of the undelivered elements until these elements are delivered. The Company recognizes revenue for maintenance services ratably over the contract term. The training and consulting services are billed based on hourly rates, and the Company generally recognizes revenue as these services are performed. However, at the time of entering into a transaction, the Company assesses whether or not any services included within the arrangement are essential to the functionality of other elements of the arrangement. If services are determined to be essential to other elements of the arrangement, the Company recognizes the license, consulting and training revenues using the percentage of completion method. The Company estimates the percentage of completion based on its estimate of the total costs estimated to complete the project as a percentage of the costs incurred to date and the estimated costs to complete. In December 1999, the Securities and Exchange Commission (SEC) issued SAB No. 101, which summarizes certain views of the SEC staff in applying generally accepted accounting principles to revenue recognition in financial statements. SAB No. 101 clarified delivery criteria, which affected the Company's revenue recognition policy. The Company applied the provisions of SAB No. 101 in the quarter ended December 31, 2000, retroactive as of the beginning of the fiscal year. Accordingly, the accompanying consolidated statement of operations for the years ended December 31, 2001 and 2000, are reflected in accordance with SAB No. 101. Had the Company applied the provisions of SAB No. 101 at the beginning of 1999, unaudited pro forma results of operations for 1999 would have been as follows (in thousands, except per share amounts):
1999 -------- Net loss as reported................................................... $(28,851) Adjustment for the change in accounting principle applied retroactively 2,044 -------- Net loss as adjusted................................................... $(26,807) ======== Basic and diluted net loss per share as reported....................... $ (0.60) Effect of change per share............................................. 0.05 -------- Basic and diluted net loss per share as adjusted....................... $ (0.55) ========
37 The impact of adoption of SAB No. 101 in fiscal 2000 resulted in approximately $4 million of revenue being deferred to future periods. As such, the Company's net loss for the year ended December 31, 2000, under its revenue recognition policies prior to SAB No. 101 would have been approximately $32 million, and its basic and diluted loss per share would have been $0.63. There was no cumulative effect of this change in accounting principle at the beginning of fiscal 2000. Deferred Revenue Deferred revenue primarily represents payments received from customers for maintenance support or products prior to revenue recognition. 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 (SFAS) 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. Advertising Expenses The Company expenses the costs of advertising, including promotional expenses, as incurred. Advertising expenses for the years ended December 31, 2001, 2000, and 1999, were approximately $9 million, $8 million, and $10 million, respectively. Stock-Based Compensation In accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company continues to apply Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee stock option awards. Per Share Information Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share further include the dilutive impact, if any, of stock options and restricted stock awards. Foreign Currency Translation and Foreign Exchange Transactions Operations of the Company's foreign subsidiaries are measured using local currencies 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 the average rates in effect for the periods presented. Translation adjustments are reported as a separate component of accumulated other comprehensive income (loss) in the consolidated statements of shareholders' equity. The loss from foreign currency transactions was approximately $1.4 million in 2001 and was not material for 2000 and 1999. The Company enters into forward foreign exchange contracts that are designed to hedge intercompany account balances. Market value gains and losses on these contracts substantially offset foreign exchange gains or losses on the balances being hedged. 38 Concentration of Credit Risks Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents, short-term investments, and accounts receivable. Cash and cash equivalents are held primarily with three financial institutions and consist primarily of commercial paper and cash in bank accounts. The Company's short-term investments are managed primarily by two money managers and consist of corporate notes and bonds, municipal bonds, and government treasury notes. The Company has an Investment Committee that oversees compliance with the established investment policies. The Company sells its products primarily to large organizations in diversified industries worldwide. The Company performs ongoing credit evaluations of its customers' financial condition and generally does not require its customers to provide collateral or other security to support accounts receivable. The Company maintains an allowance for doubtful accounts based on an assessment of the collectibility of such accounts. 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 $10,500 in 2001) to this plan, for which the Company, at the discretion of the Board of Directors and within certain limitations, may make matching contributions and discretionary contributions. The Company temporarily suspended matching contributions in 2001. Contributions made by the Company to the plan were approximately $1 million in 2001, $3 million in 2000, and $3 million in 1999. Comprehensive Income (Loss) Accumulated other comprehensive income (loss) at December 31 is comprised of (in thousands):
2001 2000 1999 ------- ------- ------- Accumulated unrealized gains on available-for-sale securities, net $ 603 $ 5,320 $50,564 Accumulated translation adjustments, net.......................... (2,598) (2,594) (2,236) ------- ------- ------- Accumulated other comprehensive income (loss)..................... $(1,995) $ 2,726 $48,328 ======= ======= =======
New Accounting Pronouncements SFAS 133 SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS No. 133 effective January 1, 2001. Adoption of SFAS 133 did not have a material impact on the consolidated financial position, results of operations, or cash flows of the Company. SFAS 141 In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. Business combinations originally accounted for under the pooling of interest method will not be changed. The adoption of SFAS No. 141 did not have a material impact on the financial position, results of operations or cash flows of the Company. 39 SFAS 142 In June 2001, FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. The Company will adopt SFAS No. 142 for its fiscal year beginning January 1, 2002. Upon adoption of SFAS No. 142, the Company will no longer amortize its goodwill and assembled workforce with a net carrying value of approximately $54 million at December 31, 2001 and the annual amortization of $14 million that resulted from business combinations initiated prior to the adoption of SFAS No. 141. The Company will evaluate goodwill under the SFAS No. 142 transitional impairment test to determine the impact. Any transitional impairment loss will be recognized as a change in accounting principle on the date of adoption. The Company has not determined whether adoption of SFAS No. 142 will have an impact on its financial results. SFAS 144 In August 2001, FASB issued SFAS No.144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company will adopt SFAS No. 144 for its fiscal year beginning January 1, 2002. The Company has not determined whether adoption of SFAS No. 144 will have an impact on its financial results. Note 2: Business Combinations and Other Acquisitions On February 18, 2000, the Company acquired privately held PakNetX Corporation (PakNetX), an eBusiness software provider based in Salem, New Hampshire. The transaction enabled Aspect to integrate multimedia-over-IP technology into its flagship customer relationship portal software and strengthen the Company's CRM market position. The transaction was accounted for as a purchase and resulted in a one-time charge of approximately $5 million related to in-process technology in the quarter ended March 31, 2000. The Company initially paid approximately $55 million in cash for all the outstanding common and preferred shares and warrants of PakNetX. In addition, Aspect assumed the existing PakNetX stock option plan and converted PakNetX stock options into options to purchase approximately 160,000 shares of Aspect common stock with a fair value of approximately $10 million and incurred transaction costs of approximately $2 million. The historical operations of PakNetX are not material to the financial position or results of operations of the Company. The total purchase price and final allocation among the tangible and intangible assets and liabilities acquired including purchased in-process technology are summarized as follows (in thousands):
Amortization Total purchase price: Purchase price allocation: period (years) - -------------------------------- ---------------------------------------- -------------- Total cash consideration $54,948 Tangible assets $ 301 Value of options assumed 10,422 Intangible assets: Transaction costs....... 1,850 Developed and core technology 41,466 7 Assembled workforce 567 4 Testing tools 518 4 Goodwill 34,018 7 In-process technology 5,018 Expensed Tangible liabilities (1,790) Deferred tax liabilities (12,878) ------- -------- $67,220 $ 67,220 ======= ========
40 As noted above, Aspect recorded a one-time charge of approximately $5 million in the first quarter of 2000 for purchased in-process technology that had not reached technological feasibility and had no alternative future use. The purchased in-process technology related to the development of Version 4.0 of PakNetX's integrated contact center solution that had not reached technological feasibility, and therefore successful development was uncertain. During 2000, some components of this technology were incorporated into Aspect products. The development of the remaining components was completed in 2001 and incorporated into additional Aspect products. During 2001 and 2000, we incurred $5 million and $4 million, respectively, in the development of this technology. The Company will no longer amortize goodwill and assembled workforce beginning in 2002. Significant assumptions used to determine the value of in-process technology included: (i) projected net cash flows that the Company expected to result from development efforts; (ii) an estimate of the percentage completion of the project; and (iii) a discount rate of approximately 25%. As of December 31, 2001, no significant departures from the assumptions included in the valuation analysis had occurred. Note 3: Investments Short-term investments in marketable debt and equity securities at December 31 consist of the following (in thousands):
2001 --------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- ------- Corporate notes and bonds $40,187 $ 731 $(62) $40,856 Government obligations... 21,414 315 -- 21,729 ------- ------ ---- ------- Total................. $61,601 $1,046 $(62) $62,585 ======= ====== ==== =======
2001 --------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- ------- Corporate notes and bonds... $27,889 $ 139 $(37) $27,991 Municipal obligations....... 37,361 253 -- 37,614 Government obligations...... 21,211 61 (8) 21,264 ------- ------ ---- ------- Total short-term investments 86,461 453 (45) 86,869 Marketable equity securities 1,233 8,312 -- 9,545 ------- ------ ---- ------- Total.................... $87,694 $8,765 $(45) $96,414 ======= ====== ==== =======
The maturity of short-term investments in marketable debt securities at December 31, 2001, was as follows (in thousands):
Market Value -------------------- Within One to One Year Three Years -------- ----------- Corporate notes and bonds........................ $7,832 $33,024 Government obligations........................... 891 20,838 ------ ------- Total......................................... $8,723 $53,862 ====== =======
During 2001 and 2000, the Company realized pretax gains of approximately $563,000 (cost basis of approximately $1 million) and $20 million (cost basis of approximately $2 million), respectively, on the sale of appreciated marketable equity securities. 41 Note 4: Fair Value of Financial Instruments The following summary disclosures are made in accordance with the provisions of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," 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 No. 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. Because SFAS No. 107 excludes certain financial instruments and all non-financial 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):
2001 2000 ------------------- ------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- Assets: Cash and cash equivalents.............. $72,564 $72,564 $84,544 $84,544 Short-term investments................. 62,585 62,585 86,869 86,869 Marketable equity securities........... -- -- 9,545 9,545 Other investments in equity securities. 9,009 9,009 10,450 10,450 Liabilities: Borrowings............................. 43,641 43,641 1,351 1,351
The Company does not use derivative financial instruments for speculative or trading purposes. The Company enters into forward foreign exchange contracts to hedge intercompany balances against future movements in foreign exchange rates. The forward foreign exchange contracts require the Company to exchange foreign currencies for U.S. dollars or vice versa, and generally mature in one month or less. As of December 31, 2001 and 2000, the Company had outstanding forward foreign exchange sale contracts with aggregate notional amounts of approximately $24 million and $50 million, respectively, that had remaining maturities of one month or less. At December 31, 2001, forward exchange sale contracts were primarily for British pounds, Australian dollars and Euros. At December 31, 2000, forward foreign exchange sale contracts were primarily for Euros and British pounds. Gains and losses on the foreign exchange contracts, which were not significant in any of the periods presented, are included in interest and other income (expense), which offset foreign exchange gains or losses from revaluation of foreign currency denominated balance sheet items and intercompany balances. At December 31, 2001 and 2000, the estimated fair values of forward foreign exchange contracts were $24 million and $51 million, respectively. The fair value of foreign exchange contracts is based on prevailing financial market information. The Company has not entered into any other material financial derivative instruments. The fair value of cash and cash equivalents reported in the consolidated balance sheets approximates its carrying value. The fair value of short-term investments, and forward foreign exchange sale contracts is based on quoted market prices. Marketable equity securities comprise investments in companies in the historically volatile high-technology market. Note 5: Inventories Inventories at December 31 consist of (in thousands):
2001 2000 ------- ------- Raw materials.............................................. $ 8,492 $14,779 Work in progress........................................... 2,173 3,404 Finished goods............................................. 1,379 1,757 ------- ------- Total................................................... $12,044 $19,940 ======= =======
42 Note 6: Other Current Assets Other assets at December 31 consist of (in thousands):
2001 2000 ------- ------- Prepaid expenses................................. $10,412 $10,143 Other receivables................................ 4,304 13,388 Deferred tax asset............................... 3,944 3,394 Restricted Cash.................................. 4,700 -- ------- ------- Total......................................... $23,360 $26,925 ======= =======
Note 7: Property and Equipment Property and equipment at December 31 consist of (in thousands):
2001 2000 --------- --------- Land..................................... $ 3,914 $ 3,914 Buildings and improvements............... 42,606 12,315 Computer and development equipment....... 144,302 134,021 Field spares............................. 21,745 21,524 Office equipment......................... 36,461 31,664 Leasehold improvements................... 21,881 23,083 Construction in progress................. 3,591 15,375 --------- --------- Total................................. 274,500 241,896 Accumulated depreciation and amortization (162,410) (133,116) --------- --------- Property and equipment, net.............. $ 112,090 $ 108,780 ========= =========
The Company began capitalizing interest costs relating to the construction of a new building during the third quarter of 2000. In 2001, the Company completed construction of the building and as of December 31, 2001, approximately $800,000 was capitalized into the cost of the building. During 2000, the Company entered into an equipment capital lease of approximately $2 million. At December 31, 2001 and 2000, accumulated amortization under this lease was approximately $800,000 and $300,000 respectively. Note 8: Intangible Assets Intangible assets at December 31 consist of (in thousands):
2001 2000 -------- -------- Goodwill, net.................................... $ 54,138 $ 66,727 Other intangible assets, net..................... 61,231 79,667 -------- -------- Total intangible assets, net..................... $115,369 $146,394 ======== ========
Other intangible assets include purchased existing technology, intellectual property, customer relationships and sales channels. Accumulated amortization at December 31, 2001 and 2000, was approximately $105 million and $74 million, respectively. 43 Note 9: Other Accrued Liabilities Other accrued liabilities at December 31 consist of (in thousands):
2001 2000 ------- ------- Accrued sales and use taxes........................... $ 6,986 $11,854 Accrued restructuring................................. 16,835 -- Accrued income taxes.................................. 10,520 16,590 Other accrued liabilities............................. 35,951 38,666 ------- ------- Total.............................................. $70,292 $67,110 ======= =======
Note 10: Loans to officers and employees Principal plus accrued interest due from current employees totaled approximately $675,000 and $1.6 million at December 31, 2001 and 2000, respectively. Interest rates on these loans are 6.0%. These loans plus accrued interest are subject to specific terms and conditions for forgiveness or repayment. In the event of employment termination, the outstanding loan balance and the imputed interest will be payable to the Company. Note 11: Convertible Subordinated Debentures and Notes Payable In August 1998, the Company completed a private placement of approximately $150 million ($490 million principal amount at maturity) of zero coupon convertible subordinated debentures due 2018. The debentures are priced at a yield to maturity of 6% per annum and are convertible into the Company's common stock anytime prior to maturity at a conversion rate of 8.713 shares per $1,000 principal amount at maturity. Holders can require the Company to repurchase the debentures on August 10, 2003, August 10, 2008, and August 10, 2013, for cash; or at the election of the Company, for the Company's common stock, if certain conditions are met. If the Company had to convert the debentures to equity on August 10, 2003 at the then accreted value of approximately $201 million using the ending stock price on December 31, 2001 of $3.88 per share, the Company would issue an additional 51.8 million common shares. The debentures are not secured by any of the Company's assets and are subordinated in right of payment to all of the Company's senior indebtedness and effectively subordinated to the debt of Aspect's subsidiaries. At December 31, 2001 and 2000, debt issuance costs of approximately $4 million and $4 million, respectively, net of amortization of approximately $775,000 and $550,000, respectively, are included in other assets in the consolidated balance sheets and are being amortized over the life of the debt. At December 31, 2001, the fair market value of the convertible subordinated debentures was $137 million. See Note 20 regarding the Company's repurchase of a portion of the convertible subordinated debentures in 2002. Note 12: Lines of Credit and Borrowings On June 19, 2001, the Company obtained a secured line of credit with a US commercial bank in the amount of $20 million, which bears interest at the Company's choice of either the bank's prime rate (4.75% at December 31, 2001) or LIBOR (1.93% at December 31, 2001) + 1.75%. The Company also obtained a secured equipment line of $5 million with the same bank, which bears interest at the Company's choice of either the bank's prime rate or LIBOR + 2.00%. Both credit facilities are secured by a general lien on all Company assets, excluding real property. Borrowings under the $20 million line of credit are available for one year from the date of the agreement. Borrowings under the equipment line were available through December 2001, at which time all borrowings thereunder become term notes, which are payable in equal monthly installments, including interest, over three years. At December 31, 2001, the Company had $15 million outstanding under the credit facility and $5 million outstanding under the equipment line. The Company was in compliance with all related covenants and restrictions at December 31, 2001. The financial covenants include adjusted tangible net worth, quick ratio, earnings before interest expense, income taxes, depreciation and amortization (EBITDA), unrestricted cash, and leverage ratio. Additionally, there is a covenant that requires the Company to obtain the written consent of the lender prior to repurchasing any convertible subordinated debentures. 44 In October 2001, the Company entered into a 5-year loan with an investment bank in the amount of $25 million which bears interest at an initial rate of 8% which is then re-measured semi-annually beginning May 2002 at the rate of LIBOR + 3.75% subject to a floor of 8% and a ceiling of 14%. The loan is secured by a security interest in the Company owned buildings in San Jose. Borrowings are payable in equal monthly installments including interest computed on a 20-year amortization schedule until November 1, 2006, at which time the outstanding loan balance will become payable. At December 31, 2001, the Company had $23 million outstanding. The bank also required that the Company supply a $3 million letter of credit which is recorded as restricted cash on the balance sheet at December 31, 2001. In addition to the line of credit, the Company has utilized a fully collateralized (110%), line of credit with a European banking partner used for securing letters of credit or bank guarantees which are required for daily operations such as payroll, duty and facilities. At December 31, 2001, approximately $5 million was outstanding and $0 was available for future use under this credit line. Future minimum payments under the lines of borrowings as of December 31, 2001 are as follows (in thousands): 2002............................................. $17,195 2003............................................. 2,172 2004............................................. 1,907 2005............................................. 594 2006............................................. 644 2007 and thereafter.............................. 20,174 ------- Total payments................................ $42,686 =======
Note 13: Commitments The Company leases its facilities and certain equipment under non-cancelable capital and operating leases. Future minimum lease payments under such capital and operating leases and the present value of minimum lease payments under capital leases as of December 31, 2001 are as follows (in thousands):
Capital Operating ------- --------- 2002.......................................... $ 719 $ 20,027 2003.......................................... 308 19,188 2004.......................................... -- 18,020 2005.......................................... -- 17,921 2006.......................................... -- 12,853 2007 and thereafter........................... -- 62,315 ------ -------- Future minimum lease payments................. 1,027 $150,324 ======== Amounts representing interest (10%)........... (72) ------ Present value of future minimum lease payments 955 Current portion............................... (656) ------ Capital lease obligations..................... $ 299 ======
Rent expense incurred under the operating leases was approximately $15 million, $11 million, and $12 million, in 2001 2000, and 1999, respectively. Rent expense under the facilities leases is recognized on a straight-line basis over the term of the lease. At December 31, 2001, the Company had $11 million of non-cancelable purchase commitments payable within 2002 and $9 million payable within 3 years ($3 million in 2002, $3 million in 2003, $3 million in 2004) 45 under a patent license agreement and $322 million payable within 10 years ($39 million in 2002, $39 million in 2003, $40 million in 2004, $41 million in 2005, $33 million in 2006 and $131 million thereafter) under outsourced information technology agreements. Note 14: Shareholders' Equity Stock Option Plans Under the Company's stock option plans, incentive and non-qualified stock options may be granted to employees, officers, and directors. All options are granted at fair market value. Options granted to non-directors vest and become exercisable as determined by the Board of Directors (generally over one to four years) and typically expire seven to ten years after the date of grant. Options granted to outside directors vest and become exercisable over four years and expire ten years after the date of grant. A summary of stock option activity follows:
Number of Weighted-Average Shares Exercise Price ---------- ---------------- Outstanding as of January 1, 1999 (3,967,930 stock options exercisable at a weighted average exercise price of $11.05)..................... 10,528,842 $15.55 Granted............................................................ 5,310,584 11.41 Canceled........................................................... (3,221,773) 16.69 Exercised.......................................................... (2,192,175) 9.87 ---------- Outstanding as of December 31, 1999 (3,009,237 stock options exercisable at a weighted average exercise price of $14.87)......... 10,425,478 14.28 Granted............................................................ 7,085,476 28.36 Canceled........................................................... (2,181,687) 22.07 Exercised.......................................................... (2,425,939) 13.63 ---------- Outstanding as of December 31, 2000 (4,576,691 stock options exercisable at a weighted average exercise price of $14.18)......... 12,903,328 20.82 Granted............................................................ 7,101,150 4.90 Canceled........................................................... (9,307,526) 22.25 Exercised.......................................................... (285,062) 4.97 ---------- Outstanding, as of December 31, 2001.................................. 10,411,890 $ 9.12 ==========
The following table summarizes information about stock options outstanding at December 31, 2001:
Weighted Average Remaining Number Contractual Life Weighted Average Number Weighted Average Range of Exercise Prices Outstanding (in years) Exercise Price Exercisable Exercise Price - ------------------------ ----------- ---------------- ---------------- ----------- ---------------- $ 0.80 -- $ 2.96 4,082,804 7.77 $ 2.90 1,470,238 $ 2.95 3.14 -- 6.99 1,682,576 9.07 6.15 66,473 5.76 7.00 -- 10.75 1,855,419 7.48 9.13 1,027,397 8.73 10.94 -- 13.94 1,034,333 7.74 12.79 556,452 13.21 14.06 -- 24.31 1,249,250 7.13 18.12 793,064 18.03 24.75 -- 36.38 256,908 7.74 32.21 121,350 31.41 37.63 -- 51.94 238,450 7.90 45.46 111,541 45.54 59.56 -- 62.44 12,150 8.17 61.93 5,361 61.91 ---------- --------- $ 0.80 -- $62.44 10,411,890 7.85 $ 9.12 4,151,876 $10.73 ========== =========
At December 31, 2001, 5,207,360 shares were available for future grant under the Company's stock option plans. 46 2001 Stock Option Exchange Program In April 2001, the Company's Board of Directors approved the 2001 Stock Option Exchange Program. Under this program, eligible employees could elect, by June 19, 2001, to exchange their existing options for new options to purchase the same number of shares of the Company's common stock, but with a grant date of December 20, 2001. Employees accepting the exchange offer were also required to exchange all options granted within six months of the exchange offer. The new options were issued from the Company's 1996 Employee Stock Option Plan and were nonstatutory stock options. The individuals that participated in this program were required to be employees of the Company on the re-grant date to be eligible to receive the new stock options. Executive officers were not eligible to participate in the program. No consideration for the canceled stock options was provided to individuals terminating employment prior to the re-grant date. The new grants have an exercise price of $2.96, the closing sale price of the Company's common stock on December 20, 2001, the date of re-grant. The new stock options vest on the same schedule as the canceled options; provided, however, that vesting was suspended from the June 19, 2001 cancellation date until December 20, 2001, the new grant date. The new stock options have the same expiration date as the cancelled options. At the expiration date of this program, June 19, 2001, the Company had accepted for exchange options to purchase 4,327,897 shares of common stock, representing approximately 48% of the options that were eligible to be tendered. Upon the terms and subject to the conditions of the program, the Company granted new options to purchase an aggregate of 3,446,311 shares of the Company's common stock on December 20, 2001. Stock Repurchase Program In August 2000, the Company's Board of Directors approved a stock repurchase program to acquire up to 5 million shares of its common stock. Through December 31, 2001, the Company repurchased 1,350,000 shares in 2000 at a weighted average acquisition price of $18.56 per share. All shares repurchased have been retired. No additional shares were repurchased in 2001. In October 1998, the Company's Board of Directors approved a stock repurchase program to acquire up to 5 million shares of its common stock. A total of 5 million shares at a weighted average acquisition price of approximately $10.66 have been repurchased under this program, including 2,990,000 shares in 1999 at a weighted average exercise price of approximately $7.26 per share. The Company completed this program in June 1999 and all shares repurchased have been retired. Shareholder Rights Plan On May 11, 1999, the Company's Board of Directors declared a dividend of one preferred share purchase right (Right) for each outstanding share of common stock, $0.01 par value, of the Company. The dividend was payable on May 26, 1999 to shareholders of record as of the close of business on that date. Each Right entitles the registered holder to purchase from the Company one thousandth of a share of Series A Participating Preferred Stock, $0.01 par value, of the Company, subject to adjustment, at a price of $80.00 per one-thousandth of a share, subject to adjustment. The rights are not exercisable until ten days after a person or group announces acquisition of 15% or more of the Company's common stock or tenders such an offer. The rights expire on May 11, 2009. The description and terms of the Rights are set forth in a Preferred Shares Rights Agreement dated December 12, 2001. Employee Stock Purchase Plan In 1990, the Board of Directors established the 1990 Employee Stock Purchase Plan, under which 6 million common shares are currently 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 each offering period. Shares purchased were 524,639, 435,093, and 940,427 at weighted average exercise prices of $8.44, $12.67, and $6.11 in 2001, 2000 and 1999, respectively. At December 31, 2001, 3,933,620 shares had been issued under this plan. 47 Shares Reserved for Issuance At December 31, 2001, the Company had reserved shares of common stock for issuance as follows: Stock option plans............................... 15,619,250 Stock purchase plans............................. 2,066,380 Other stock plans................................ 14,010 ---------- 17,699,640 ==========
In addition, the Company may need to reserve additional shares in the future for the issuance of common stock in connection with the conversion of any convertible subordinated debentures. Restricted Stock Issuance In July 2000, the Company's Board of Directors amended the 1996 Employee Stock Option Plan and granted 165,000 shares of restricted stock to specific employees. If an employee terminates before the third anniversary of the grant date, that employee's restricted common shares are subject to forfeiture. As of December 31, 2001, 47,550 shares were forfeited. The Company recorded a deferred stock compensation charge of approximately $3 million for the fair value of the common shares on the issuance date and amortizes the amount, net of forfeitures, over the three-year vesting period. 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. SFAS No. 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 No. 123, do not necessarily provide a reliable single measure of the fair value of the Company's stock-based awards. The fair value of each option grant (estimated on the date of grant) was estimated using the Black-Scholes model with the following assumptions:
Year ended December 31, ---------------------- 2001 2000 1999 ----- ------ ----- Employee Stock Options Expected life from vest date (in months).... 8 9 14 Stock volatility............................ 104% 88% 74% Risk-free interest rate..................... 4% 6% 5% Dividend yield.............................. -- -- -- Weighted-average fair value................. $3.96 $23.10 $7.90 Employee Stock Purchase Plan Expected life from vest date (in months).... 6 6 6 Stock volatility............................ 117% 122% 94% Risk-free interest rate..................... 4% 5% 5% Dividend yield.............................. -- -- -- Weighted-average fair value................. $3.75 $15.45 $7.65
48 The Company continues to account for stock-based awards to employees using the intrinsic value method prescribed in APB No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized for stock option plans and the 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, consistent with the method of SFAS No. 123, the Company's net loss and loss per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):
2001 2000 1999 --------- -------- -------- Net loss............................... As reported $(151,827) $(35,321) $(28,851) Pro forma (181,833) (84,211) (46,709) Basic and diluted loss per share....... As reported $ (2.95) $ (0.69) $ (0.60) Pro forma $ (3.53) $ (1.65) $ (0.97)
Note 15: Income Taxes Income tax benefits (provisions) for the years ended December 31 consist of (in thousands):
2001 2000 1999 ------ -------- ------- Current: Federal....................................... $2,879 $(10,909) $ 5,057 State......................................... 660 (1,247) 578 Foreign....................................... 959 (2,171) 980 ------ -------- ------- Subtotal.................................. 4,498 (14,327) 6,615 Deferred: Federal....................................... 0 (4,605) 3,645 State......................................... 0 6,242 2,104 ------ -------- ------- Subtotal.................................. 0 1,637 5,749 ------ -------- ------- Total.................................. $4,498 $(12,690) $12,364 ====== ======== =======
Loss before income taxes for the years ended December 31 consists of (in thousands):
2001 2000 1999 --------- -------- -------- Domestic......................................... $(123,520) $(13,886) $(19,556) Foreign, net..................................... (32,805) (8,745) (21,659) --------- -------- -------- Total......................................... $(156,325) $(22,631) $(41,215) ========= ======== ========
A reconciliation of the statutory federal income tax rate and the effective tax rate as a percentage of income (loss) before income taxes for the years ended December 31 is as follows:
2001 2000 1999 ----- ----- ----- Tax at statutory rate.............................. (35.0)% (35.0)% (35.0)% State income taxes--net of federal effect.......... (3.0) (4.0) (3.5) Goodwill amortization.............................. 3.0 18.0 6.3 Research and development tax credits............... (2.1) (9.7) (7.7) Tax-exempt investment income....................... (0.3) (3.1) (1.4) Foreign sales corporation.......................... -- (3.1) (0.7) Foreign losses for which no benefit may be realized 4.5 12.7 13.4 Purchased in-process technology.................... -- 8.6 -- Change in valuation allowance...................... 32.8 70.9 -- Other.............................................. (2.8) 0.8 (1.4) ----- ----- ----- Total........................................... (2.9)% 56.1% (30.0)% ===== ===== =====
49 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 carry forwards and tax credits. Significant components of the Company's deferred income tax assets and liabilities as of December 31 were as follows (in thousands):
2001 2000 -------- -------- Deferred tax assets: Accruals deductible in different periods................................ $ 22,346 $ 15,289 Deferred revenue........................................................ 1,501 1,178 Depreciation and amortization........................................... 8,484 7,010 Net operating loss and tax credit carryovers of Aspect and subsidiaries. 47,348 23,026 Net operating loss and tax credit carryovers of purchased companies..... 8,973 8,973 Costs capitalized for state tax purposes................................ 2,810 4,516 Other deferred tax assets............................................... 90 794 -------- -------- Total............................................................... 91,552 60,786 Valuation allowance..................................................... (72,780) (33,357) -------- -------- Total deferred tax assets........................................... $ 18,772 $ 27,429 ======== ======== Deferred tax liabilities: Unrealized gains on investments......................................... $ (385) $ (3,508) Purchased intangibles................................................... (18,387) (23,247) Other deferred tax liabilities.......................................... -- (674) -------- -------- Total deferred tax liabilities...................................... $(18,772) $(27,429) -------- -------- Net deferred tax asset (liability)............................... $ -- $ -- ======== ======== Deferred taxes included in: Other current assets.................................................... 3,944 3,394 Other assets............................................................ -- -- Other accrued liabilities............................................... -- -- Noncurrent deferred taxes............................................... (3,944) (3,394) -------- -------- Net deferred tax asset (liability).................................. $ -- $ -- ======== ========
Due to the uncertainty surrounding the eventual realization of the benefits of its deferred tax assets, the Company has placed a valuation allowance against such assets. At December 31, 2001, approximately $4 million of the Company's total deferred tax assets related to net operating losses resulting from the exercise of employee stock options. When recognized, the tax benefit of these losses will be accounted for as a credit to shareholder's equity rather than as a reduction of the income tax provision. At December 31, 2001, the Company had approximately $88 million of federal net operating losses, which will expire beginning in 2020. The net operating losses related to foreign jurisdictions amounted to approximately $22 million. At December 31, 2001, the Company had approximately $5 million of available Federal Research and Development Credits, which expire beginning in 2019; $800,000 of Minimum Tax Credit, which may be carried forward indefinitely; $3 million of available California Research and Development Credits, which may be carried forward indefinitely; and $500,000 of California Manufacturer's Investment Credits, which expire beginning in 2006. At December 31, 2001, the Company had approximately $23 million of federal net operating losses and $1 million of tax credit carryovers from its acquisitions, which were accounted for under the purchase method of accounting. The amount of the net operating losses and tax credits relating to these acquisitions that can be 50 utilized in any given year to reduce certain future taxable income may be limited. The net operating losses and tax credit carryovers from these acquisitions will begin expiring in 2004. Note 16: Loss Per Share Basic and diluted loss per share for the years ended December 31 are calculated as follows (in thousands, except per share amounts):
2001 2000 1999 --------- -------- -------- Weighted average shares outstanding.......... 51,660 51,318 48,375 Restricted common stock...................... (130) (152) -- --------- -------- -------- Shares used in calculation, basic and diluted 51,530 51,166 48,375 --------- -------- -------- Net loss..................................... $(151,827) $(35,321) $(28,851) Basic and diluted loss per share.......... $ (2.95) $ (0.69) $ (0.60) ========= ======== ========
The Company had approximately 10 million, 13 million and 10 million common stock options outstanding for the periods ended December 31, 2001, 2000, and 1999, respectively, which could potentially dilute basic earnings per share in the future. These options were excluded from the computation of diluted earnings per share because inclusion of these shares would have had an anti-dilutive effect, as the Company had a net loss for the period. As of December 31, 2001, 2000, and 1999, the Company had 47 million, 21 million and 4 million shares respectively, of common stock issuable upon conversion of the convertible debentures. Additionally, the Company had 117,450 shares of restricted common stock outstanding at December 31, 2001. The weighted average of these shares were not included in the calculation of diluted earnings per share for any of the periods presented, because this inclusion would have been anti-dilutive. Note 17: Segment, Geographic, and Customer Information Under SFAS No. 131, the Company's operations are reported in two operating segments, which are product and services. All financial segment information required by SFAS No. 131 can be found in the consolidated financial statements. For geographical reporting, revenues are attributed to the geographic location in which customers are invoiced and revenue is recognized. Long-lived assets (excluding intangible assets for purposes of geographical reporting) consist of property and equipment and are attributed to the geographic location in which they are located. No single customer accounted for 10% or more of net revenues or accounts receivable in 2001, 2000, and 1999. The following presents net revenues for the years ended December 31, 2001, 2000, and 1999; and property and equipment as of December 31, 2001, 2000, and 1999, by geographic area (in thousands):
2001 2000 1999 -------- -------- -------- Net revenues: United States........................... $345,295 $477,777 $415,562 United Kingdom.......................... 40,693 57,714 67,547 Other International ((less than)10%).... 129,238 144,030 72,895 Eliminations............................ (65,838) (89,000) (66,892) -------- -------- -------- Total consolidated.................. $449,388 $590,521 $489,112 ======== ======== ======== Long-lived assets (property and equipment): United States........................... $102,146 $ 91,741 $ 63,195 United Kingdom.......................... 7,092 13,413 12,639 Other International ((less than)10%).... 3,893 5,294 6,175 Eliminations............................ (1,041) (1,668) (2,612) -------- -------- -------- Total consolidated.................. $112,090 $108,780 $ 79,397 ======== ======== ========
51 Note 18: Restructuring Charges In February, April and October 2001, the Company reduced its workforce by 6%, 11% and 10%, respectively, and consolidated selected facilities in its continuing effort to better optimize operations. These activities resulted in restructuring charges of $7 million, $13 million and $24 million, respectively. As of December 31, 2001, the total restructuring accrual was $30 million, of which, $17 million was a short-term liability and $13 million was a long-term liability. Components of the restructuring accrual as of December 31, 2001 were as follows (in thousands):
Severance and Consolidation of Other Restructuring Outplacement Facilities Costs Costs Total ------------- ---------------- ------------------- -------- February 2001 provision.......... $ 3,227 $ 3,219 $ 508 $ 6,954 June 2001 provision.............. 4,947 8,076 130 13,153 October 2001 provision........... 3,411 20,858 (425) 23,844 Payments and property write-downs (9,428) (4,646) (112) (14,186) ------- ------- ----- -------- Balance at December 31, 2001..... 2,157 27,507 101 29,765 ======= ======= ===== ========
Severance and outplacement costs are related to the termination of 740 employees (153 in February 2001, 304 in June 2001 and 283 in October 2001). Employee separation costs include severance and other related benefits. Functions impacted by the restructuring included sales and sales infrastructure, support services, manufacturing, marketing, research and development, and corporate functions. As of December 31, 2001, the Company made $9 million in severance payments and reduced the accrual by $292,000 for the February provision and $985,000 for the June provision as part of the October provision. The remaining balance will be paid by the end of 2002. Consolidation of facilities costs includes rent of unoccupied facilities, property write-downs, and other facilities related costs. As of December 31, 2001, the Company paid approximately $2 million in expenses and wrote down $3 million in property. The remaining accrual balance will be paid over the next eight years. The Company also increased the reserve for the February 2001 provision by $6 million and the June 2001 provision by $3 million as part of the October provision due to the change in the Company's estimates. Other restructuring costs primarily include legal, and travel expenses. The Company expects the remaining expenses to be paid by the end of the second quarter of 2002. The Company reduced the accrual by $421,000 for the February provision and $68,000 for the June provision as part of the October provision. Note 19: Legal Proceedings The Company is subject to various legal proceedings and claims, which arise, in the normal course of business. The Company does not believe that any current litigation or claims will have a material adverse effect on the Company's business, operating results or financial condition. See Note 20 below regarding the arbitration proceeding related to a dispute between the Company and Universities Superannuation Scheme Limited (USS). Note 20: Subsequent Events In January 2002 the Company paid $10 million to repurchase convertible subordinated debentures in the open market. The Company's carrying value of these securities at the date of repurchase was $12 million, thereby resulting in an extraordinary gain on debt extinguishment of approximately $2 million for the first quarter of 2002. This purchase reduced the principal amount of the Company's outstanding face value of the convertible debt from $490 million to $458 million. 52 The Company is currently in an arbitration proceeding in the United Kingdom which relates to a dispute between the Company and USS regarding an Agreement to Lease between the Company and USS. USS is seeking specific performance by the Company of the Agreement to Lease and damages in excess of 50,000 (British pounds) (approximately US $75,000 at December 31, 2001). In July 2001, the High Court of Justice, Chancery Division in the United Kingdom granted a stay of the proceedings and the dispute was referred to arbitration. In February 2002, the arbitrator ordered the Company to specifically perform the Agreement to Lease and to pay currently outstanding rent, service charges and the rent deposit. The amount of the rent deposit is approximately $6 million. On February 28, 2002, the Company filed an appeal of the arbitrator's order with the High Court of Justice, Queen's Bench Division, Commercial Court in the United Kingdom. The Company's current estimate of its obligation relating to the lease is $9.4 million through the second quarter of 2006 which has been included in its restructuring accrual at December 31, 2001. The maximum obligation under the lease is estimated to be $31.5 million payable over 15 years. The Company will have to provide a deposit of $6 million in the event that it cannot secure a guarantee with a financial institution in the United Kingdom. On March 9, 2002, the President signed into law the Job Creation and Worker Assistance Act of 2002. A provision of this law extends the net operating loss carryback period for income tax purposes from 2 years to 5 years for losses incurred in 2001 and 2002. As a result of this change, the Company will record in the first quarter of 2002 an income tax benefit and corresponding income tax receivable of approximately $20 million from tax losses generated in 2001. The Company is still in the process of evaluating the effect of this change in tax law which could affect the actual amount realized and reported by the Company as required in its first quarter operating results for 2002, the year the tax law changed. 53 Selected Quarterly Financial Data (unaudited)
Dec. 31 Sept. 30 June 30 Mar. 31 -------- -------- -------- -------- (in thousands, except per share amounts) 2001 Quarters Ended Net revenues.................... $112,825 $108,651 $113,379 $114,533 Gross margin.................... 52,688 51,627 53,718 52,695 (% of net revenues).......... 47% 48% 47% 46% Loss from operations............ (38,808) (24,639) (44,247) (45,940) Net loss........................ $(33,892) $(25,747) $(45,957) $(46,231) (% of net revenues).......... 30% 24% 41% 40% Basic and diluted loss per share $ (0.65) $ (0.50) $ (0.89) $ (0.90) 2000 Quarters Ended Net revenues.................... $166,018 $148,472 $131,608 $144,423 Gross margin.................... 88,540 76,826 66,129 74,801 (% of net revenues).......... 53% 52% 50% 52% Loss from operations............ (7,405) (12,286) (16,486) (7,362) Net loss........................ $(19,382) $ (3,808) $ (7,684) $ (4,447) (% of net revenues).......... (12)% (3)% (6)% (3)% Diluted loss per share.......... $ (0.38) $ (0.07) $ (0.15) $ (0.09)
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosures Not Applicable. 54 PART III Item 10. Directors and Executive Officers of the Registrant There is incorporated herein by reference the information required by this Item included in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders under the captions "Management," "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance," which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended December 31, 2001. 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 February 28, 2002:
Name Age Position - ---- --- -------- Beatriz V. Infante........... 48 Chairman, President, and Chief Executive Officer Gary E. Barnett.............. 48 Executive Vice President, Products, and Chief Technology Officer Rod Butters.................. 44 Group President, Worldwide Market Development, Sales, and Services Susanne O. Hereford.......... 38 Vice President, General Counsel, and Secretary Betsy Rafael................. 40 Executive Vice President, Finance, Chief Financial Officer, and Chief Administrative Officer
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. Beatriz V. Infante has been employed by the Company since October 1998, and has served as an executive officer since that time. Ms. Infante currently holds the position of Chairman, President and Chief Executive Officer. She has previously served as Co-President. Prior to joining the Company, Ms. Infante held various executive positions at Oracle Corporation from January 1994 to October 1998 including Senior Vice President, Application Server. Gary E. Barnett was a founding engineer of the Company and has served as an executive officer since April 2000. Mr. Barnett currently holds the position of Executive Vice President, Products and Chief Technology Officer. He has previously served as Executive Vice President eCRM Applications, and other technical leadership positions with the Company. Prior to joining the Company, Mr. Barnett served as President at Prospect Software, Inc. from August 1987 to October 1996. Rod Butters has been employed by the Company since December 1998 and has served as an executive officer since April 2000. Mr. Butters currently holds the position of Group President, World Wide Market Development, Sales, & Services. He has previously served as Executive Vice President Product Strategy/Portal Platforms and Chief Strategy Officer. Prior to joining the Company, Mr. Butters held various executive positions at Oracle Corporation from 1995 to 1998. Susanne O. Hereford has been employed by the Company since June 2001 and has served as an executive officer since October 2001. Ms. Hereford currently holds the position of Vice President, General Counsel and Secretary. From March 2000 to October 2001, Ms. Hereford served as Vice President and General Counsel at 55 Escalate Corporation. Prior to joining Escalate Corporation, Ms. Hereford served as Vice President, Senior Counsel of Baan Company N.V. from June 1995 to March 2000. Betsy Rafael has been employed by the Company since December 2000, and has served as an executive officer since that time. Ms. Rafael currently holds the position of Executive Vice President, Finance, Chief Financial Officer and Chief Administrative Officer. From May 2000 to November 2000, Ms. Rafael served as Senior Vice President and Chief Financial Officer at Escalate Corporation. Prior to joining Escalate Corporation, from November 1994 to May 2000, Ms. Rafael held various positions with Silicon Graphics Incorporated, including Senior Vice President and Chief Financial Officer. 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 2002 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 Certain Beneficial Owners and Management" contained in the Registrant's 2002 Proxy Statement. Item 13. Certain Relationships and Related Transactions The information required by this Item is incorporated by reference to the information under the caption "Certain Relationships and Related Transactions" contained in the Registrant's 2002 Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (a) Documents filed as part of this report: 1. Financial Statements The financial statements included in Part II, Item 8 of this Annual Report on Form 10-K are filed as part of this Report. 2. Financial Statement Schedule The financial statement schedule included in Part II, Item 8 of this Annual Report on Form 10-K are filed as part of this Report. 3. Exhibits 56 INDEX TO EXHIBITS
Exhibit Number Description - ------ ----------- 2.1 Agreement and Plan of Merger dated April 1, 1998, among the Registrant, Venus Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of the Registrant, and Voicetek Corporation a Massachusetts corporation. (1) 3.1 Amended and Restated Articles of Incorporation of the Registrant. (2) 3.2 Certificate of Determination of the Rights, Preferences and Privileges of the Series A Participating Preferred Stock, dated May 11, 1999. (3) 3.3 Bylaws of the Registrant, as amended to date. (2) 3.4 Certificate of Amendment to Registrant's Articles of Incorporation, dated September 24, 1999. (2) 4.1 Indenture, dated August 10, 1998, by and among the Registrant and State Street Bank and Trust Company of California, N.A., as Trustee, including the form of Debenture. (4) 4.2 Form of Debenture (included in Exhibit 4.1). (4) 4.3 Registration Rights Agreement, dated August 10, 1998, by and among the Registrant, Morgan Stanley & Co. Incorporated and Credit Suisse First Boston Corporation. (4) 4.4 Preferred Shares Rights Agreement, dated May 11, 1999. (3) 10.2a 1989 Stock Option Plan and forms of option agreements thereunder, as amended, effective January 22, 1991. (5) 10.2b 1989 Stock Option Plan and forms of option agreements thereunder, as amended, effective May 20, 1993. (5) 10.3a 1989 Directors' Stock Option Plan and forms of option agreements thereunder. (5) 10.3b 1998 Directors' Stock Option Plan, as amended. (2) 10.4a 1990 Employee Stock Purchase Plan and form of subscription agreement thereunder, as amended, effective July 1, 1991. (2) 10.4b 1996 Employee Stock Option Plan, as amended. (2) 10.6 Form of Stock Bonus Agreement for the Registrant's Newborn Stock Bonus Program. (5) 10.7 Form of Indemnification Agreement. (5) 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 French #97, L.P., dated August 1, 1993. (2) 10.39c Amendment to the Lease Agreement between the Registrant and Spieker French #97, L.P., 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 Properties, L.P. dated July 12, 1995. (2) 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. (2) 10.58 Severance Agreement between the Registrant and Dennis L. Haar, dated November 11, 1998. (2)+ 10.59 Severance Agreement between the Registrant and Robert A. Blatt, dated March 25, 1999. (2)+ 10.62 Employment Agreement between the Registrant and Kathleen M. Cruz, dated March 1, 1999. (2)+ 10.69 Employment Agreement between the Registrant and Eric J. Keller, dated May 15, 1999. (2)+ 10.71 Form of Employment Agreement between the Registrant and certain executive officers of the Registrant. (2)+ 10.72 Employment Agreement between the Registrant and Beatriz V. Infante, dated February 16, 2000. (2)+
57
Exhibit Number Description - ------ ----------- 10.73 Promissory Note between the Registrant and Barry Wright, dated August 9, 1999. (2)+ 10.74 Cash Bonus Agreement between the Registrant and Barry Wright, dated August 9, 1999. (2)+ 10.75 Employment Agreement between the Registrant and Gary L. Smith, dated April 6, 2000. (2)+ 10.76 Severance Agreement between the Registrant and William H. Delevati, dated April 3, 2000. (2)+ 10.77 Severance Agreement between the Registrant and Barry Wright, dated April 4, 2000. (2)+ 10.78 Employment Agreement between the Registrant and James R. Carreker, dated April 25, 2000. (2)+ 10.79 Employment Agreement between the Registrant and Beatriz V. Infante, dated April 26, 2000. (2)+ 10.80 Form of Employment Agreement between the Registrant and certain executive officers of the Registrant. (2)+ 10.82a Employment Agreement between the Registrant and Donald P. Casey, dated January 30, 2001. (2)+ 10.82b Severance Agreement between the Registrant and Gary L. Smith, dated June 18, 2001. (2)+ 10.83a Board Agreement between the Registrant and David B. Wright, dated February 15, 2001. (2)+ 10.83b Comerica Bank Credit Agreement, dated June 19, 2001. (2) 10.84 Consulting Agreement between the Registrant and Barry Ariko, dated November 29, 2001 10.85 Employment Agreement between the Registrant and Susanne O. Hereford, dated June 19, 2001 10.86 Fremont Loan Agreement, dated September 28, 2001 10.87 Amendments to the Comerica Bank Credit Agreement, dated November 13, 2001 and December 26, 2001 21.1 Subsidiaries of the Registrant--Jurisdiction of Incorporation. 23.1 Independent Auditors' Consent. 24.1 Power of Attorney. (see page 59)
- -------- (1) Incorporated by reference to the Registrant's Report on Form 8-K, dated May 11, 1998. (2) Incorporated by reference to identically numbered exhibits to the Registrant's previously filed Form 10-K's or Form 10-Q's or to the exhibits to the Registrant's previously filed Form S-8's. (3) Incorporated by reference to the Registrant's Registration Statement on Form 8-A filed June 25, 1999. (4) Incorporated by reference to Amendment No. 1 to the Registrant's Registration Statement on Form S-3 filed on December 21, 1998. (5) Incorporated by reference to Exhibit 3.3 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. + Management compensatory plan, contract or arrangement. (b) Reports on Form 8-K Not Applicable. 58 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 28, 2002 on its behalf by the undersigned, thereunto duly authorized. ASPECT COMMUNICATIONS CORPORATION By: /s/ BEATRIZ V. INFANTE ------------------------------- Beatriz V. Infante, Chairman, President, 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 Beatriz V. Infante, Betsy Rafael, and Susanne O. Hereford, and each one of them, her attorneys in fact, each with the power of substitution, for 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 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/ BEATRIZ V. INFANTE Chairman, President, and, March 28, 2002 - ----------------------------- Chief Executive Officer (Beatriz V. Infante) /s/ BETSY RAFAEL Executive Vice President, March 28, 2002 - ----------------------------- Finance, Chief Financial (Betsy Rafael) Officer, and Chief Administrative Officer /s/ SUSANNE O. HEREFORD Vice President, General March 28, 2002 - ----------------------------- Counsel, and Secretary (Susanne O. Hereford) /s/ NORMAN A. FOGELSONG Director March 28, 2002 - ----------------------------- (Norman A. Fogelsong) /s/ DAVID B. WRIGHT Director March 28, 2002 - ----------------------------- (David B. Wright) /s/ DEBRA J. ENGEL Director March 28, 2002 - ----------------------------- (Debra J. Engel) /s/ JOHN W. PETH Director March 28, 2002 - ----------------------------- (John W. Peth) 59 Signature Title Date --------- ----- ---- /s/ CHRISTOPHER B. PAISLEY Director March 28, 2002 - ----------------------------- (Christopher B. Paisley) /s/ DONALD P. CASEY Director March 28, 2002 - ----------------------------- (Donald P. Casey) /s/ BARRY M. ARIKO Director March 28, 2002 - ----------------------------- (Barry M. Ariko) 60 ASPECT COMMUNICATIONS CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (in thousands)
Beginning Ending Balance Additions Deductions Balance --------- --------- ---------- ------- 2001 Allowance for doubtful accounts.................. $9,059 $4,291 $6,783 $6,567 Warranty reserve................................. $1,728 $1,026 $1,744 $1,010 2000 Allowance for doubtful accounts.................. $7,180 $2,412 $ 533 $9,059 Warranty reserve................................. $ 712 $2,387 $1,371 $1,728 1999 Allowance for doubtful accounts.................. $4,415 $6,722 $3,957 $7,180 Warranty reserve................................. $3,347 $ 935 $3,570 $ 712
EX-10.84 3 dex1084.txt CONSULTING AGREEMENT WITH BARRY ARIKO DATED 11/01 Exhibit 10.84 CONSULTING AGREEMENT THIS AGREEMENT is made effective as of November 29, 2001 by and between Barry M. Ariko, an individual ("Consultant"), and Aspect Communications, Inc., a company based in San Jose, California (the "Company"). Consultant has been involved in fields of particular interest to the Company and is by education and/or experience qualified and skilled with respect to the Consulting functions described herein. The Company wishes to retain Mr. Ariko as a Consultant to the Company, and Mr. Ariko desires to perform such services. Accordingly, the parties agree as follows: 1. Consulting Services. Consultant will serve as an advisor to the Company ------------------- and will provide information, counsel and assistance as requested by the Company in furtherance of the Company's desire to move the sales force from its current culture, models, policy and procedures to one that is better targeted towards growing revenue for the Company's full suite of products in today's market (see Attachment A - "Schedule and Objectives for Consulting on Development of Aspect Sales), and will perform such other services as are agreed upon from time to time by Consultant and the Company's senior management (collectively, the "Consulting Services"), specifically either Ms. Beatrice Infanti, CEO or Mr. Rod Butters, COO. Consultant agrees that some Consulting Services may be sought by the Company over the telephone, in person at Company's offices, or through written or email correspondence. This consulting engagement terminates on June 30, 2002. 2. Consulting Fee. The Consultant agrees to perform the scope of -------------- Consulting Services described in Attachment A for a minimum fee of $30,000 which will be calculated as follows: in connection with the services provided under this Agreement, and effective upon the Company's approval hereof, Consultant shall be paid at the rate of $3,000/day (not to exceed eight (8) hours/day) for his services ($2,000/day for meetings of four (4) hours or less), $500/hour for telephone consulting (minimum charge of $125) and time spent preparing for meetings or responding to email requests. Meetings that require the Consultant to travel overnight will be billed as a multiple day engagement. 3. Payment and Reimbursement of Expenses. (i) Company shall pay the ------------------------------------- Consultant monthly and within five (5) days of Company receiving an invoice from the consultant; (ii) Company shall reimburse Consultant for Consultant's reasonable out-of-pocket expenses incurred in connection with any meetings of the Company's Advisors (including first class airfare), and (iii) for other pre-approved out-of-pocket expenses directly related to services rendered by Consultant under this Agreement. Reimbursement shall be subject to Consultant promptly providing to the Company an itemized expense statement and receipts supporting all such reimbursable expenses. Reimbursement shall be made by the Company according to its usual and customary accounting and payment procedures. 4. Confidentiality. --------------- (a) Consultant acknowledges that, during the course of performing the Consulting Services, the Company may be disclosing certain nonpublic information and materials concerning its business to Consultant, including but not limited to information regarding its projects, products, technology and know-how, industry and competitor analyses, services, potential customers, personnel, business plans, finances and other commercially valuable information (collectively "Confidential Information"). All nonpublic information disclosed to Consultant in connection with the Consulting Services will be presumed to be Confidential Information and shall be treated as such. (b) Consultant agrees that the Confidential Information will be used by Consultant only in connection with Consulting Services and will not be used in any way that is detrimental to the Company. (c) Consultant agrees not to disclose, directly or indirectly, the Confidential Information to any third person or entity, other than representatives or agents of the Company. Consultant will treat all such Confidential Information as confidential and proprietary property of the Company. (d) The term "Confidential Information" does not include information that (i) is or becomes generally available to the public other than by disclosure in violation of this Agreement, (ii) was within Consultant's possession prior to being furnished by the Company provided that the source of such information is not and was not bound at the time of delivery by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to the Company, (iii) becomes available to Consultant on a nonconfidential basis from a source other than the Company provided that such source is not and was not bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to the Company with respect to such information, or (iv) was independently developed by Consultant without reference to the Confidential Information. (e) Consultant may disclose any Confidential Information that is required to be disclosed by law, government regulation or court order. If such disclosure is required Consultant will give the Company reasonable advance notice so that the Company may seek protective order or take other action reasonable in light of the circumstances. (f) Consultant shall continue to be bound by the terms of the confidentiality provisions contained in this Section 4 for a period of two (2) years after the termination of the Consulting Services by Consultant. 5. Other Matters. Consultant understands that the Company is not seeking ------------- to obtain any information that is proprietary to any prior or current business relationship of Consultant. Consultant shall not, in performing services for the Company, make use of any such proprietary information of third parties. 6. Assignment: Further Assurances. To the extent necessary for the ------------------------------ Company's complete ownership of all property rights embodied in the Confidential Information (i.e. to the extent the Confidential Information cannot legally be considered "work made for hire" and with respect to patent, trade secret and other rights), Consultant hereby sells, assigns, grants, transfers, and delivers to the Company, and its successors and assigns, all Consultant's right, title and interest in and to the Confidential Information, and the right to secure patent rights, copyrights, and other intellectual property rights throughout the world, and to have and to hold such rights in perpetuity. Consultant further waives for himself/herself and his/her successors in interest, any right they may have now or in the future to terminate or waive this assignment. Consultant agrees to assist and cooperate with the Company in obtaining, maintaining, and enforcing any U.S. or foreign patents, copyrights, trademarks, service marks, trade secrets or other intellectual property rights relating in any manner to the Consulting Services, including, but not limited to, executing applications therefor and other documents relating thereto, and rendering all such assistance and testimony as may be reasonably necessary to protect the rights of the Company or its designee. All such filings and enforcement activities shall be conducted at the Company's expense. 7. Relationship of the Parties: Terminable At Will. In the performance of ----------------------------------------------- all services under this Agreement, Consultant shall be an independent contractor and not an employee, agent, partner, joint venturer or co-venturer of the Company. Consultant shall have no right to bind the Company, transact any business in the name of the Company or on its behalf in any matter, or make any promises or representations on behalf of the Company. As an independent contractor, Consultant shall be solely responsible for all income, self- employment, social security, medicare, unemployment or other federal or state withholding or taxes applicable to compensation paid to Consultant by the Company under this Agreement; provided, however, that the Company shall have a right to make any and all tax withholdings reasonably deemed necessary or advisable by the Company. This Agreement and the relationship of the parties are terminable at will by either party, at any -2- time, with or without cause. If terminated by the Consultant, the minimum fee provisions of the contract is thereby waived. 8. No Conflict: Valid and Binding. Consultant represents that neither the ------------------------------ execution of this Agreement nor the performance of Consultant's obligations under this Agreement will result in a violation or breach of any other agreement by which Consultant is bound. The Company represents that this Agreement has been duly authorized and executed and is a valid and legally binding obligation of the Company, subject to no conflicting agreements. 9. Indemnification of Consultant. The Company will, to the extent and in ----------------------------- the manner permitted by applicable law, indemnify Consultant against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that Consultant is or was providing Consulting Services to the Company; provided, however, that Consultant shall have no right to indemnification on account of (i) acts or omissions of Consultant constituting intentional misconduct or a knowing violation of law; (ii) any transaction with respect to which Consultant personally received a benefit in money, property or services to which Consultant was not legally entitled; or (iii) any activities by Consultant that constitute a breach or default under any agreement between the Company and Consultant. 10. Assignment. This Agreement may not be assigned. ---------- 11. Merger; Entire Agreement; Waiver; Severability. This Agreement, except ---------------------------------------------- as supplemented or modified in writing between the parties, constitutes the entire agreement between the parties with respect to the subject matter hereof. No waiver of breach shall constitute a subsequent waiver of any subsequent breach, and if any provision of this Agreement be held invalid, the remaining provisions shall remain enforceable. 12. Governing Law. This Agreement shall be governed by, construed and ------------- enforced in accordance with the laws of the State of California (without giving effect to any choice or conflict of laws provision or rule). "CONSULTANT" /s/ Barry M. Ariko an individual ------------------ Barry M. Ariko "COMPANY" By: /s/ Rod Butters ----------------------------- Name: Rod Butters --------------------------- Its: Group President ---------------------------- -3- EX-10.85 4 dex1085.txt EMPLOYMENT AGREEMENT WITH SUSSIE O. HEREFORD Exhibit 10.85 EMPLOYEE AGREEMENT In exchange for my becoming employed (or my employment being continued) by Aspect Communications Corporation, or its subsidiaries, affiliates, or successors (hereinafter referred to collectively as the "Company"), I hereby agree as follows: Employment at Will I agree that this Agreement is not an employment contract and that I have the right to resign and the Company has the right to terminate my employment at any time for any reason, with or without cause. This is the full and complete agreement between myself and the company and no employee or representative of the Company has any authority to enter into any agreement to the contrary. I will perform for the Company such duties as may be designated by the Company from time to time. During my period of employment by the Company, I will devote my best efforts to the interests of the Company and will not engage in other employment with any Aspect competitor, customer or supplier without the prior written consent of the Company. I will not accept a position with any other company if the time demands of the position will impair my ability to fulfill my obligations to the Company. Definitions As used in this Agreement the term "Inventions", means designs, trademarks, discoveries, formulae, processes, manufacturing techniques, trade secrets, inventions, improvements, ideas, original works of authorship or copyrightable works, including all rights to obtain, register, perfect and enforce these proprietary interests. As used in this Agreement, the term "Confidential Information" means information pertaining to any aspects of the Company's business which is either information not known by actual or potential competitors of the Company or is proprietary information of the Company or its customers or suppliers, whether of a technical nature or otherwise. Assignment of Inventions Without further compensation, I hereby assign and agree to assign to the Company or its designee, my entire right, title, and interest in and to all Inventions made by me during the period of my employment unless the Invention was developed entirely on my own time without using the Company's equipment, supplies, facilities, or trade secret information: and (a) the Invention does not relate at the time of conception or reduction to practice of the Invention to the Company's business, or the Company's actual or demonstrably anticipated research or development; and, (b) the Invention does not result from any work performed by me for the Company, whether or not during normal working hours. No rights are hereby conveyed in Inventions, if any, made by me prior to my employment with this Company which are identified on the back of this Agreement or on a sheet attached to and made a part of this Agreement, if any. I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment and which are protectable by copyright are "works made for hire," as that term is defined in the United States Copyright Act as in effect of this date. I agree to perform, during and after my employment, all acts deemed necessary or desirable by the Company to permit and assist it, at its expense, in obtaining and enforcing the full benefits, enjoyment, rights and title throughout the world in the Inventions hereby assigned to the Company. Such acts may include, but are not limited to, execution of documents and assistance or cooperation in legal proceedings. This Agreement does not apply to an Invention, the assignment of which to the Company would violate applicable law, including an Invention which qualified fully under Section 2870 of the California Labor Code. I agree to disclose in confidence to the company all Inventions made by me to permit a determination as to whether or not the Inventions should be the property of the Company. Page 1 of 3 Confidential Nondisclosure I agree to hold in confidence and not directly or indirectly to use or disclose, either during or after termination of my employment with the Company, any Confidential Information I obtain or create during the period of my employment, whether or not during working hours, except to the extent authorized by the Company, until such Confidential Information becomes generally known. I agree not to make copies of such Confidential Information except as authorized by the Company. I will return or deliver to the Company all tangible forms of such Confidential Information in my possession or control, including but not limited to drawings, specifications, documents, records, devices, models or any other material and copies or reproductions thereof. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by me in confidence or in trust prior to my employment with the Company, and I will not disclose to the Company, or induce the Company to use, any confidential or proprietary information or material belonging to any previous employer or others. No Solicitation I agree that for a period of twelve (12) months immediately following the termination of my relationship with the Company for any reason, I shall not either directly or indirectly solicit, induce, recruit, or encourage any of the Company's employees to leave their employment or attempt to solicit, induce, encourage, recruit employees of the Company, either for myself or for any other person or entity. No Conflict I agree not to enter into any agreement, either written or oral, in conflict with the provisions of this Agreement. I certify that, to the best of my information and belief, I am not a party to any other agreement which will interfere with my full compliance with this Agreement. Survivability This Agreement (a) shall survive my employment by the Company (b) does not in any way restrict my right or the right of the Company to terminate my employment, (c) inures to the benefit of successors and assignees of the Company, and (d) is binding upon my heirs and legal representatives. Compliance I certify and acknowledge that I have carefully read all of the provision of this agreement and that I understand and will fully and faithfully comply with such provisions. Employee Print Name: Susanne Hereford Signature: /s/ Susanne Hereford Date: 6/19/01 Aspect Communications Corporation Print Name: Peter S. MacGregor Signature: /s/ Peter S. MacGregor Title: Staff Manager Date: 6/19/01 Page 2 of 3 LIST OF INVENTIONS NONE Page 3 of 3 EX-10.86 5 dex1086.txt FREMONT LOAN AGREEMENT Exhibit 10.86 Loan No. 950114178 LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (this "Agreement") is made as of September 28, 2001, by and between FREMONT INVESTMENT & LOAN, a California industrial loan association ("Lender"), and ASPECT COMMUNICATIONS REAL ESTATE HOLDINGS LLC, a Delaware limited liability company ("Borrower"), with respect to the following Recitals: RECITALS A. Borrower is the owner of that certain real property described on Exhibit ------- A attached hereto (the "Property"), together with the improvements now or - - hereafter located thereon (the "Improvements"). The Property and the Improvements are collectively referred to herein as the "Project". B. Borrower desires to borrow from Lender, and Lender is willing to loan to Borrower, a loan in the maximum principal amount of Twenty-Five Million Dollars ($25,000,000) (the "Loan") for the purposes and upon the terms set forth herein. NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 GENERAL DEFINITIONS ------------------- When used herein, the following initially-capitalized terms shall have the following meanings: "Affiliate" means, with respect to any Person, any other Person which controls, is controlled by, or is under common control with the Person in question. For the purposes of the foregoing definition, "controls" (and its correlative terms "controlled by" and "under common control with") means possession by the applicable Person of the power to direct or cause the direction of the management and policies thereof, whether through the ownership of voting securities, by contract, or otherwise. "Agreement" means this Loan and Security Agreement, together with all supplements, amendments and modifications hereto and a11 extensions and renewals hereof. "Application Information" means all financial Information and statements and other information submitted to Lender in connection with the application for the Loan, including, without limitation, information relating to the tenants. Leases and rent payment history and the information set forth on the Borrower Questionnaire delivered to Lender. "Architect" is defined in the Note. "Aspect Communications" means Aspect Communications Corporation, a California Corporation. "Assignment of Architect's Agreement" is defined in Section 3.1. ----------- "Assignment of Contractors Agreement" is defined in Section 3.1. ----------- -1- "Assignment of Rents" means that certain Assignment of Rents and Leases of even date herewith executed by Borrower, as assignor, in favor of Lender, as assignee, to be recorded on the Closing Date in the Official Records of the County in which the Project is situated. "Attorneys' Fees," "Attorneys' fees and Costs," "'attorneys` fees" and "attorneys' fees and costs" mean the fees and expenses of counsel to the applicable parties to the Loan Documents, which may include printing, photostating, duplicating, facsimilating, messengering, filing and other expenses, air freight charges, and fees billed for law clerks, paralegals, librarians and others not admitted to the bar but performing services under the supervision of an attorney. The terms "attorneys' fees" or "attorneys' fees and costs" shall also include, without limitation, all such fees and expenses incurred with respect to appeals, arbitrations, bankruptcy proceedings and any post-judgment proceedings to collect any judgment, and whether or not any action or proceeding is brought with respect to the matter for which such fees and expenses were incurred. The recovery of post-judgment fees, costs and expenses is separate and several and shall survive the merger of the applicable Loan Documents into any judgment. "Average Loss" is defined in Section 7.6(F). -------------- "Bankruptcy Code" means Title 11 of the U.S. Code, as applicable, or any similar federal or state laws for the relief of debtors, each as hereafter amended. "Business Day" means any day other than a Saturday, a Sunday, a legal holiday under the laws of the State of California or a day on which commercial banks in such state are authorized or required by law or other governmental action to be closed. "Cash Collateral Account" is defined in Section 7.13. ------------ "Cash Collateral Pledge Agreement" means that certain Pledge and Assignment of Cash Collateral Account of even date herewith executed by Borrower in favor of Lender and pursuant to which Borrower grants Lender a security interest in the Cash Collateral Account. "Closing Date" means the date of the recordation of the Deed of Trust in the Official Records of the County in which the Project is situated, but in no event later than the Termination Date. "Commitment Letter" means the Commitment Letter dated August 30, 2001 as amended on September 27, 2001, each issued by Lender in connection with the Loan. "Completion Date" is defined in Section 7.12. ------------ "Completion Guarantor" means Aspect Communications. "Completion Guaranty" is defined in Section 3.1. ----------- "Contractor" is defined in the Note. "Contractual Obligation" as applied to any Person means any provision of any instrument, document or security issued by that Person or of any indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which any of its properties is bound or to which it or any of its properties is subject. "Deed of Trust" means that certain Deed of Trust and Fixture Filing of even data herewith executed by Borrower, as trustor, to Fremont General Credit Corporation, as trustee, and naming Lender, as beneficiary, to be recorded on the Closing Date in the Official Records of the County, in which the Project is situated. -2- "Default Interest Rate" is defined in the Note. "Deposit" is defined in Section 7.13. ------------ "Entitlements" means all final use, zoning, platting, site plan and other applicable development approvals and permits (including, without limitation, building permits and certificates of occupancy) from all applicable Governmental Agencies for the; development and occupancy of the Improvements (as defined in the Note) in a manner consistent with the terms of the Master Lease. "Environmental Indemnity" means that certain Environmental Indemnity of even date herewith executed by Borrower and the other parties named therein, if any. "Environmental laws" means any and all present and future federal, state and local laws, ordinances, regulations, policies and any other requirements of any Governmental Agency relating to health, safety, the environment or to any Hazardous Substances, including without limitation, the Comprehensive Environmental Response; Compensation, and Liability Act of 1980 (CERCLA), the Resource Conservation Recovery Act (RCRA), the Hazardous Materials Transportation Act, the Toxic Substance Control Act, the Endangered Species Act, the Clean Water Act, the Occupational Safety and Health Act, the California Environmental Quality Act and the applicable provisions of the California Health anti Safety Code, California Labor Code and the California Water Code, each as hereafter amended from time to time, and the present and future rules, regulations and guidance documents promulgated under any of the foregoing. "Environmental Report" means: that certain Phase I Environmental Site Assessment dated August 17, 2001 performed by ADR Environmental Group. "Event of Default" means any other events specified in Section 8.1. ----------- "First Reduction Date" means the date upon which Lender shall have received evidence satisfactory to Lender in its sole and absolute discretion, but acting in good faith, that at all times during the immediately prior eight consecutive fiscal quarters (i) the Net Worth of the Guarantor was not less than Two Hundred Million Dollars ($200,000,040), (ii) Guarantor's EBITDA was greater than zero (0), and (iii) there has been no material adverse change in the financial condition of Guarantor. "Formation Documents" means: (a) as to any corporation. its articles of incorporation and bylaws, (b) as to any limited partnership, its Certificate of Limited Partnership and partnership agreement, (c) as to any general partnership or joint venture, its statement of Partnership and partnership agreement, (d) as to any limited liability company, its articles or certificate of organization and operating agreement, and (e) as to any trust, its trust agreement and a certification of the current trustees thereof, each of the foregoing together with all supplements, amendments and modifications, "General Partner" or "general partner" means the general partners of the partnership in question or the managers, members or managing member of the limited liability company in question, together with any constituent general partners, managers, members or managing members of such general partners, managers, members or managing members. "Governmental Agency" means any federal, state, municipal or other governmental or quasi-governmental court, agency, authority or district. "Guarantor's EBITDA" means far any period, the sum, as reflected in consolidated financial statements, of the following, each of which shall be calculated in accordance with generally accepted accounting principles: (a) the net income (or net loss) for such period, plus (b) all amounts treated as expenses for depreciation and interest and the amortization of intangibles (including purchased in-process -3- Research and Development) of any kind to the extent deducted in the determination of such net income (or net loss), plus (c) all accrued taxes on or measured by income to the extent included in the determination of such net income (or net loss), plus (d) amortization of stock-based compensation, less (e) any non-recurring gains (or plus any nonrecurring losses), all determined by Lender in its sole and absolute discretion; provided, however, that net income (or loss) shall be computed for these purposes without giving effect to extraordinary losses or extraordinary gains, and provided, further, that each of the above shall be to the extent reported on the financial statements of Guarantor submitted to Lender in accordance with the Loan Documents. "Hazardous Substances" means (a) any chemical, compound, material, mixture or substance that is now or hereafter defined or listed in, or otherwise classified pursuant to, any Environmental Laws as a "hazardous substance", "hazardous material", "hazardous waste", "extremely hazardous waste", "acutely hazardous waste", "radioactive waste", "infectious waste", "biohazardous waste", "toxic substance". "pollutant", "toxic pollutant", "contaminant" as well as any formulation not mentioned herein intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, "E:P toxicity", or "TCLP toxicity"; (b) Petroleum natural gas, natural gas liquids, liquefied natural gas, synthetic gas usable for fuel (or mixtures of natural gas and such synthetic gas) and ash produced by a resource recovery facility utilizing a municipal solid waste stream, and drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas, or geothermal resources; (c) "hazardous substance" as defined In Section 252B1(f) of the California Health and Safety Code; (d)"waste" as defined In Section 13050(d) of the California Water Code; (e) asbestos in any form; (f) ureas formaldehyde foam insulation; (g) polychlorinated biphenyls (PCBs); (h) radon; and (i) any other chemical material, or substance exposure to which is limited or regulated by any Governmental Agency because of its quantity, concentration, or physical or chemical characteristics, or which poses a significant present or potential hazard to human health or safety or to the environment if released into the workplace or the environment. "Hazardous Substances" shall not include ordinary office supplies and repair, maintenance and cleaning supplies maintained in reasonable and necessary quantities and used in accordance with all Environmental Laws. "Indemnitees" means, collectively and individually, Lender, its, Affiliates and its and their directors, officers, agents, employees, successors and assigns. "Issuer" means the ABN AMRO (provided that it issues a letter of credit that can be drawn in California or Chicago, Illinois) or other issuer or confirming bank of a letter of credit which is a bank (other than an affiliate of Borrower or Guarantor) organized under the laws of the United States, any state of the United States, or of the District of Columbia end with both: (a) a Long-Term Bank deposit Rating of A2 or better from Moody's Investors Service, and (b) a Long Term Counterparty Credit Rating of A or better from Standard & Poor's, and otherwise, approved by Lender in its sole discretion. "Junior Lender" is defined in Section 7.14. ------------ "Junior Loan" is defined in Section 7.14. ------------ "Laws" means all federal, state, county, municipal and other governmental and quasi-governmental statutes, laws, rules, orders; regulations, ordinances, judgments, decrees and injunctions affecting either the Project or the occupanty, operation, ownership or use thereof, whether now or hereafter enacted and in force including, without limitation, the American With Disabilities Act, 42 U.S.C. Sections 12101-12213 (1991) and all Environmental Laws, any zoning or other land use entitlements and any requirements which may require repairs, modifications or alterations in or to the Project, all Permits and all covenants, agreements, restrictions and encumbrances running in favor of any Person, contained in any instruments, either of record or known to Borrower, at any time in force affecting the Project or the occupancy, operation, ownership or use thereof. -4- "Lease Subordination Agreement" means that certain Lease Subordination Agreement of even date herewith, executed by Borrower, Guarantor and Lender with respect to the Master Lease and recorded on the Closing Date in the Official Records in which the Project is located. "Leases" is defined in the Assignment of Rents. "Letter of Credit" means an irrevocable, unconditional, direct draw letter of credit issued by an Issuer, payable at site in the State of California, in the face amount of Three Million Dollars ($3,000,000), having an initial term of not less than twelve (12) months, automatically renewable through a date no earlier than sixty-five (65) months after the Closing Date, and otherwise in form and substance acceptable to Lender in its sole discretion, and any and all modifications, extensions, renewals and replacements thereof and substitutions therefor. "Letter of Credit Amount" means the maximum amount available under the Letter of Credit. "Lien" Means any mortgage, deed of trust, pledge, security interest, encumbrance, lien, charge or claim of any kind (including any agreement to give any of the foregoing, any Conditional sale or other title retention agreement, any lease in the nature thereof, and/or the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction) with respect to the Project or the Personal Property or any portion thereof or interest therein. "Limited Recourse Obligations Guarantor" means Aspect Communications. "Limited Recourse Obligations Guaranty" is defined in Section 3.1(A). -------------- "Loan" means the Loan to Borrower as more particularly described in Section ------- 2.1. - --- "Loan Amount" means Twenty-Five Million Dollars ($25,000,000). "Loan Documents" means the documents described in Section 3.1 and all other ----------- documents securing, or executed in connection with, the Loan, together with all renewals, substitutions, extensions, modifications or replacements thereof, but excluding the Environmental Indemnity. "Loan Fee" means a fee in the amount of one percent (1.0%) of the Loan Amount. "Loan Year" shall mean the twelve (12) month period commencing on the first day of the month following the Closing Date and each twelve (12) months thereafter. "Major Lease" means a Lease of ten percent (10%) or more of the net rentable square feet of space in the Project and includes, without limitation the Master Lease. "Master Lease" means that certain Lease dated October 1, 2001, by and between Borrower, as landlord, and Aspect Communications, as tenant. "Material Lease Provisions" is defined in Section 7.4(E). ------------- "Maturity Date" means the date set forth in the Note upon which the entire principal amount of the Loan, together with all other amounts owing to Lender under the Loan Documents, shall be due and payable. "Minimum Balance" means Three Million Dollars ($3,000,000), provided, however, that as long as Lender shall have received evidence satisfactory to Lender in its sole discretion, but acting in good faith, that with respect to any period of time after the First Reduction Date, during the immediately prior -5- eight consecutive fisca1 quarters, (a) the Net Worth of Guarantor was not less than Two Hundred Million Dollars ($200,000,000), (b) the Guarantor's EBITDA was greater than zero (0), and (3) there has been no material adverse change in the financial condition of Guarantor, then (i) from the first Reduction Date through and including the first anniversary of the First Reduction Date, Two Million Seven Hundred Thousand Dollars ($2,700,000), (ii) from the first anniversary of the First Reduction Date through and including the second anniversary of the first Reduction Date, Two Million Four Hundred Thirty Thousand Dollars ($2,430,000), (iii) from the second anniversary of the First Reduction Date through and including the third anniversary of the First Reduction Date, Two Million One Hundred Eighty-Seven Thousand Dollars ($2,867,000). (iv) from the third anniversary of the First Reduction Date through and including the fourth anniversary of the First Reduction Date, One Million Nine Hundred Sixty-Eight Thousand Three Hundred Dollars ($1,968,300), and (v) from the fourth anniversary of the First Reduction Date through and including the fifth anniversary of the First Reduction Date, One Million Seven Hundred Seventy-One Thousand Four Hundred Seventy Dollars ($1,771,470). "Minimum Rent Loss Coverage" means Five Million Dollars ($5,000,000). "Net Rentable Square Feet" and "net rentable square feet" shall be calculated in accordance with the method of measuring net rentable area as described in the Standard Method for Measuring Floor Area in Office Buildings, ANSI Z65.1-1996, as promulgated by the Building Owners and Managers Association (BOMA) International. "Net Worth" means, with respect to Aspect Communications, the stockholders equity of Aspect Communications, as determined in accordance with generally accepted accounting principles. "Note" means that certain Secured Promissory Note of even date herewith in the principal amount of Twenty-Five Million Dollars ($25,000,000), executed by Borrower, as maker, in favor of Lender, as holder, and any and all modifications, extensions, renewals and replacements thereof. "Permits" means all permits, licenses, franchises, approvals, variances and land use entitlements necessary for the occupancy, operation, ownership and use of the project. "Person" means and includes natural persons, corporations, limited liability companies, limited liability partnerships, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts, real estate investment trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof. "Personal Property" means all personal property now or hereafter located on or used or useful in the development, operation, ownership, occupancy, use, maintenance, repair or restoration of the Project or any portion thereof, together with all present and future attachments, accessions, replacements, substitutions and additions thereto or therefor, and together with all insurance proceeds from any policy of insurance covering any of the foregoing property provided that the Borrower now or hereafter owns or acquires any interest or right in the foregoing property. "Personal Property" shall include, without limitation, the personal property described in Exhibit B attached hereto and any --------- leased personal property. "Potential Default" means a condition or event which, with the giving of notice or passage of time, or both, would constitute an Event of Default under any of the Loan Documents. "Principals" means individually end collectively Borrower, its general partners, managing members and major shareholders, as applicable, and each of such parties' constituent general partners, managing members and major shareholders, as applicable, the Limited Recourse Obligations Guarantor and the Completion Guarantor. -6- "Probable Maximum Loss" is defined in Section 7.6(F). -------------- "Project Documents" means (a) a11 agreements now or hereafter in effect with any contractor, architect or engineer, including, without limitation, any design architect, landscape architect, civil engineer, electrical engineer, environmental engineer, soils engineer or mechanical engineer, in connection with the Project; (b) all other agreements now or hereafter in effect with any property manager or broker with respect to the management, leasing, or operation of the Project; (c) all as-built plans and specifications and surveys for the Project; (d) all Permits; and (e) all renewals, substitutions, extensions, modifications or replacements of any of the foregoing. "Related Parties" means Borrower, Principals, any Affiliate of Borrower or Principals, any partnership of which Borrower or any Principal is a general partner, and any limited liability company of which Borrower or any Principal is a manager or managing member. "Replacement Cost" is defined in Section 7.6(F). -------------- "Secured Obligations" is defined in the Deed of Trust. "Seismic Principal Payment" is defined in Section 7.6(F). -------------- "Seismic Review" is defined in Section 7.6(F). -------------- "Subordination Agreement" is defined in Section 7.15. ------------ "Tax Identification Number" means Borrower's employer identification number or social security number, which is 77-0582967. "Termination Date" means October 5, 2001. "Title Company" means the title insurance company selected by Borrower and approved by Lender in Lender's sole discretion to provide the Title Policy. "Title Policy" means an American Land Title Association Extended Coverage Policy of Title Insurance (1970 version, amended 10/17/70 only), insuring Lender that on the Closing Date Borrower owns fee simple title to the Project and that the Deed of Trust is a valid first lien on the Project. The Title Policy shall have a liability limit equal to the Loan Amount. The Title Policy shall contain such endorsements as Lender reasonably requires and shall be subject only to such exceptions to coverage as approved by Lender in writing prior to the Closing Date. ARTICLE 2 LOAN TERMS ---------- 2.1 Loan and Disbursement of Loan Proceeds. -------------------------------------- Subject to the terms and conditions of this Agreement, and in reliance upon the representations and warranties of Borrower set forth in the Loan Documents, Lender agrees to make to Borrower, and Borrower agrees to accept from Lender, loan (the "Loan") in the maximum principal amount of Twenty-Five Million Dollars ($25,000,000). The Loan proceeds shall be disbursed by Lender as provided in Section 2.6 of the Note. ----------- -7- 2.2 Evidence of Indebtedness and Maturity. ------------------------------------ Borrower shall execute and deliver to Lender, on or before the Closing Date, the Note evidencing the Loan. Borrower agrees to repay the indebtedness evidenced by the Note in accordance with the terms thereof and the terms hereof. The outstanding principal balance of the Loan, together with accrued and unpaid interest thereon and all other amounts payable by Borrower with respect to the Loan under the Loan Documents shall be due and payable on the Maturity Date. The outstanding principal balance of the Loan, together with all accrued and unpaid interest thereon and all other amounts payable by Borrower under the Loan Documents shall be due and payable on the Maturity Date provided in the Note. 2.3 Interest Rate. ------------- The Loan shall bear interest at the rate per annum specified in the Note. 2.4 Loan Fee and Payment of Expenses. -------------------------------- Subject to the terms of Section 10 of the Commitment, Borrower ---------- acknowledges and agrees that any unpaid portion of the Loan Fee has been fully earned by Lender. Borrower further acknowledges and agrees that any unpaid portion of the Loan Fee has been fully earned by Lender and is due and payable upon the Closing of the Loan. The Loan Fee shall be nonrefundable except as set forth in the Commitment Letter. Borrower hereby authorizes Lender to disburse proceeds of the Loan to Lender or to any other party to pay the Loan Fee, interest for any partial calendar month in which the Closing Date occurs, and the fees and expenses of Lender's appraisers, engineers, consultants, legal counsel and other third parties retained by Lender in connection with the Loan, notwithstanding that Borrower may not have requested a disbursement of such amounts. Borrower covenants to pay all such amounts within ten (10) days after demand by Lender, if and to the extent not disbursed by Lender from proceeds of the Loan. Borrower's payment of the Loan Fee is in addition to Borrower's obligation to pay closing costs, brokers' commissions and any and all other sums due hereunder, under the Commitment Letter or under any of the Loan Documents. 2.5 Recourse. -------- The Loan and the amounts payable to Lender under the Loan Documents with respect to Borrower's obligations under the Loan shall be fully recourse to Borrower. 2.6 Prepayment. ---------- Borrower may prepay the outstanding principal balance of each Loan in whole or in part at any time in accordance with the provisions of the Note. ARTICLE 3 CONDITIONS TO LOAN ------------------ 3.1 Condition Precedent to Closing of Loan. -------------------------------------- As a condition precedent to Lender's obligation to close the Loan and disburse any Loan proceeds, on or before the Closing Date Borrower must satisfy and fulfill each of the following conditions precedent to closing, to the satisfaction of Lender: -8- A. Loan Documents and Environmental Indemnity. Borrower shall deliver to Lender the following documents, each duly executed and acknowledged by a notary public where necessary, and in form and substance satisfactory to Lender: (i) This Agreement; (ii) The Note; (iii) The Deed of Trust; (iv) The Assignment of Rents; (v) A Delaware UCC-1 Financing Statement relating to the Personal Property, to be filed with the Delaware Secretary of State, together with UCC-1 Financing Statements for such other States as are required by Lender; (vi) The Environmental Indemnity; (vii) A guaranty, on Lender's form, executed by the Completion Guarantor, of the completion of certain improvements to the extent provided therein (the "Completion Guaranty"); (viii) A guaranty, on Lender's form, executed by the Limited Recourse Obligations Guarantor, of the payment and performance of certain of the obligations for which Borrower is personally liable pursuant to the terms thereof (the "Limited Recourse Obligations Guaranty"); (ix) The Lease Subordination Agreement; (x) Cash Collateral Pledge Agreement; (xi) An assignment of all agreements between Borrower, any Principal or any agent or nominee thereof, and each Architect, executed by Borrower and each Architect (the "Assignment of Architect's Agreement"); and (xii) An assignment of all agreements between Borrower, any Principal or any agent or nominee thereof, and each Contractor, executed by Borrower and each Contractor (the "Assignment of Contractor's Agreement"). B. Commitment Letter Conditions. Borrower shall have satisfied all of the conditions set forth in the Commitment Letter, together with any additional conditions imposed by Lender in connection with its final approval of the Loan. C. Truth of Representations and Warranties. The representations and warranties contained herein and in the other Loan Documents shall be true, correct and complete in all material respects on the Closing Date. D. No Default. As of the Closing Date, no event shall have occurred or would result from the funding of the Loan that would constitute an Event of Default or a Potential Default. 3.2 Termination of Agreement. ------------------------ Lender's obligation to make the Loan and perform any of its other obligations under the Loan Documents shall terminate unless all of the conditions precedent set forth in Section 3.1 have been satisfied, and the ----------- Closing Date for the Loan has occurred, on or before the Termination Date. -9- ARTICLE 4 ASSIGNMENT OF PROJECT DOCUMENTS ------------------------------- 4.1 Assignment of Documents. ----------------------- A. As security for the payment and performance of the Secured Obligations, Borrower hereby grants, conveys, assigns and transfers to Lender the Project Documents, and all rights of Borrower thereunder, together with the immediate and continuing right to collect and receive all sums which are now or hereafter due to Borrower thereunder or in connection therewith, and all of Borrower's rights to receive the proceeds of any insurance, indemnity, warranty or guaranty with respect to any of the Project Documents. The parties expressly acknowledge and agree that Lender does not hereby assume any of Borrower's obligations with respect to any of the Project Documents, including, without limitation, any obligation to pay for any work done pursuant thereto, unless Lender expressly assumes such obligations in accordance with Section 4.1(B). At -------------- Lender's request from time to time, Borrower shall deliver copies of the Project Documents to Lender. B. Lender shall not exercise its rights under this Section 4.1 until ----------- the occurrence of an Event of Default. Upon the occurrence of an Event of Default under any of the Loan Documents, Lender may, at its option in its sole discretion and without any obligation, exercise any or all of its rights and remedies under Section 8.4 and/or upon written notice to Borrower and the other ----------- parties to any or all of the Project Documents, exercise or enforce any or all of the rights and remedies granted to Borrower under such Project Documents as if Lender had been a party to or recipient of such Project Documents (and Borrower hereby irrevocably constitutes and appoints Lender as its attorney-in-fact, which power is coupled with an interest, to do so). Upon giving such notice Lender may elect to assume all of the obligations of Borrower thereafter accruing under any or all of the Project Documents; provided that in no event shall Lender be responsible for any default by Borrower or any other party occurring prior to any election by Lender to assume such obligations. C. The acceptance by Lender of the assignment contained in this Section 4.1 and the rights granted to Lender hereunder and under Section 8.4 - ----------- ----------- shall not, prior to Lender's assumption of the obligations under the Project Documents as provided in Section 4.1(B), obligate Lender to assume any -------------- obligations or liability under the Project Documents, to expend any money or incur any expense in connection with the Project Documents or to perform any obligation under any of the Project Documents. 4.2 Performance under Project Documents. ----------------------------------- Borrower shall at all times perform and discharge each of its obligations under the Project Documents, diligently enforce its rights under the Project Documents unless otherwise agreed by Lender, and, at Borrower's sole cost and expense, appear in and defend Lender in any action or proceeding in any way related to any of the Project Documents. Borrower shall, within ten (10) days after demand by Lender, pay all reasonable costs and expenses incurred by Lender in connection with any such action or proceeding, including, without limitation, reasonable attorneys' fees and costs. 4.3 Indemnification. --------------- Borrower hereby indemnifies and agrees to defend and hold the Indemnitees harmless from all expenses, loss, claims, damage or liability which the Indemnitees may or might incur under any of the Project Documents or under or by reason of the assignment set forth in Section 4.1 or by reason of any ----------- alleged obligation or undertaking on Lender's part to perform or discharge any covenants or agreements contained in any of the Project Documents; provided that such indemnity shall not extend to expenses, loss, claims, damage or liability arising from an Indemnitee's gross negligence or wilful misconduct or -10- arising after the date, if ever, that Lender assumes the obligations under the Project Documents as provided in Section 4.1(B). -------------- ARTICLE 5 SECURITY AGREEMENT ------------------ 5.1 Grant of Security Interest. -------------------------- As security for the payment and performance of the Secured Obligations, Borrower hereby assigns, transfers and grants to Lender, and there is hereby created in favor of Lender, a security interest under the California Commercial Code in and to the Personal Property, whether now owned or hereafter acquired, and in all proceeds thereof (and proceeds of proceeds) in whatever form. This Agreement shall constitute a security agreement pursuant to the California Commercial Code with respect to the Personal Property and proceeds thereof, with Borrower the "Debtor" and Lender the "Secured Party" as such terms are used therein. 5.2 Representations, Agreements and Covenants Regarding Personal Property. --------------------------------------------------------------------- In order to induce Lender to enter into this Agreement and make the Loan, Borrower represents, warrants and covenants as follows: A. Except for the security interest in favor of Lender, Borrower is, and as to any of the Personal Property acquired after the date hereof will be, the sole owner of the Personal Property, free from any adverse lien, security interest, or adverse claim of any kind whatsoever. Borrower will notify Lender of and will defend the Personal Property against all claims and demands of all persons at any time claiming any interest therein. B. Borrower will keep the Personal Property in good condition and repair, and will not misuse, abuse, allow to deteriorate, waste or destroy the Personal Property or any part thereof, except for ordinary wear and tear resulting from normal and expected use in the ordinary course of Borrower's business, which shall be promptly replaced by Borrower with property of similar nature and of equal or greater value unless obsolete. C. Borrower will not, without the prior written consent of Lender, sell, offer to sell or otherwise transfer, exchange or dispose of the Personal Property or any interest therein, unless in the normal course of business the Personal Property is being replaced by collateral of similar nature and of equal or greater value. If the Personal Property or any part thereof is sold, transferred, exchanged, or otherwise disposed of (either with or without the written consent of Lender), the security interest of Lender shall extend to the proceeds of such sale, transfer, exchange or other disposition and Borrower will hold such proceeds in a separate account for Lender's benefit and will, at Lender's request, transfer such proceeds to Lender. D. The tangible Personal Property will be kept on or at the Project and Borrower will not, without the prior written consent of Lender, remove the Personal Property therefrom except such portions or items of Personal Property which are consumed or worn out in ordinary usage, all of which shall be promptly replaced by Borrower as provided in Section 5.2(B). -------------- E. Borrower will immediately notify Lender in writing of any change in its place of business or the adoption or change of any trade name or fictitious business name, and will, within ten (10) days after Lender's request, execute any additional financing statements or other certificates reasonably requested by Lender to reflect such change. -11- F. The Personal Property is not and will not be used or bought for personal, family or household purposes. G. Borrower shall immediately notify Lender of any claim against the Personal Property adverse to the interest of Borrower or Lender therein. H. Lender may examine and inspect the Personal Property at any reasonable time. wherever located upon reasonable prior notice to Borrower (except in the event of an emergency, in which event prior notice shall not be required). 5.3 Affixed Collateral. ------------------ The inclusion in Section 5.1 of any Personal Property which may now be ----------- or hereafter become affixed or in any manner attached to the Project shall be without prejudice to any claim at any time made by Lender that such Personal Property is or has become a part of or an accession to the Project. 5.4 Further Security Agreements. --------------------------- Borrower agrees to take such actions and, within ten (10) days after Lender's request, to execute, deliver and file and/or record such documents, agreements and financing statements as may be reasonably necessary to evidence the security interest set forth in Section 5.1, to establish the priority ----------- thereof and to carry out the intent and purpose of this Article 5. Borrower --------- further agrees that Lender may, in such manner and upon such terms and at such times as Lender deems best, and without demand or notice to or consent or signature of Borrower, file such UCC financing statements (including fixture filings), and/or amendments to or continuations of any previously filed financing statements, to evidence and/or perfect and/or continue the perfection of the security interest in the Collateral created or to be created pursuant to the Loan Documents. ARTICLE 6 BORROWER'S REPRESENTATIONS AND WARRANTIES ----------------------------------------- As an inducement to Lender to execute this Agreement and make the Loan, Borrower represents and warrants to Lender the truth and accuracy of the matters set forth in this Article 6. --------- 6.1 Organization, Power, Good Standing, and Business. ------------------------------------------------ A. Borrower is a Delaware limited liability company duly formed, validly existing and in good standing under the Laws of the State of Delaware and, if formed under the Laws of a jurisdiction other than the State of California, has registered to do business and is in good standing under the Laws of the State of California. Borrower has the full power and authority to own and operate its properties, to carry on its business as now conducted, to enter into each Loan Document and the Environmental Indemnity, and to carry out the transactions contemplated hereby and thereby. Borrower does not do business under any trade name or fictitious business name. Borrower has delivered to Lender true, correct and complete copies of its Formation Documents and such Formation Documents have not been amended or modified except pursuant to agreements delivered to Lender prior to the date hereof. B. Aspect Communications is a California corporation duly formed, validly existing and in good standing under the Laws of the State of California. Aspect Communications has the full power and authority to own and operate its properties, to carry on its business as now conducted, to act as the sole member and manager of Borrower, to enter into each Loan Document and the Environmental Indemnity as the manager of Borrower, to enter into the Lease Subordination Agreement, Limited -12- Recourse Obligations Guaranty, Completion Guaranty and the Environmental Indemnity, on its own behalf, and to carry out the transactions contemplated in the Loan Documents and the Environmental Indemnity. Borrower has delivered or caused to be delivered to Lender true, correct and complete copies of the Formation Documents for Aspect Communications and such Formation Documents have not been amended or modified except pursuant to agreements delivered to Lender prior to the date hereof. 6.2 Authorization of Borrowing, etc. ------------------------------- A. Authorization of Borrowing. The execution, delivery and performance of the Loan Documents and the Environmental Indemnity and the issuance, delivery and payment of the Note have been duly authorized by all necessary action of Borrower, its general partners, Aspect Communications, Limited Recourse Obligations Guarantor and Completion Guarantor. B. No Conflict. The execution, delivery and performance by Borrower, its general partners, Limited Recourse Obligations Guarantor and Completion Guarantor of each applicable Loan Document and the Environmental Indemnity do not and will not (i) violate any Law applicable to any such Person, the Formation Documents of any such Person, or any order, judgment or decree of any court or other Governmental Agency binding on any such Person; (ii) conflict with, result in a breach of or constitute (with the giving of notice or the passage of time or both) a default under any Contractual Obligation of any such Person; (iii) result in or require the creation or imposition of any Lien of any nature on Borrower's properties or assets other than the Liens in favor of Lender under the Loan Documents; or (iv) require any approval or consent of any. Person under any Contractual Obligation of Borrower, its general partners or Limited Recourse Obligations Guarantor or Completion Guarantor. C. Governmental Consents. The execution, delivery and performance by Borrower, its general partners, Limited Recourse Obligations Guarantor and Completion Guarantor of each applicable Loan Document and the Environmental Indemnity does not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any Governmental Agency or other Person. D. Binding Obligation. The Note and the other Loan Documents are the legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally. The Environmental Indemnity is the legally valid and binding obligation of each of the parties thereto, enforceable against such parties in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally. The Completion Obligations Guaranty is the legally valid and binding obligation of the Completion Guarantor, enforceable against the Completion Obligations Guarantor in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally. The Limited Recourse Obligations Guaranty is the legally valid and binding obligation of the Limited Recourse Obligations Guarantor, enforceable against the Limited Recourse Obligations Guarantor in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally. 6.3 Actions. ------- There is no action, suit, proceeding or arbitration, before or by any Governmental Agency or other Person, pending or, to Borrower's best knowledge, threatened against or affecting Borrower, any of the Principals or any properties or rights of Borrower or any of the Principals, which might adversely affect Lender's rights or remedies under the Loan Documents or the Environmental Indemnity, the business, assets, operations or financial condition of any such party or its ability to perform its obligations under the Loan Documents or the Environmental Indemnity. As of the date hereof, there are no -13- outstanding judgments against the Related Parties or their property in excess of Twenty-Five Thousand Dollars ($25,000) as to any individual judgment or Fifty Thousand Dollars ($50,000) in the aggregate. 6.4 Financial Position. ------------------ A. Financial Information. The Application Information and all financial statements and financial data delivered to Lender in connection with the Loan and/or relating to Borrower and the Principals are true, correct and complete in all material respects and accurately present the financial position of such parties as of the date thereof. No material adverse change has occurred in the financial position disclosed by the Application Information or in any other financial statements or financial data delivered to Lender. B. Bankruptcy and Insolvency. Neither Borrower nor any of the Related Parties has filed or been the subject of any bankruptcy, Insolvency, reorganization, dissolution or similar proceeding or any proceeding for the appointment of a receiver or trustee for all or any substantial part of their respective property. Neither Borrower nor any of the Related Parties has admitted in writing its inability to pay its debts when due, made an assignment for the benefit of creditors or taken other similar action. C. Other Borrowing. Except for the Loan, no borrowings have been made by Borrower which are secured by the Project or any other assets of Borrower or which might give rise to any Lien other than the Liens created by the Loan Documents. 6.5 Liens. ----- Borrower is the sole owner of the Project and the Personal Property free from any adverse Liens, except for Liens in favor of Lender. Borrower has paid or will pay in full all contractors, materialmen, laborers, architects or other such Persons hired by Borrower to perform services or work with respect to the Project and all statutory lien periods have expired with respect to any such services or work. No previous assignment, sale, pledge, encumbrance or other hypothecation of the Leases or the Project Documents has been made (except for pledges and encumbrances which have been released in full prior to the date hereof or will be released in full concurrently with the funding of the Loan). 6.6 Compliance with Laws. -------------------- The Project and the use thereof are in material compliance with all Laws. The Property consists of legal and separate lot(s) for tax assessment purposes and under the California Subdivision Map Act (California Government Code Sections 66410 et. seq., as amended from time to time). All Permits, easements and rights of way necessary for the occupancy, operation, ownership and use of the Project have been obtained by Borrower and are in full force and effect. 6.7 Defects. ------- There are no defects, facts or conditions affecting the Project or any portion thereof which would make the Project unsuitable for the occupancy, operation, use or sale thereof. There are no surface or subsurface soils conditions adversely affecting the Property. Including, without limitation, unstable soil or landfills. 6.8 Utilities. --------- All utilities necessary for the full enjoyment of the Project, including, without limitation, trash collection, police and fire protection, sewer and storm drain, water, telephone, gas and electricity, are -14- available to the Project and are not subject to any conditions which would limit the use of such utilities, other than the payment of normal charges to the utility supplier. 6.9 No Condemnation. --------------- No Condemnation Event (as defined in the Deed of Trust) is pending against the Project or any portion thereof. To Borrower's best knowledge, no Condemnation Event is threatened against the Project which would impair the full utilization of the Project in any material manner. 6.10 Hazardous Substances. -------------------- To the best of Borrower's knowledge, after due and diligent Inquiry, except as set forth in the Environmental Report and in a writing delivered to Lender prior to the Closing Date, there are no Hazardous Substances on, in, under or at the Project. The Project and each portion thereof is in full compliance with all Environmental Laws. There are no above or below ground storage tanks located at the Project. Borrower has not received written notice from any Governmental Agency or other third party alleging that the Project or any portion thereof does not comply with any Environmental Laws. 6.11 No Defaults. ----------- No Potential Default or Event of Default exists under this Agreement or any of the other Loan Documents. No default by Borrower exists under any Contractual Obligation which would have a material adverse effect on Borrower's ability to repay the Loan or to perform its obligations under any of the Loan Documents or under the Environmental Indemnity. 6.12 Disclosure. ---------- No representation or warranty of Borrower contained in this Agreement, any Loan Document, or any Application Information contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. 6.13 Single Purpose Entity. --------------------- Borrower (a) has not engaged and does not engage in any business unrelated to the Project, (b) has not had and does not have assets other than those related to its interest in the Project, (c) has not had and does not have any indebtedness other than as permitted by this Agreement, (d) has its own books and records separate and apart from any other person, (e) holds itself out as being and conducts all business as a legal entity, separate and apart from any other person, partnership, corporation, limited liability company, trust or other entity, with separate stationary, invoices and checks, (f) has not guarantied the debts or obligations of any other person, partnership, corporation, limited liability company, trust or other entity, and (g) has not commingled its assets or funds with those of any other person, partnership, corporation, limited liability company, trust or other legal entity. Borrower's Formation Documents provide that any dissolution or winding up or insolvency ------- filing for Borrower requires the unanimous consent of all members. ARTICLE 7 BORROWER'S COVENANTS -------------------- Borrower covenants and agrees that, until the Loan and all other amounts owing to Lender under the Loan Documents have been paid in full and all Secured Obligations have been satisfied. Borrower shall perform all of the covenants in this Article 7. --------- -15- 7.1 No Liens. -------- Except as expressly provided in Section 1.12 of the Deed of Trust, ------------ Borrower shall not permit any Lien to be made or filed. Borrower shall be the sole owner of the Project and Personal Property, free from any adverse Liens, except for Liens in favor of Lender. Borrower shall not assign, sell, pledge, encumber or otherwise hypothecate all or any portion of the Leases or the Project Documents. 7.2 Compliance with Laws. -------------------- Borrower will comply with all Laws applicable to Borrower, its property, the Project, the Personal Property and/or the occupancy, operation, ownership or use thereof. 7.3 Inspection. ---------- Subject to the rights of tenants at the Project. during normal business hours and upon reasonable advance notice (except in the event of an emergency, in which event entry shall not be limited to normal business hours and no advance notice shall be necessary) Borrower shall permit Lender and any Person designated by Lender to visit and inspect the Project. 7.4 Leasing of Space. ---------------- A. Unless otherwise approved by Lender in writing in advance, all Leases shall be entered into with bona fide third party tenant financially capable of performing their obligations thereunder and shall reflect arms-length transactions at the then current market rate for comparable space. Borrower shall perform all obligations required to be performed by it as landlord under any Lease. Borrower shall not accept any rent (however denominated) or other charges under any of the Leases more than one (1) month in advance. B. Borrower shall not enter into, or modify, amend, terminate or accept a surrender or cancellation of, any Lease, or consent to any assignment or subletting under any Lease, without Lender's prior written consent except as follows: {i) Borrower may terminate Leases other than Major Leases without Lender's prior written consent for the non-payment of rent if Borrower would in good faith terminate such Lease in the ordinary course of its business. (ii) Lender's prior written consent shall not be required for any new Lease (a) which is not a Major Lease, (b) which does not include any Material Lease Provisions, (c) where the term of the Lease (including any options to extend the initial term of the Lease) does not exceed ten (10) years, and (d) where the proposed use of the portion of the Project leased does not involve the use, storage, processing, manufacture, transportation, disposal or release of Hazardous Substances other than Hazardous Substances used by Aspect communications in the ordinary course of its business as disclosed to Lender in writing prior to the Closing Date. (iii) Lender's prior written consent shall not be required for any amendment or modification of a Lease if the amendment or modification contains no provision which, had the provision been included in the original Lease, would require Lender's prior written consent. (iv) Lender's prior written consent shall not be required in connection with any sublease or assignment of any Lease if either (a)(1) the assignee or subtenant meets the requirements of Section 7.4(A), and (2) the -------------- proposed use of the Project by such assignee or subtenant does not involve the use, storage, processing, manufacture, transportation, disposal or release of Hazardous Substances (other than Hazardous Substances used by Aspect Communications in the ordinary course of its business -16- as disclosed to Lender in writing prior to the Closing Date), or (b) such sublease or assignment does not require Borrower's consent under the terms of the Lease executed by Borrower in accordance with the terms of this Agreement. C. Borrower shall promptly deliver to Lender such Leases, rent rolls, leasing reports, operating statements or other leasing information as Lender may from time to time request. Borrower shall promptly notify Lender of (i) any material tenant dispute, (ii) any material default by Borrower or the tenants under any of the Major Leases, (iii) any material adverse change in leasing activity for the Project and (iv) any notice received by Borrower relating to any material default by Borrower under any Lease. D. With respect to any Major Lease, and if requested by Lender with respect to any other Lease, Borrower shall, within twenty (20) days after Lender's request, execute and deliver to Lender, and cause the tenants under the Leases (and any other party to, or guarantor of, the Leases) to execute and deliver to Lender, nondisturbance and attornment agreements and/or estoppel certificates, in form and substance reasonably satisfactory to Lender. E. As used herein, "Material Lease Provision" means a provision which materially increases the landlord's obligations under a Lease, which provides the tenant with material rights or recourse against the landlord or with the right to terminate the Lease, or which adversely affects Lender's security in the Lease. Without limiting the generality of the foregoing, each of the following shall constitute a Material Lease Provision: (i) any provision which affects Lender's rights with respect to the Lease, which affects the relative priority of the Lease and the Deed of Trust without Lender's consent, or which requires Lender to agree to or provide any nondisturbance agreement to the tenant; (ii) the grant of an option, right of first offer or refusal or other right to purchase all or any portion of the Project, (iii) the grant of an option, right of first offer or refusal or other right to lease any additional space in the Project at a rent less than market rent, (iv) the grant of any early termination option, (v) any provision which provides for the application of insurance or condemnation proceeds in a manner contrary to the Loan Documents, (vi) the grant of any offsets, or the agreement for the payment of any amounts by the landlord, if such offset or payment obligation would be applicable to any subsequent owner of the Project, including, without limitation any owner succeeding to the landlord's interest by foreclosure or a deed in lieu or in aid thereof, (vii) a limit to the expense reimbursements due from the tenant for increases in taxes or expenses, or (viii) an environmental, hazardous substance or other indemnification binding on the landlord that would be applicable to any subsequent owner of the Project, including, without limitation, any owner succeeding to landlord's interest by foreclosure or a deed in lieu or in aid thereof. 7.5 Environmental Matters. --------------------- A. Borrower shall, at its own expense, comply and cause all persons entering the Project to comply with all Environmental Laws applicable thereto and Borrower shall not use, store, process, manufacture, transport, dispose or release any Hazardous Substances on or adjacent to any part of the Project or permit any of the foregoing to occur other than Hazardous Substances used by Aspect Communications in the ordinary course of its business as disclosed to Lender in writing prior to the Closing Date and in accordance with all Environmental Laws. Borrower shall immediately advise Lender in writing of any (i) discovery of Hazardous Substances on the Project or any portion thereof other than Hazardous Substances used by Aspect Communications in the ordinary course of its business as disclosed to Lender in writing prior to the Closing Date; or (ii) any claim, action or order threatened or instituted by any third party (including any Governmental Agency) against the Project or Borrower relating to damages, cost recovery, loss or injury resulting from any Hazardous Substances. Borrower shall provide Lender with copies of all communications with any third party (including any Governmental Agency) relating to any Environmental Law or any claim, action or order relating to Hazardous Substances at, on, under or in the Project or any portion thereof. If any remedial action is required to bring the Project into compliance with Environmental Laws, Borrower shall immediately notify Lender of such situation and shall prepare a written plan setting forth a description of such situation (and all environmental reports -17- relating thereto) and the remedial action that Borrower proposes to implement to bring the Project into compliance with all Environmental Laws, Borrower shall, at its own expense, thereafter diligently and continuously pursue the remediation of the condition necessary to bring the Project into compliance with all Environmental Laws and cause all liens or encumbrances against the Project in connection therewith to be removed and satisfied. B. Lender shall have the right to retain a professional environmental consultant to conduct tests and investigations of the Project (including, without limitation, ground water and soils testing) with respect to Hazardous Substances or the Project's compliance with Environmental Laws. Borrower hereby grants to Lender, its agents, employees, consultants and contractors, an irrevocable license and authorization to enter upon and inspect the Project and to conduct such tests and investigations on the Project or any portion thereof as Lender, in its sole discretion, determines necessary. Such tests and investigations shall be at Lender's expense unless (i) Lender reasonably believes that a breach of the provisions of Section 6.10 or this Section 7.5 has ------------ ----------- occurred, (ii) a breach of the provisions of Section 6.10 or this Section 7.5 ------------ ----------- has in fact in occurred, or (iii) an Event of Default or Potential Default has occurred. Borrower acknowledges and agrees that, as between it and Lender, only Borrower owns and operates the Project and only Borrower has the responsibility for compliance with this Section 7.5 and neither Lender's enforcement of, or ----------- failure to enforce, Section 7.5 shall be deemed to affect the obligations or ----------- provisions of this Section.7.5. ----------- C. To the fullest extent permitted by law, Borrower hereby indemnifies and agrees to defend, and hold harmless the indemnitees from and against any and all loss, claim, damage or liability of any kind or nature and from any suits, actions, claims or demands, including without limitation, all amounts described in Section 7.5(D), arising directly or indirectly, in whole or in part, out of -------------- (i) the existence or alleged existence of any Hazardous Substances at, on under or in the Project or any portion thereof, (ii) the removal of or failure to remove any Hazardous Substances from the Project or any portion thereof, (iii) any activity involving Hazardous Substances with respect to the Project carried on or undertaken on or off the Project, (iv) any residual contamination on or under the Project, or (v) any contamination of any property or natural resources arising in connection with any activity involving Hazardous Substances, in each case whether prior to or during the term of the Loan, and whether by Borrower or any predecessor-in-title or any employees, agents, contractors or subcontractors of Borrower or any predecessor-in-title, or any third parties occupying or present on the Project. Upon receiving knowledge of any suit, action, claim or demand asserted by a third party that Lender believes is covered by this indemnity, Lender shall give Borrower written notice of the matter and an opportunity to defend it, at Borrower's sole cost and expense, with legal counsel reasonably satisfactory to Lender. Lender may also require Borrower to so defend the matter. The obligations of Borrower under this Section 7.5(C) are, -------------- without limitation, intended to operate as a binding valid indemnity agreement under 42 U.S.C. Section 9607(e)(1) and shall survive the closing of the Loan and the repayment of the Loan and the satisfaction of all other Secured Obligations. D. The indemnity set forth in Section 7.5(C) shall include, without -------------- limitation, (i) loss, claims, damage or liability for, or arising from, personal injury and property damage, (ii) compensation for lost wages, business income, profits or other economic loss, (iii) all consequential damages; (iv) all damages to any natural resources and the environment, the costs of any required or necessary repair, clean up, response cost, or remediation of the Property and the Project, and the preparation and implementation of any closure, remedial or other required plans; and (v) all costs and expenses incurred in connection with any of the foregoing, including reasonable attorneys' fees and costs. 7.6 Insurance Requirements ---------------------- A. Borrower shall procure and maintain, or cause to be procured and maintained, at all times until the repayment of the Loan and the satisfaction of the Secured Obligations, policies of insurance in form and amounts reasonably satisfactory to Lender, and issued by companies having a Best's rating of at least B+, Class VI and otherwise reasonably satisfactory to Lender, covering (i) such -18- casualties, risks, perils, liabilities and other hazards as may be reasonably required by Lender and (ii) such casualties, risks, perils, liabilities and other hazards which are at the time commonly insured against or required by institutional lenders to be insured against with respect to properties similar to the Project. All policies shall expressly protect Lender's interest as required by Lender. Without limiting the generality of the foregoing, Borrower shall maintain or cause to be maintained the insurance coverage described in Section 7.6(B). If Borrower fails to maintain the insurance coverage required - -------------- hereunder, Lender may, but shall have no obligation to, obtain such insurance, and Borrower will pay all amounts expended by Lender, together with interest thereon at the Default Interest Rate, within ten (10) days after demand by Lender. In the event of any foreclosure of the Deed of Trust or a deed in lieu or in aid thereof, all interest under the insurance policies required by this Section 7.6 and then in force shall pass to the new owner of the Project. - ----------- B. Without limiting the generality of Section 7.6(A). Borrower shall -------------- maintain or cause to be maintained the following insurance coverages: (i) property insurance for the full replacement cost of the Project (excluding the Property), on an "all risks" basis (including fire, extended coverage, vandalism and malicious mischief); (ii) commercial general liability insurance on an "occurrence" basis, including contractual liability and automobile liability, in the minimum amount of Two Million Dollars ($2,000,000) for personal injury to any one person. Four Million Dollars ($4,000,000) for any one accident and Two Hundred Fifty Thousand Dollars ($250,000) for property damage; (iii) twelve (12) months of business interruption or loss of rents coverage in an amount not less than the Minimum Rent Loss Coverage; (iv) flood insurance in an amount equal to the greater of the full replacement cost of the Project (excluding the Property), or the maximum flood insurance available, if either (a) the Property is located in an area now or hereafter designated as having special flood hazards under the Flood Disaster Protection Act of 1973, as amended from time to time, or any other Law, or (b) flood insurance is required by any Law applicable to Borrower, Lender or the Project or by any federal or state regulatory agency having jurisdiction over Lander ; and (v) earthquake insurance if required by any Law applicable to Borrower, Lender or the Project or by any federal or state regulatory agency having jurisdiction over Lender or if otherwise required by this Section 7.6. ----------- C. All original policies, or certificates thereof, and endorsements and renewals thereof, shall be delivered to and retained by Lender unless Lender agrees otherwise. In case of insurance about to expire, Borrower shall deliver renewal policies to Lender not less than thirty (30) days prior to the expiration thereof. All policies of insurance to be furnished hereunder (i) shall be in form reasonably satisfactory to Lender, (ii) shall have a deductible of not more then Fifty Thousand Dollars ($50,000) with respect to any insurance other than earthquake insurance and, with respect to earthquake insurance shall have a deductible acceptable to Lender, (iii) shall include a Standard Mortgage Clause/ Lender's Loss Payable Endorsement and Chattel Mortgage Clause in favor of, and in form reasonably satisfactory to, Lender, including a provision requiring that the coverage evidenced thereby shall not be terminated or materially modified without thirty (30) days' prior written notice to Lender, and (iv) may be in the form of blanket policies in amount, form and substance satisfactory to Lender. Borrower shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained hereunder. D. Notwithstanding anything to the contrary contained in the Loan Documents, Borrower waives any and all right to claim or recover against Lender, or its directors, officers, employees, agents and representatives, for loss of or damage or injury to the Project, Borrower, Borrower's property, -19- or the property of others under Borrower's control, from any cause insured against or required to be insured against under this Section 7.6 or coverable by ----------- insurance. E. Borrower shall, at its expense, provide from time to time at the written request of Lender, not more frequently than once per year, satisfactory evidence of the insurable value of the Project. Such evidence may be in the form of an insurance appraisal or valuation report prepared by an insurance company, appraiser or other consultant approved by Lender. F. Without limiting Borrower's obligations under this Section 7.6 and ----------- without limiting Lender's rights and remedies if Borrower fails to comply with the provisions hereof, (i) Lender may at its sole discretion and at any time and from time to time as provided herein conduct a seismic risk review of the Project (the "Seismic Review"), which, if required by Lender, shall be prepared by an engineer and in a manner acceptable to Lender at Borrower's sole cost and expense, and (ii) If the Seismic Review demonstrates in Lenders sole discretion a Probable Maximum Loss in excess of thirty percent (30%) of the Replacement Cost or an Average Loss in excess of twenty percent (20%) of the Replacement Cost. Borrower shall either (a) maintain earthquake insurance throughout the remaining term of the Loan in an amount, with a deductible, and otherwise in form and substance acceptable to Lender, or (b) If Borrower provides evidence reasonably satisfactory to Lender that an earthquake retrofit of the Project will reduce the Probable Maximum Loss to thirty percent (30%) of the Replacement Cost or less and the Average Loss to twenty percent (20%) of the Replacement Cost or less, cause the Project to be earthquake retrofitted (which retrofitting shall be subject to Lender's prior written approval) in compliance with all applicable laws, and maintain earthquake insurance in an amount with a deductible, and otherwise in form and substance acceptable to Lender until a new Seismic Review demonstrates in Lender's sole discretion a Probable Maximum Loss which does not exceed thirty percent (30%) of the Replacement Cost, and an Average Loss which does not exceed twenty percent (20%) of the Replacement Cost, and (iii) in the event that Borrower fails at any time to maintain such earthquake insurance if required herein. Borrower shall, within ten (10) days after demand by Lender, pay to Lender an amount equal to the greater of (a) five percent (5%) of the Loan Amount, or (b) the amount by which the Probable Maximum Loss exceeds thirty percent (30%) of the Replacement Cost, or (c) the amount by which the Average Loss exceeds twenty percent (20%) of the Replacement Cost (the "Seismic Principal Payment"). Such payment shall be applied first to the outstanding principal balance of the Loan, than to accrued and unpaid interest on the Loan, and then to any other amounts owed to Lender under the Loan Documents, and such payment shall be in addition to all other payments required to be made by Borrower under the terms of the Loan Documents; provided, however that as a result of such payment, the Monthly Installments (as defined in the Note) shall be adjusted effective with the Monthly installment due immediately following payment of the amount equal to the Seismic Principal Payment. Lender may obtain a Seismic Review in connection with the Loan closing, following any earthquake of a magnitude of 6.0 or higher or following significant physical damage to the Project as determined by Lender in its sole discretion. As used herein, "Probable Maximum Loss" shall mean the product of (1) the then estimated replacement cost of the Improvements as determined by Lender in its sole discretion and (2) the "90% Confidence Damage Ratio" calculated in such Seismic Review based upon a 475 year return interval. As used herein, "Average Loss" shall mean the product of (1) the estimated replacement cost of the improvements as determined by Lender in its sole discretion and (2) the "Average Damage Ratio" calculated in such Seismic Review based upon a 475 year return interval. As used herein, "Replacement Cost" shall mean, at any given time, the replacement cost of the Project as determined at such time by Lender in its sole discretion. 7.7 Notice of Proceeding. -------------------- Borrower will promptly notify Lender of any action, suit, proceeding or arbitration (including, without limitation, any judicial or nonjudicial foreclosure proceeding, any voluntary or involuntary bankruptcy proceeding or any proceeding for the appointment of a receiver), commenced or threatened against Borrower, any of the Principals, or the Project or any portion thereof or interest therein. Borrower shall deliver to Lender copies of all notices and other information in connection with any action suit, proceeding or arbitration promptly upon receipt or transmittal thereof. -20- 7.8 Financial and Other Information. ------------------------------- Borrower shall maintain full and complete books of account and other records reflecting the results of operations of the Project in accordance with generally accepted accounting principles consistently applied (or such other accounting method approved in writing by Lender). Borrower shall furnish or cause to be furnished to Lender such financial information concerning Borrower, the Principals and the Project as Lender may reasonably request from time to time. Lender shall also have access to such books and records and Borrower's corporate books, during regular business hours and upon reasonable advance notice to Borrower and shall have the right to make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of Borrower with Borrower and its independent public accountants, all as Lender may reasonably request. Without limiting the generality of the foregoing, each year Borrower shall furnish to Lender, Without prior request or demand: A. If Borrower and/or any Principal is not a natural person or a trust, within ninety (90) days after the end of each Loan Year and at such other times within thirty (30) days after request by Lender, Borrower shall provide Lender with annual financial statements (including, without limitation, a balance sheet and a profit and loss statement) for such party's previous fiscal year and the current fiscal year-to-date, each of which shall (i) be in form reasonably acceptable to Lender, (ii) contain comparative information for the two (2) previous fiscal years, (iii) be certified as true, correct and complete by Borrower or such Principal, and (iv) at Lender's election after the occurrence of an Event of Default or Potential Default, be certified by a certified public accountant acceptable to Lender. B. If Borrower and/or any Principal is a natural person or trust, Borrower shall provide Lender with (i) annual financial statements, in form reasonably acceptable to Lender, for each such party within ninety (90) days after the end of each Loan Year and at such other times within thirty (30) days after request by Lender, and (ii) copies of the tax returns for each such party, together with all supporting schedules, within thirty (30) days after the filing thereof. Such financial statements and tax returns shall be certified as true, correct and complete by Borrower or such Principals. C. Within ninety (90) days after the end of each Loan Year and at such other times within thirty (30) days after request by Lender, Borrower shall provide Lender with annual operating statements for the Project for the previous fiscal year and the current fiscal year-to-date, which shall (i) be in form reasonably acceptable to Lender, (ii) contain comparative information for the two (2) previous fiscal years, (iii) be certified as true, correct and complete by Borrower, and (iv) at Lender's election after the occurrence of an Event of Default or Potential Default, be certified by a certified public accountant acceptable to Lender. D. Within ninety (9O) days after the end of each Loan Year and at such other times within thirty (30) days after request by Lender, Borrower shall provide Lender with an updated rent roll for the Project, in form satisfactory to Lender and containing such information as is reasonably required by Lender. E. Without limiting any of Lender's rights or remedies in the event of any failure by Borrower to comply with the provisions of this Section 7.8, if ----------- Borrower fails to deliver to Lender any of the financial statements or other information required herein on or before the date required in this Section 7.8 ----------- (the "Information Delivery Date"), then commencing on the information Delivery Date the Variable Rate Margin (as defined in the Note) shall be increased by one-half percent (.50%) until such time as Borrower has delivered, and Lender has approved, all of the financial statements or other information required to be delivered by Borrower pursuant to this Section 7.8. In addition to such ----------- increase in the Variable Rate Margin, the Monthly Installments (as defined in the Note) shall be adjusted effective with the Monthly Installment due immediately following the Information Delivery Date to reflect such increase. Once Borrower has delivered, and Lender has approved, all of the financial statements and other information -21- required to be delivered by Borrower pursuant to this Section 7.8, the Monthly ----------- Installments shall be readjusted effective with the Monthly Installment due immediately thereafter. 7.9 Representations and Warranties. ------------------------------ Until repayment of the Loan and all other amounts owing to Lender under the Loan Documents and the satisfaction of all other Secured Obligations, the representations and warranties set forth in Article 6 shall remain true and --------- complete. 7.10 Further Assurances. ------------------ Borrower shall execute and deliver from time to time, within ten (10) days after any request by Lender, any and all instruments, agreements and documents and shall take such other action as may be reasonably necessary or desirable in the opinion of Lender to maintain, perfect or insure Lender's security provided for herein and in the other Loan Documents, including, without limitation, the execution of UCC-1 renewal statements, the execution of such amendments to the Deed of Trust and the other Loan Documents and the delivery of such endorsements to the Title Policy, all as Lender shall reasonably require, and shall pay all fees and expenses (including reasonable attorney's fees) related thereto. 7.11 Distribution of Assets. ---------------------- From and after the occurrence of an Event of Default or Potential Default, Borrower shall not make any distribution of its assets, directly or indirectly, to its partners, shareholders, members or other owners. As used herein, the distribution of assets shall include, without limitation, the repayment of any loans made to Borrower or any interest or other charges payable in connection therewith, the return of capital contributions and distributions upon the termination, liquidation or dissolution of Borrower and the payment of fees, including management, leasing, brokerage and other fees to the extent such fees exceed the amounts payable in arms' length transactions with third parties. Borrower shall maintain and preserve its existence and all rights and franchises material to its business. 7.12 Construction. ------------ (a) Borrower shall cause construction of the Improvements (as such term is defined in the Note) to be prosecuted with due diligence and in good faith in accordance with the terms of this Agreement, the Note and the other Loan Documents, and without delay, so that the same will be fully completed and ready for occupancy not later than April 1, 2002 (the "Completion Date"). (b) On or before the Completion Date (i) Lender shall have received evidence satisfactory to Lender that (A) all Entitlements, in form and substance satisfactory to Lender, have been obtained, (B) Borrower has recorded a Notice of Completion in form and substance satisfactory to Lender in connection with the Improvements, (C) all hard and soft costs associated with the construction of the Improvements have been paid in full, including, without limitation, unconditional lien releases for all costs and expenses incurred in connection with the Improvements (as defined in the Note), and (ii) Aspect Communications shall have taken one hundred percent (100%) occupancy of the Project. 7.13 Cash Collateral Account and/or Letter of Credit. ----------------------------------------------- A. On the Closing Date, Borrower shall (a) establish a cash collateral account with Lender (the "Cash Collateral Account"), and (b) deposit the sum of Three Million Dollars ($3,000,000) (the "Deposit") into the Cash Collateral Account. Borrower shall have the right to withdraw funds from the Cash Collateral Account pursuant to the terms and conditions set forth in the Cash Collateral Pledge -22- Agreement. Within ten (10) days after Lender's request, Borrower shall execute any and all documents reasonably requested by Lender in connection with the Cash Collateral Account and the Deposit. B. As long as no Event of Default or Potential Default shall have occurred under the Loan Documents, Borrower shall have a one-time right to deliver to Lender one (1) Letter of Credit in the face amount of the Minimum Balance, issued by an Issuer acceptable to Lender in its sole discretion and otherwise in form and substance acceptable to Lender in its sole discretion but acting in good faith, and upon Lender's receipt of such Letter of Credit and any and all other documents as Lender shall reasonably require in connection with the delivery of such Letter of Credit, Lender shall permit the disbursement of from the Cash Collateral Account of all proceeds in the Cash Collateral Account. The Letter of Credit so delivered shall be additional security for the Secured Obligations. C. Borrower shall promptly deliver to Lender upon receipt a copy of any communication received from any Issuer to the effect that the Issuer will not extend the expiry date of the Letter of Credit or otherwise to the effect that the Letter of Credit will not at any time be in force or effect. In addition, Borrower shall from time to time, upon request, certify to Lender that it has not received any such communication. D. If for any reason the Letter of Credit expires or is revoked or withdrawn, Borrower shall immediately cause the Letter of Credit to be replaced by a letter of credit, issued by Issuer, containing substantially the same terms as those of the Letter of Credit and otherwise in form and substance acceptable to Lender in its sole discretion, and shall deliver, as applicable, such substitute Letter of Credit to Lender upon the same terms as the assignment and delivery to Lender of the Letter of Credit. E. Lender shall promptly deliver to Borrower the Letter of Credit if the Letter of Credit has not theretofore been drawn down in full upon the earlier to occur of (i) full repayment of the Loan and all amounts owed to Lender under the Loan Documents, as determined by Lender, or (ii) as long as no Potential Default or Event of Default shall have occurred under the Loan Documents, Lenders receipt of evidence satisfactory to Lender in its sole discretion that the Guarantor shall have received a long-term credit rating of at least "BBB-" from Standard & Poor's Rating Service or Baa1 from Moody's Investor Service. Lender shall not be required, however, to deliver to Borrower any amounts drawn by Lender under the Letter of Credit. F. Lender shall be entitled to draw upon the Letter of Credit upon the occurrence of the following: (i) Borrower fails to make any payment required by the Loan Documents on the due date thereof, (ii) an Event of Default under any of the Loan Documents; (iii) if the Letter of Credit has not been replaced within sixty (60) days prior to the expiration date of the Letter of Credit, by a letter of credit in the form of the Letter of Credit (A) having a term of not less than the later to occur of (1) twelve (12) months or (a) the remaining term under the then existing Letter of Credit, and (B) issued by an Issuer acceptable to Lender in its sole discretion, and (C) otherwise in form and substance acceptable to Lender in its sole discretion; and (iv) if the Letter of Credit has not been replaced by a letter of credit in the form of the Letter of Credit having a term equal to the then remaining term of the Letter of Credit and issued by Issuer, within fifteen (15) days following the occurrence of any of the following events: -23- (a) the Issuer of the Letter of Credit shall admit in writing its inability to pay its debts generally as they become due, shall file a petition in bankruptcy where a petitioner can take advantage of any insolvency statute, shall consent to the appointment of a receiver or conservator of itself or the whole or any substantial part of its property, shall file a petition or answer seeking reorganization or arrangement under the Federal Bankruptcy laws, or (b) Lender's determination (as evidenced by Lender's written notification to Borrower) that the issuer of the Letter of Credit is not sufficiently creditworthy or shall become subject to operational supervision by any federal or state regulatory authority. Any and all amounts drawn under the Letter of Credit as provided in this Section 7.13 (F) shall, at Lender's sole discretion, be applied to the amounts - ---------------- owing to Lender under the Loan Documents in such order as Lender may elect. Notwithstanding anything to the contrary contained herein, Lender shall have no obligation to draw upon the Letter of Credit to pay any amount due under the Loan Documents and Lender's right to draw upon the Letter of Credit shall not be deemed or construed to affect or limit Borrower's obligations under any of the Loan Documents. G. So long as the Letter of Credit has not theretofor been drawn upon by Lender in whole or in part, and as long as no Event of Default or Potential Default shall have occurred under any of the Loan Documents, then on (i) the First Reduction Date, the face amount of the Letter of Credit may be reduced to Two Million Seven Hundred Thousand Dollars ($2,700,000), and (ii) each anniversary of the First Reduction Date, the face amount of the Letter of Credit may be reduced by an amount equal to ten percent (10%) of the face amount of the Letter of Credit immediately prior to such reduction provided that on such anniversary date and on the date of such reduction (if it does not actually occur on the anniversary date), Lender shall have received evidence satisfactory to Lender in its sole and absolute discretion that Lender shall have received evidence satisfactory to Lender that during the immediately prior eight consecutive fiscal quarters, (i) the Net Worth of the Guarantor was not less than Two Hundred Million Dollars ($200,000,000), (ii) the Guarantor's EBITDA was greater than zero (0), and (iii) there has been no adverse change in the financial condition of Guarantor. 7.14 Single Purpose Entity. --------------------- Borrower shall not do any of the activities or take any of the actions proscribed in Section 6.13 above until the full and final repayment of the Loan ------------ and other obligations under the Loan Documents. 7.15 Proposed Subordination. ---------------------- Borrower anticipates obtaining a junior loan (the "Junior Loan") secured by the Project from a third party institutional lender other than Lender (the "Junior Lender"). Nothing contained herein shall be deemed or construed to constitute an agreement by Lender to permit (a) Borrower to obtain the Junior Loan unless and until all of the conditions set forth herein have been satisfied in full, or (b) any financing or title matters or exceptions other than the Junior Loan. Lender shall not unreasonably withhold its consent to the Junior Loan provided that (a) no Potential Default or Event of Default shall have occurred under any of the Loan Documents; (b) the interest of the Junior Lender in the Project is expressly subordinated to the interest of Lender in the Project, (c) the Junior Lender is not then granted and is not granted during the term of the Loan (x) any option or right of first refusal to purchase, or (y) a participation interest in, the ownership or benefits of ownership, directly or indirectly, of the Project; (d) any default by Borrower under the documents evidencing or securing the Junior Loan shall constitute an Event of Default under the Loan Documents; (e) the Junior Lender is an institutional lender approved in advance by Lender, including, without limitation, with respect to its financial condition; (f) the amount of the Junior Loan, after taking into account all advances to be made in connection therewith, shall not exceed Five Million Dollars ($5,000,000); (g) all of the documentation for the Junior Loan shall be satisfactory to Lender; (h) the Junior Loan shall contain an interest reserve sufficient, in Lender's determination, to pay all -24- interest and other amounts due with respect to the Junior Loan if Lender determines that net cash flow from the Project is insufficient to pay all debt service on the Junior Loan, as determined by Lender, (i) Borrower, the Junior Lender and Lender shall execute and deliver a subordination agreement for the benefit of Lender, in form and substance acceptable to Lender in its sole discretion (the "Subordination Agreement") pursuant to which the Junior Lender expressly acknowledges and agrees (i) that the Junior Loan is subordinate to the Loan and any and all future advances thereunder, (ii) after the occurrence of a Potential Default under the Loan Documents, the Junior Lender shall have no right to receive any payments in connection with the Junior Loan until all outstanding obligations under the Loan have been satisfied in their entirety, and (iii) the Junior Lender shall have no right to exercise any of its rights and remedies following a default under the Junior Loan as long as the Loan remains outstanding, (j) Borrower shall pay for all costs associated with Lender's review and approval of the Junior Loan, including, without limitation, reasonable attorneys' fees and costs; (k) if required by Lender, Borrower also shall pay to Lender a fee for the appraisal in connection with the proposed Junior Loan, (l) the disbursement of the proceeds from the proposed Junior Loan shall be made upon such terms and conditions as may be reasonably required by Lender; (m) the maturity date of such Junior Loan shall be at least three (3) months after the Maturity Date (as defined in the Note); and (n) the loan documents securing or evidencing the Junior Loan and/or the Subordination Agreement shall expressly provide that: (1) subject to the foregoing provisions, if any action or proceeding shall be brought to foreclose on the Project, no action shall be taken with respect to the Project which would terminate any occupancy or tenancy of the Project without the prior written consent of Lender (and the Junior Lender will execute such nondisturbance and attornment agreements as Lender may require to evidence such provisions); (2) any insurance and/or condemnation proceeds payable with respect to the Project will be applied in a manner consistent with the terms of the Deed of Trust; (3) the Junior Lender and its assigns shall agree to be bound by, and no consent shall be required for, any extensions, modifications or amendments to the Deed of Trust or any of the other Loan Documents; and (4) the Junior Lender and its assigns shall waive all rights, legal and equitable, it may now or hereafter have to require the marshalling of assets or to require upon foreclosure sales of assets in a particular order. All matters required to be approved or delivered by or to Lender under this Section 7.14 , or in ------------ connection with the Subordination, shall be satisfactory to Lender in its sole and absolute discretion. ARTICLE 8 EVENTS OF DEFAULT: REMEDIES --------------------------- 8.1 Events of Default. ----------------- The occurrence of any of the following events shall constitute an Event of Default under this Agreement and the other Loan Documents: A. Failure to Make Payments When Due. Borrower's, Completion Guarantor's or Limited Recourse Obligations Guarantor's failure to pay any principal, interest or other monies due under this Agreement or any of the other Loan Documents within ten (10) days after such amount is due. B. Breach of Certain Covenants. Borrower's, Completion Guarantor's or Limited Recourse Obligations Guarantor's failure to perform or comply with any term, obligation or condition contained in this Agreement or any of the other Loan Documents, other than those terms, obligations and conditions otherwise referred to in this Section 8.1 and other than Borrower's obligations under ----------- Section 1.10(A) of the Deed of Trust, within thirty (30) days after the delivery - --------------- of written notice from Lender of such failure; provided that if such default is not reasonably capable of being cured within such thirty (30) day period, such failure shall not constitute an Event of Default so long as Borrower, Completion -25- Guarantor or Limited Recourse Obligations; Guarantor, as applicable, commences the cure of such default within such thirty (30) day period and diligently prosecutes such cure to completion within one hundred eighty (180) days after such written notice from Lender. C. Breach of Warranty. Any representation, warranty, certification or other statement made by Borrower or any of the Principals herein or in any other Loan Document or in any statement or certificate at any time given by Borrower or any of the Principals to Lender in writing in connection with the Loan shall be materially false or misleading. D. Involuntary Bankruptcy; Appointment of Receiver, etc. (i) A court having proper jurisdiction shall enter a decree or order for relief with respect to Borrower or any of the Principals in an involuntary case under the Bankruptcy Code or any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, which decree or order is not stayed within seven (7) days after entry and dismissed within ninety (90) days after the entry of such order; or any other similar relief shall be granted under any applicable federal or state 1aw; or (ii) An involuntary case is commenced against Borrower or any of the Principals, under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect; or a decree or order of a court for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Borrower or any of the Principals or over all or a substantial part of their respective property, shall be entered; or the involuntary appointment of an interim receiver, trustee or other custodian of Borrower or any of the Principals, for all or a substantial part of their respective property; or the issuance of a warrant of attachment, execution or similar process against any substantial part of the respective property of Borrower or any of the Principals, and the continuance of any such event in this clause (ii) for ninety (90) days unless dismissed or discharged. E. Voluntary Bankruptcy; Appointment of Receiver, etc. (i) Borrower or any of the Principals shall have an order for relief entered with respect to them or commence a voluntary case under the Bankruptcy Code or any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of their respective property; the making by Borrower or any of the Principals of any assignment for the benefit of creditors; or (ii) The inability or failure of Borrower or any of the Principals, or the admission by Borrower or any of the Principals in writing of its inability, to pay their respective debts as such debts become due. F. Lien Priority. Except as expressly permitted by Section 1.8 of the ----------- Deed of Trust, Lender fails to have a legal, valid binding and enforceable first priority Lien on the Project and the Personal Property. G. Unapproved Transfers. Any transfer (as defined in Section 1.10 of ------------ the Deed of Trust) of the Project or any interest in Borrower occurs without Lender's prior written consent in accordance with Section 1.10 of the Deed of ------------ Trust. H. Failure to Maintain Insurance. Borrower fails to maintain or cause to be maintained the insurance coverage required by Section 7.6. ----------- -26- I. Other Liens. Without limiting the provisions of Section 7.1 of this ----------- Agreement or Section 1.10 of the Deed of Trust, Borrower defaults under any Lien ------------ (other than the Liens created by the Loan Documents) or foreclosure or other proceedings are commenced to enforce any Lien (other than the Liens created by the Loan Documents). J. Other Loan Documents. The occurrence of an Event of Default under any of the other Loan Documents (as "Event of Default" is defined therein). K. Cessation of Construction. The cessation of work on the Improvements or, for any reason whatsoever, work does not progress continuously in a manner satisfactory to Lender in its sole and subjective discretion while acting in good faith. L. Cash Collateral Account/Letter of Credit. Borrower's failure to comply with any term, obligation or condition contained in Section 7.13 of this ------------ Agreement in the time and manner provided therein. M. Subordination Borrower's failure to comply with any term, obligation or condition contained in Section 7.15 of this Agreement in the time ------------ and manner provided therein. 8.2 General Remedies. ---------------- Notwithstanding anything to the contrary contained herein or in any of the other Loan Documents, upon the occurrence of any Event of Default (i) automatically without notice to Borrower as to Sections 8.1(D),(E)and(J), and ------------------------- otherwise at the option of Lender upon written notice to Borrower as to any other Event of Default, the unpaid principal amount of the Loan, all accrued and unpaid interest and all other Secured Obligations shall become immediately due and payable, without presentment, demand, protest, further notice or other requirements of any kind, all of which are hereby expressly waived by Borrower, (ii) Lender shall have the rights and remedies of a secured party under the California Commercial Code, and under any other applicable law, (iii) Lender may pursue all of its rights and remedies hereunder, under the other Loan Documents, at law, in equity or otherwise, including without limitation, obtaining the appointment of a receiver to perform any act of Lender permitted in this Agreement and to perform such other duties as permitted by applicable Laws, (iv) Lender may pursue any remedies available to it pursuant to California Code of Civil Procedure Section 726.5, (v) all outstanding indebtedness and all other amounts owing to Lender under the Loan Documents shall bear interest at the Default Interest Rate, and (vi) Lender shall have no further obligation to disburse Loan proceeds to Borrower. 8.3 Specific Performance -------------------- Upon the occurrence of an Event of Default. Lender may commence and maintain an action in any court of competent jurisdiction: for specific performance of any of the covenants and agreements contained herein or in any of the other Loan Documents, may obtain the aid and direction of the court in the performance of any of the covenants and agreements contained herein or therein, and may obtain orders or decrees directing the same and, In the case of any sale under the Dead of Trust, directing, confirming or approving Lender's or the trustee's actions. 8.4 Remedies as to Project Documents. -------------------------------- Upon the occurrence of an Event of Default, Lender shall have the right (and Borrower hereby irrevocably constitutes and appoints Lender as its attorney-in-fact, which power is coupled with an interest, to do so) to (a) demand, receive and enforce Borrowers rights with respect to the Project Documents, (b) give appropriate receipts, releases and satisfactions for and on behalf of Borrower with respect to any of the Project Documents, (c) do any and all acts in the name of Borrower or in the name of -27- Lender with the same force and effect as Borrower could do if the assignment in Article 4 had not been made, and (d) perform and discharge each and every - --------- obligation, convenant, condition and agreement of Borrower under the Project Documents. 8.5 Construction Remedies --------------------- Upon the occurrence of an Event of Default, Lender will also have the right, in its sole discretion, to enter the Property and take any and all actions necessary in its sole and subjective judgment to complete construction of the Project, including, but not limited to, making changes in Project Documents, work, or materials, and entering into, modifying, or terminating any contractual arrangements, subject to Lender's right at any time to discontinue any work without liability. If Lender elects to complete the Project, it will not thereby assume any liability to Borrower or to any other person for completing the Project, or for the manner or quality of construction of the Project, and Borrower expressly waives any such liability. Upon the occurrence of an Event of Default, Borrower irrevocably appoints, designates, empowers, and authorizes Lender as Borrower's attorney-in-fact, coupled with an interest, with full power of substitution, to sign and file for record any notices of completion, notices of cessation of labor, or any other notice or written document that Lender may deem necessary to file or record to protect its interests, and to complete construction in Borrower's name or in Lender's own name. In any event, all sums expended by or on behalf of Lender in completing construction (whether or not construction is, in fact, completed), plus a fee of fifteen percent (15%) for supervision of construction in addition to any fees charged by third party inspectors or architects to supervise construction, will be considered to be disbursed to Borrower, and will be secured by the Deed of Trust and the other Loan Documents, and any such sums that cause the principal amount of the Loan to exceed the face amount of the Loan will be considered to be an additional advance to Borrower, payable on demand, bearing interest at the Default Interest Rate, and secured by the Deed of Trust and the other Loan Documents. ARTICLE 9 MISCELLANEOUS PROVISIONS ------------------------ 9.1 Nonforeign Status ----------------- Section 1446 of the Internal Revenue Code of 1985, as amended (the "Internal Revenue Code") and Sections 18662, 18668 and 18669 of the California Revenue and Taxation Code (the "California Tax Code") provide that a transferee of a U.S. real property interest, or California property interest, as the case may be, must withhold, tax under the circumstances described therein. To inform Lender that the withholding of tax will not be required in the event of the disposition of the Project pursuant to the terms of the Deed of Trust, Borrower hereby certifies, under penalty of perjury, that: (a) Borrower is not a foreign corporation, foreign partnership, foreign trust or foreign estate, as those terms are defined in the Internal Revenue Code and/or California Tax Code and the regulations promulgated thereunder. and (b) Borrowers U.S. employer identification number is the Tax Identification Number; (c) Borrowers principal place of business is at the address set forth in Section 9.10. and (d) Borrower ------------- is qualified to do business in the State of California. Lender may disclose the contents of this Section 9.1 to the Internal Revenue Service or any other ----------- Governmental Agency and Borrower acknowledges that any false statement contained herein could be punished by fine, imprisonment or both. Borrower covenants and agrees to execute further certificates, which shall be signed under penalty of perjury, as Lender shall reasonably require in connection with the certifications set forth herein. The covenant set forth herein shall survive the foreclosure of the lien of the Deed of Trust or acceptance of a deed in lieu or in aid thereof. -28- 9.2 Assignments and Participations in Loan and Note. ----------------------------------------------- Lender may assign its rights and delegate its obligations under this Agreement or any of the other Loan Documents and further may assign, or sell participations in, all or any part of the Loan, the Loan Documents, or any other interest herein or in the Note to any Person, all without notice to or the consent of Borrower. To the extent of any such assignment, Lender shall be relieved of its obligations with respect to the Loan and the assignee shall have the same rights, benefits and obligations as it would if it were Lender hereunder and a holder of the Note. Lender may furnish any information (including, without limitation, financial information) concerning the Project, Borrower, Principals and any of their assets to third parties from time to time for legitimate business purposes. 9.3 Expenses. -------- Borrower agrees to pay, within ten (10) days after demand by Lender, all reasonable costs and expenses (including, without limitation, reasonable attorneys' fees and costs, fees of any consultants, and fees for any environmental audits, appraisal, inspections or other review required by Lender) incurred by Lender in connection with the Loan, the enforcement of any of the Secured Obligations, the enforcement of any of Lender's rights and remedies under the Loan Documents, the collection of any payments owing to Lender hereunder or under any of the other Loan Documents, whether or not such enforcement and collection includes the filing of a lawsuit, or the retaking, holding, preparing for sale or selling the Project or any portion thereof or any interest therein. Such costs and expenses shall include, without limitation, Lender's reasonable attorneys' fees and costs, including without limitation attorneys' fees and costs incurred by Lender in connection with any insolvency, bankruptcy, reorganization, arrangement or other similar proceedings involving Borrower or any of the Principals which in any way affect the exercise by Lender of its rights and remedies hereunder, under any of the other Loan Documents, at law or in equity. 9.4 Joint and Several 0bligations. ----------------------------- The liability of Borrower under this Agreement and under each of the other Loan Documents shall be joint and several. Any married person signing the Loan Documents as Borrower or its general partner agrees that recourse may be had against community assets and against his or her separate property for the satisfaction of all obligations under the Loan Documents. 9.5 Indemnity. --------- Borrower hereby indemnifies and agrees to defend and hold harmless the Indemnitees from and against any and all expenses, loss, claims, damage or liability, including, without limitation, architects', engineers' and attorneys' fees and costs by reason of: (a) the construction of any improvements on the Project, (b) any capital improvements, other work or things done in, on or about the Project or any part thereof, (c) any use, nonuse, misuse, possession, occupation, alteration, operation, maintenance or management of the Project or any part thereof or any street, drive, sidewalk, curb passageway or space comprising a part thereof or adjacent thereto, (d) any negligence or willful act or omissions on the part of Borrower or its agents, contractors, servants, employees, licensees or invitees, (e) any accident, injury (including death) or damage to any person or property occurring in, on or about the Project or any part thereof, (f) any Lien or claim which may be alleged to have arisen on or against the Project or any part thereof or any liability asserted against Lender with respect thereto, (g) any tax attributable to the execution, delivery, filing or recording of the Deed of Trust, the Note or the other Loan Documents, (h) any contest due to Borrower's actions or failure to act, (i) any default under the Note or the other Loan Documents, or (j) any claim by-or liability to any contractor or subcontractor performing work or any party supplying materials in connection with the Project. -29- 9.6 Waiver of Offset. ---------------- All sums payable by Borrower pursuant to any of the Loan Documents shall be paid without notice, demand, counterclaim, setoff, deduction or defense and without abatement, suspension, deferment, diminution or reduction, and the obligations and liabilities of Borrower under the Loan Documents shall in no way be released, discharged or otherwise affected (except as expressly provided in the Loan Documents) by reason of: (a) any damage to or destruction of the Project or any Condemnation Event (as defined is the Deed of Trust) affecting the Project or any part thereof; (b) any restrictions or prevention of or interference by any third party with any use of the Project or any part thereof, (c) any title defect or encumbrance or any eviction from the Project or any part thereof by title paramount or otherwise; (d) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to Lender, or any action taken with respect to any of the Loan Documents by any trustee or receiver of Lender, or by any court, in any such proceeding; (e) any claim which Borrower has or might have against Lender; (f) any default or failure on the part of Lender to perform or comply with any of the terms hereof or of any other agreement with Borrower; or (g) any other occurrence whatsoever, whether similar or dissimilar to the foregoing; whether or not Borrower shall have notice or knowledge of any of the foregoing. Except as expressly provided herein, Borrower waives all rights now or hereafter conferred by statute or otherwise to any abatement, suspension, deferment, diminution or reduction of any of the Secured Obligations. 9.7 Amendments and Waivers. ---------------------- This Agreement and the other Loan Documents may only be modified in writing signed by all of the parties hereto or thereto or their respective successors and assigns. No waiver of any provision of this Agreement or of any of the other Loan Documents, or consent to any departure by Borrower therefrom, shall in any event be effective without the written agreement of Lender. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. Except as expressly required by the terms of the Loan Documents, no notice to or demand on Borrower in any case shall entitle Borrower to any other or further notice or demand in similar or other circumstances. 9.8 WAIVER OF JURY TRIAL. -------------------- BORROWER AND LENDER EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY 1N RESPECT TO ANY TORT OR CONTRACT LITIGATION BASED HEREON OR ON ANY OF THE OTHER LOAN DOCUMENTS, OR ARISING OUT OF, UNDER OR IN CONJUNCTION WITH THE NOTE, ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF EITHER PARTY IN CONNECTION THEREWITH. 9.9 Submission of Loan Documents. ---------------------------- The submission of this Agreement, any of the other Loan Documents or the Environmental Indemnity to Borrower or its-agents or attorneys for review or signature does not constitute a commitment by Lender to make the Loan to Borrower, and the Loan Documents and the Environmental Indemnity shall have no binding force or effect unless and until they are executed and delivered by Borrower and Lender and all of the conditions set forth in Section 3.1 have been ----------- satisfied. 9.10 Notices. ------- Any notice, or other document or demand required or permitted under this Agreement or any of the other Loan documents shall be in writing addressed to the appropriate address set forth below and shall be deemed delivered upon the earliest of (a) actual receipt, (b) the next Business Day after the -30- date when sent by recognized overnight courier, or (c) the second Business Day after the date when sent by registered or certified mail, postage prepaid. Any party may, from time to time, change the address at which such written notice or other documents or demands are to be sent, by giving the other party written notice of such change in the manner hereinabove provided. To Borrower: Aspect Communications Real Estate Holdings LLC 1310 Ridder Park Drive San Jose, California 95131 To Lender: Fremont Investment & Loan 175 N. Riverview Drive Anaheim, California 92808 Attention: Commercial Real Estate Loan No.950114178 9.11 Survival of Warranties and Certain Agreements. --------------------------------------------- All agreements, indemnities. representations and warranties made herein and in the other Loan Documents shall survive the execution and delivery of this Agreement, the making of the Loan hereunder and the execution and delivery of the Note. All representations and warranties made in this Agreement or in any of the other Loan Documents shall further survive any and all investigations and inquiries made by Lender, shall remain true, correct and complete in all material respects and shall remain continuing obligations so long as any portion of the Secured Obligations remains outstanding or unsatisfied. Notwithstanding anything In this Agreement or the other Loan Documents or implied by law to the contrary, any indemnities made by Borrower in the Loan Documents shall survive the payment of the Loan, the satisfaction of the Secured Obligations, and/or the termination of the Agreement or the other Loan Documents. 9.12 Failure or Indulgence Not Waiver: Remedies Cumulative. ----------------------------------------------------- No failure or delay on the part of Lender or any holder of the Note or portion thereof in the exercise of any power, right or privilege hereunder or under the Note shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right power or privilege. All rights and remedies existing under this Agreement and the other Loan Documents are separate, distinct and cumulative to, and not exclusive of, any rights or remedies otherwise available at low or in equity. No act of Lender under any of the Loan Documents shall be construed as an election to proceed under any one provision to the exclusion of any other provision, notwithstanding anything in the Loan Documents to the contrary. Borrower expressly waives all right to the benefit of any statute of limitations and any moratorium, reinstatement, marshaling, forbearance, extension, redemption, or appraisement now or hereafter provided by federal or state law, as a defense to any demand against Borrower to the fullest extent permitted by law. 9.13 Survival of Obligations Upon Termination of Agreement. ------------------------------------------------------ No termination or cancellation (regardless of cause or procedure) of this Agreement or any of the other Loan Documents shall in any way affect or impair the powers, obligations, duties, rights, and liabilities of Borrower or Lender relating to (a) any transaction or event occurring prior to such termination or cancellation, or (b) any of the undertakings, agreements, covenants, indemnities, warranties and representations of Borrower or Lender contained in this Agreement or any of the other Loan Documents. -31- 9.14 Disbursements in Excess of Loan Amount. -------------------------------------- In the event the total disbursements by Lender exceed the amount of the Loan set forth herein, the total of all disbursements shall, to the extent permitted by the laws of the State of California, constitute part of the Secured Obligations and be secured by the Deed of Trust and other Loan Documents. All other sums expended by Lender pursuant to this Agreement or any of the other Loan Documents shall be deemed,to have been paid to Borrower and shall be secured by the Loan Documents. 9.15 Severability. ------------ If any term of this Agreement or any of the other Loan Documents or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Agreement or other Loan Document or the application of such term to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term of this Agreement or other Loan Document shall be valid and enforceable to the fullest extent. 9.16 Rules of Construction --------------------- Where the identity of the parties to this Agreement or any of the other Loan Documents or the circumstances make it appropriate, the masculine gender includes the feminine and/or neuter, and the singular number includes the plural. Article and section headings in this Agreement and the other Loan Documents are included for convenience of reference only and shall not constitute a part of this Agreement or such other Loan Documents for any other purpose or be given any substantive effect. The recitals to this Agreement and to each of the other Loan Documents are incorporated herein and therein and made a part hereof and thereof. 9.17 Applicable Law. -------------- This Agreement and the other Loan Documents shall be governed by, and construed and enforced in accordance with, the laws of the State of California. 9.18 Successors and Assigns. ---------------------- This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Except as expressly provided in the Deed of Trust. Borrower's rights and obligations or any interest hereunder or under any of the other Loan Documents may not be assigned, including, without limitation, assigned for security purposes, without the prior written consent of Lender, which may be withheld in Lender's sole discretion, and any purported assignment shall be null and void ab initio. As -- ------ used herein, and in the other Loan Documents, "Lender" (or similar references to the lender) shall include all holders of the Note, including, without limitation, pledgees of the Note, whether or not named herein or therein. In exercising any rights hereunder or under any of the other Loan Documents or taking any actions provided for herein or therein. Lender may act through Its employees, agents or independent contractors authorized by Lender. 9.19 Disclosure of Information. ------------------------- Borrower hereby acknowledges and agrees that upon the request of any partner, member or shareholder of Borrower, as applicable, Lender may disclose to such party any information (including, without limitation, financial information) relating to the Loan and Borrower's performance of its obligations under the Loan Documents. Borrower hereby indemnifies and agrees to defend and hold harmless the Indemnitees from and against any and all expenses, loss, claims, damage or liability, including, without limitation, attorneys' fees and costs, arising by reason of any disclosure of information by Lender under this Section 9.19. - ------------ -32- 9.20 Counterparts. ------------ This Agreement and the other Loan Documents may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. Signature and, if applicable, acknowledgment pages may be detached from the counterparts and attached to a single copy of the applicable document to physically form one document, which may be recorded if applicable. 9.21 Entire Agreement. ---------------- The Loan Documents and the Commitment Letter set forth the entire understanding between Borrower and Lender relative to the Loan and the same supersede all prior agreements and understandings relating to the subject matter hereof or thereof. 9.22 Inconsistencies --------------- In the event it is impossible to simultaneously comply with the terms of this Agreement and any of the terms of any other Loan Document, the terms of this Agreement shall control over any inconsistent term of any other Loan Document. 9.23 Time is of the Essence. ---------------------- Time is strictly of the essence of this Agreement and the other Loon Documents. 9.24 No Third Party Beneficiaries. ---------------------------- This Agreement and the other Loan Documents are made and entered into for the sole protection and benefit of the parties hereto and, except as provided in Section 9.18, no other person or entity shall be a direct or ------------ indirect beneficiary of, or shall have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. -33- IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by Borrower and Lender as of the date fist above written. BORROWER: ASPECT COMMUNICATIONS REAL ESTATE HOLDINGS LLC, a Delaware limited liability company By: Aspect Communications Corporation, a California corporation its manager By: /s/ Betsy Rafael ------------------------------------------- Name: Betsy Rafael ----------------------------------------- Title: CFO & CAO ---------------------------------------- By: /s/ Christine M. Gordans ------------------------------------------- Name: Christine M. Gordans ----------------------------------------- Title: VP Tax & Treasury ---------------------------------------- LENDER: FREMONT INVESTMENT & LOAN a California industrial loan association By:_______________________________________________ Its: Vice President ----------------------------------------- S-1 EXHIBIT A Description of Property ----------------------- That certain real property located in the City of San Jose, County of Santa Clara, State of California, having a street address of 1310-1320 Ridder Park Drive, more particularly described as follows: Parcel 2, as shown on that certain Parcel Map filed in the Office of the Recorder of the County of Santa Clara, State of California on November 1, 1983, in Book 520 of Maps, Page 44. In addition thereto, pursuant to Lot Line Adjustment Permit recorded August 1, 2000, under Series no. 15339526 of Official Records, the following area: Parcel 3, as shown on that certain Parcel Map filed in the Office of the Recorder of the County of Santa Clara, State of California on March 10, 1982 in Book 497 of Maps, Pages 13 through 17. APN: 237-03-040,042,058 ARB: 237-3-4.05,4.06,14.03,22.06 A-1 EXHIBIT B Description of Personal Property -------------------------------- All of Borrower's right, title and interest, now or hereafter acquired, in and to the following: (a) All personal property, including, without limitation, all goods, supplies, equipment, furniture, furnishings, fixtures, machinery, inventory and construction materials which Borrower now or hereafter owns or in which Borrower now or hereafter acquires an interest or right, including, without limitation, those which are now or hereafter located on or affixed to the Project or used or useful in the operation, use or occupancy thereof or the construction of any improvements thereon, including, without limitation, any interest of Borrower in and to personal property which is leased or subject to any superior security interest, or which is being manufactured or assembled for later installation into the improvements now or hereafter located at the Project, wherever located, and all books, records, leases and other documents, of whatever kind or character, relating to the Project; (b) All fees, income, rents, issues, profits, earnings, receipts, royalties and revenues which, after the date hereof and while any portion of the Secured Obligations remains unpaid, may accrue from such goods, fixtures, furnishings, equipment and building materials or any part thereof or from the Project or any part thereof, or which may be received or receivable by Borrower from any hiring, using, letting, leasing, subhiring, subletting, or subleasing therefor; (c) All of Borrower's present and future rights to receive payments of money, services or property (including, without limitation, rights to all deposits from tenants of the Project, deposits from prospective purchasers of the Project, capital contributions from the constituent partners of Borrower (if Borrower is a partnership), amounts payable on account of the sale of partnership interests or stock of Borrower, accounts, accounts receivable. deposit accounts, chattel paper, notes, drafts, contract rights, instruments, general intangibles and principal, interest and payments due on account of goods sold, services rendered, loans made or credit extended, together with title or interest in all documents evidencing or securing the same. (d) All other intangible property and rights relating to the Project or the operation thereof, or used in connection therewith, including but not limited to all governmental permits relating to construction or other activities on the Project, all names under or by which the Project may at any time be operated or known, all rights to carry on business under any such names, or any variant thereof, all trade names and trademarks relating in any way to the Project, goodwill in any way relating to the Project, and all permits, licenses, franchises, approvals, variances and land use entitlements relating in any way to, or to the occupancy, operation, ownership and use of, the Project; (e) All judgments, claims, settlements of claims and causes of action under any legal proceeding relating to the Project or the ownership, use, occupancy or operation thereof; (f) All proceeds from sale or disposition of the Personal Property; (g) Borrower's rights under all insurance policies covering the Project or any of the Personal Property (whether or not Borrower is required to maintain such insurance under the terms of the Loan Documents), and all proceeds, loss payments and premium refunds payable regarding the same; (h) All reserves, deferred payments, deposits, refunds, cost savings and payments of any kind relating to the construction of any improvements on the Project; (i) All water stock relating to the Project; B-1 (j) All causes of action, claims, compensation and recoveries for any damage to or condemnation or taking of the Project or the Personal Property, or for any conveyance in lieu thereof, whether direct or consequential, or for any damage or injury to the Project or the Personal Property, or for any loss or diminution in value of the Project or the Personal Property; (k) All architectural, structural, mechanical and engineering plans and specifications prepared for construction of improvements or extraction of minerals or gravel from the Project and all studies, data and drawings related thereto, and all contracts and agreements of Borrower relating to such plans and specifications or such studies, data and drawings or to the construction of improvements on or extraction of minerals or gravel from the Project; (l) All of Borrower's present and future rights in and to all refunds, rebates, reimbursements, reserves, deferred payments, deposits, cost savings, governmental subsidy payments, governmentally-registered credits (such as emissions reduction credits), other credits, waivers and payments, whether in cash or kind, due from or payable by any Governmental Agency or any insurance or utility company relating to any or all of the Project, any improvements thereon or any of the collateral described herein or arising out of satisfaction of any condition imposed upon or the obtaining of any approvals for the development of the Project or the improvements thereon; (m) All of Borrower's present and future rights in and to all refunds, rebates, reimbursements, credits and payments of any kind due from or payable by any Governmental Agency or other entity for any taxes, special taxes, assessments, or similar governmental or quasi-governmental charges or levies imposed upon Borrower with respect to the Project, any improvements thereon or any of the collateral described herein or arising out of the satisfaction of any condition imposed upon or the obtaining of any approvals for the development of the Project or the improvements thereon; (n) All Borrower's rights in proceeds of the Loan; (o) All Borrower's rights to receive the proceeds of any "take-out" or permanent financing or commitment to provide such financing; and (p) All proceeds and products of any of the foregoing (and proceeds and products of proceeds and products). All terms used herein which are defined in the California Commercial Code shall have the same meanings when used herein, unless the context requires otherwise. B-2 Loan No. 950114178 SECURED PROMISSORY NOTE $25,000,000 September 28, 2001 FOR VALUE RECEIVED, ASPECT COMMUNICATIONS REAL ESTATE HOLDINGS LLC, a Delaware limited liability company ("Borrower") promises to pay to the order of FREMONT INVESTMENT & LOAN, a California industrial loan association, and its successors and assigns ("Lender"), at 175 N. Riverview Drive, Anaheim, California 92808, Attention: Commercial Real Estate, Loan No. 950114178, or at such other place as Lender may designate in writing, in lawful money of the United States of America, the principal sum of Twenty-Five Million Dollars ($25,000,000), together with interest thereon at the rate set forth herein from the date of disbursement until paid, on the terms set forth herein. ARTICLE 1 DEFINITIONS ----------- As used herein, the following initially-capitalized terms shall have the meanings set forth below. Any initially-capitalized terms not otherwise defined herein shall have the meanings given such terms in that certain Loan and Security Agreement of even date herewith between Borrower and Lender (the "Loan Agreement"). "Adjustment Date" means the Initial Adjustment Date and the first day of every sixth month thereafter. "Advance" means the Initial Advance (as defined in Section 2.6) or any ----------- Subsequent Advance (as defined in Section 2.6). ----------- "Advance Conditions" is defined in Section 2.6. ----------- "Advance Termination Date" means May 1, 2002. "Amortization Period' means a period of two hundred forty (240) months commencing on the Closing Date if the Closing Date occurs on the first day of a calendar month, or commencing on the first day of the first calendar month after the Closing Date if the Closing Date does not occur on the first day of a calendar month. "Architect" means (i) Form 4 Inc., a California corporation or (ii) such other architect as may be acceptable to Borrower and approved by Lender. "Ceiling Rate" means a rate of fourteen percent (14%) per annum. "Contractor" means DPR Construction, Inc., a California corporation or such other general contractor as may be acceptable to Borrower and approved by Lender. "Default Interest Rate" means a rate of five percent (5%) per annum in excess of the Variable Interest Rate in effect from time to time under this Note. "Final Payment" means the final payment due on the Maturity Date of all unpaid principal, interest, charges and other amounts due under this Note or any of the other Loan Documents. "Floor Rate" means a rate of eight percent (8%) per annum. "Improvements" means the improvements contemplated to be made by Borrower to the Project, consisting of an approximately 108,355 square foot, irregularly-shaped three-story steel framed structure. "Initial Adjustment Date" means May 1, 2002. "Initial Advance" is defined in Section 2.6. ----------- "Initial Payment Date" means December 1, 2001. "Interest Rate" means the Variable Interest Rate or the Default Interest Rate, as applicable. "LIBOR Rate" means the Six-Month LIBOR rate of interest published on each Monday under this designation in the Wal1 Street Journal, in its Money Rates ------------------- section. Changes in the Variable Interest Rate shall be based on the Six-Month LIBOR rate quoted in the Wall Street Journal. If such rate ceases to be ------------------- available, or ceases to be published in the Wall Street Journal. Lender may ------------------- select a substantially similar alternate. "Loan" means the loan evidenced by this Note. "Maturity Date" means November 1, 2006. "Monthly Installment" means the monthly payments to be made by Borrower under Section 2.3. ----------- "Payment" means the Monthly Installments, the Final Payment and/or any other payment required to be made by Borrower pursuant to the terms of the Loan Documents. "Plans" means the plans and specifications for the improvements for which the Holdback for Construction (as defined on Exhibit A) shall be used, as the --------- same may be amended from time to time by Borrower but only to the extent approved by Lender. "Project Costs" means all costs and expenses incidental to the construction of the improvements, all of such costs and expenses being described in the Sources and Uses Schedule. "Sources and Uses Schedule" mean the "Sources and Uses" schedule for the Project attached hereto as Schedule C and made a part hereof, as such schedule ---------- may be amended from time to time by Borrower but only to the extent approved by Lender. "Subsequent Advance" is defined in Section 2.6. ----------- "Variable Interest Rate" means an annual rate equal to (a) eight percent (8%) until the Initial Adjustment Date, and (b) from and after the Initial Adjustment Date, the LIBOR Rate as of the date which is one (1) Business Day prior to the applicable Adjustment Date plus the Variable Rate Margin. "Variable Rate Margin" means three and three-quarters percent (3.75%) per annum, as the same may be increased as provided in Section 7.8 of the Loan ----------- Agreement. -2- ARTICLE 2 INTEREST: PAYMENTS: ADVANCES ---------------------------- 2.1 Variable Interest Rate. ---------------------- Subject to the provisions of Section 2.2 and 4.3. Interest shall accrue on ----------- --- the unpaid principal balance outstanding under this Note from time to time at the Variable Interest Rate. The Variable Interest Rate shall be adjusted on the Initial Adjustment Date and on each Adjustment Date thereafter to reflect changes in the LIBOR Rate; provided that in no event shall the Variable Interest Rate (a) exceed the Ceiling Rate, (b) be less than the Floor Rate, or (c) be adjusted by more than one percent (1%) at any Adjustment Date. Borrower acknowledges and agrees that (x) Lender has no obligation to purchase, sell and/or match funds in connection with the use of the LIBOR Rate as a basis for calculating the Variable Interest Rate; (y) the LIBOR Rate is used merely as a reference in determining the Variable Interest Rate, and (z) the LIBOR Rate is a reasonable and fair basis for calculating the Variable Interest Rate. 2.2 [Intentionally Omitted]. ----------------------- 2.3 Payments. -------- A. Borrower shall make monthly payments (the "Monthly Installments") of principal and interest beginning on the Initial Payment Date and on the first day of each month thereafter, in the amount from time to time which fully amortizes the then unpaid principal balance of the Loan and the interest accruing thereon at the Interest Rate then in effect under this Note in equal monthly installments over the then remaining term of the Amortization Period. The Monthly Installments shall be subject to adjustment to reflect any adjustments in the Variable Interest Rate of this Note, with each such adjustment effective thirty (30) days after the applicable Adjustment Date. Monthly Installments shall also be adjusted as provided in Section 7.6(F) and -------------- Section 7.8 of the Loan Agreement. Monthly installments shall not be adjusted on - ----------- any Prepayment made while the Variable Interest Rate is in effect until the next scheduled Adjustment Date. Further, the Monthly Installments shall be adjusted upon the funding of any Subsequent Advances by Lender in accordance with Section ------ 2.6. - --- B. Interest shall Commence to accrue under this Note upon the disbursement by Lender of Loan proceeds into the escrow for the Loan closing. Interest for any partial calendar month in which the Closing Date occurs shall be deducted from the funds disbursed by Lender on the Closing Date. All interest shall be calculated based on a three hundred and sixty (360) day year, but shall be computed for the actual number of days in the period for which interest is charged. C. Each Monthly Installment and the Final Payment shall be applied first to the payment of accrued and unpaid charges and interest under this Note and the other Loan Documents as of the data of receipt and the remainder, if any, shall be applied to the unpaid principal balance of the Loan; provided that upon the occurrence of a Potential Default or Event of Default under any of the Loan Documents, Lender shall be entitled to allocate Monthly Installments, the Final Payment and any other payments received by Lender to principal, interest, and/or charges in such order as Lender may elect. All payments of principal, interest and other amounts under this Note and the other Loan Documents shall be payable without any right of reduction, deferral, set-off, deduction, abatement, rescission or counterclaim. D. Whenever any payment to be made hereunder or under any of the other Loan Documents shall be stated to be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the interest due hereunder or under the other Loan Documents. -3- 2.4 Per payment Privilege --------------------- A. Borrower may prepay the outstanding principal balance of this Note in whole or in part at any time without charge or premium except as provided in this Section 2.4. Notwithstanding the foregoing, if any principal of the Loan is ----------- paid before the scheduled due date hereunder (a "Prepayment"), Borrower shall in addition pay to Lender, at the time of such Prepayment, a prepayment charge (as the same may be increased as provided below, the "Prepayment Charge") of one percent (1%) of the amount of the Prepayment for Prepayments made during the first Loan Year; and one half percent (0.5%) of the amount of the Prepayment for Prepayments made during the second Loan Year. No Prepayment Charge shall be imposed on Prepayments made after the first two (2) Loan Years. The Prepayment Charge will be due and payable whether the Prepayment is made voluntarily, involuntarily, or upon the acceleration of the Maturity Date, provided that no Prepayment Charge will be imposed on the application of Casualty Proceeds or Condemnation Proceeds (as such terms are defined in the Deed of Trust) to the amounts owing under this Note. As a condition precedent to Borrower's right to make any Prepayment, Borrower shall provide Lender with not less than thirty (30) days prior written notice of any Prepayment. The Prepayment Charge shall be in addition to Borrower's obligation to pay interest on any Prepayment at the Interest Rate through the date of such Prepayment on the terms set forth in this Note. BY INITIALING BELOW, BORROWER EXPRESSLY ACKNOWLEDGES AND UNDERSTANDS THAT, PURSUANT TO THE TERMS OF THIS NOTE. IT HAS AGREED THAT IT HAS NO RIGHT TO PREPAY THIS NOTE WITHOUT THE PAYMENT OF A PREPAYMENT CHARGE EXCEPT AS OTHERWISE PROVIDED IN THIS NOTE AND THAT IT SHALL BE LIABLE FOR THE PAYMENT OF A PREPAYMENT CHARGE FOR PREPAYMENT OF THIS NOTE ON ACCELERAT1ON OF THIS NOTE IN ACCORDANCE WITH ITS TERMS. FURTHERMORE, BY INITIALING BELOW, BORROWER WAIVES ANY RIGHTS IT MAY HAVE UNDER SECTION 2954,10 OF THE CALIFORNIA CIVIL CODE, OR ANY SUCCESSOR STATUTE, AND EXPRESSLY ACKNOWLEDGES AND UNDERSTANDS THAT LENDER HAS MADE THE LOAN IN RELIANCE ON THE AGREEMENTS AND WAIVER OF BORROWER AND THAT LENDER WOULD NOT HAVE MADE THE LOAN WITHOUT SUCH AGREEMENTS AND WAIVER OF BORROWER. BORROWER'S INITIAL /s/ ------- 2.5 Additional Advances. ------------------ If Lender advances funds under the terms of this Note or any of the other Loan Documents other than Advances pursuant to Section 2.6, such amounts (a) ----------- shall be deemed advances under this Note and shall be secured by the Deed of Trust and other Loan Documents, notwithstanding that such advances may cause the total amount advanced to exceed the face amount of this Note, (b) shall be subject to the imposition of a loan fee of one percent (1%) of the amount advanced, plus interest thereon at the Default Interest Rate from the date of Lender's advance of funds until the date of reimbursement, and (c) shall be due and payable, together with such loan fee and interest, within ten (10) days after demand by Lender. 2.6 Advances -------- A. The Loan proceeds will be advanced by Lender to Borrower pursuant to the terms and conditions of this Section 2.6 in an initial disbursement in the ----------- amount set forth on Exhibit A attached hereto, less any fees, costs, expenses --------- and interest payable to Lender as of such date (the "Initial Advance"), upon the closing of the Loan, and subsequent disbursements in the amounts set forth on Exhibit A attached hereto (individually, a "Subsequent Advance" and - --------- collectively, the "Subsequent Advances"), upon the terms and conditions set forth in this Section 2.6. ----------- B. Each Subsequent Advance shall be made by Lender to Borrower at Borrower's request only if and when all of the conditions set forth on Exhibit A --------- attached hereto (the "Advance Conditions') -4- shall have been satisfied with respect to each such Subsequent Advance. Lender shall make each Subsequent Advance within ten (10) days of its determination that all of the Advance Conditions with respect to such Subsequent Advance have been satisfied in full. C. Lender shall disburse each Subsequent Advance to Borrower net of the interest on such Subsequent Advance pursuant to this Note for the remainder of the month in which such disbursement is made, and the Monthly Installments shall be recalculated, effective on the first day of the following calendar month, so that the unpaid principal balance of the Loan, including such Subsequent Advance and the interest accruing thereon, at the Interest Rate then in effect under this Note is fully amortized in equal monthly installments over the then remaining term of the Amortization Period. D. Borrower acknowledges and agrees that Lender shall have no obligation to make any or all of the Subsequent Advances unless all of the Advance Conditions with respect thereto have been satisfied in full on or before the Advance Termination Date. In the event that all of the Advance Conditions for any Subsequent Advance have not been satisfied in full on or before the Advance Termination Date, Lenders obligation to make, and Borrower's right to receive, such Subsequent Advance and any future Subsequent Advances shall terminate and be of no further force or effect. E. The parties agree that the provisions of this Section 2.6 constitute a ----------- contract to make a loan (extend debt financing or financial accommodations) within the meaning of 11 U.S.C. Section 365(c)(2) and Section 366(e)(2)(B). ARTICLE 3 MATURITY DATE ------------- The Final Payment and all other amounts owing by Borrower to Lender under the Loan Documents shall be due and payable on the Maturity Date. ARTICLE 4 MISCELLANEOUS PROVISIONS ------------------------ 4.1 Restrictions on Transfer and Encumbrance. ---------------------------------------- This Note is secured by, among other things, the Deed of Trust. The Deed of Trust contains provisions allowing for the acceleration of the maturity date of this Note upon the sale, transfer, conveyance, assignment, encumbrance, hypothecation or other alienation without Lender's prior written consent (which may be withheld in Lender's sole discretion), of all or any portion of the Project or any interest therein or of certain interests in Borrower or its Principals. Further, the Loan Agreement contains provisions for the acceleration of the Maturity Date of this Note upon the occurrence of certain events described therein. 4.2 Interest Rate Limitation. ------------------------ It is the intent of Borrower and Lender that the Loan be exempt from the restrictions of the usury laws of the State of California. In the event that for any reason it is nonetheless determined that California usury law is applicable to the Loan. Borrower and Lender stipulate and agree that none of the terms and provisions contained herein or in any of the Loan Documents shall ever be construed to create a contract for the use, forbearance or detention of money requiring payment of interest at a rate in excess of the maximum interest rate permitted to be charged by the laws of the State of California. In such event, if Lender shall collect monies which are deemed to constitute interest which would otherwise increase the effective interest rate under this Note to a rate in excess of the maximum rate permitted to be charged by -5- the laws of the State of California, all such sums shall, at the option of Lender, be credited to the payment of the sums due hereunder or returned to Borrower. 4.3 Late Charge And Default Interest Rate. ------------------------------------- If any Payment is not received by Lender within ten (10) days after its due date, or if the due date is not a Business Day, if any Payment is not received by Lender on the next succeeding Business Day after such ten (10) day period, Borrower shall pay to Lender a late charge of ten percent (10%) of such Payment, which late charge shall be immediately due and payable without demand or notice by Lender. In addition, at Lender's option in its sole discretion, all amounts owing to Lender under the Loan Documents shall bear interest at the Default Interest Rate if any Payment is not received by Lender within thirty (30) days after its due date, or if the due date is not a Business Day, if any Payment is not received by Lender on the next succeeding Business Day after such thirty (30) day period, or if any other Event of Default occurs hereunder or under any of the other Loan Documents. The Default Interest Rate shall apply until the delinquent Payment, together with all interest at the Default Interest Rate and all late charges thereon, have been received by Lender or such other Event of Default has been fully cured. Borrower acknowledges that late payment of any Payment or the occurrence of an Event of Default will cause Lender to incur costs which would be costly or inconvenient to establish, Borrower and Lender agree that it would be impractical or extremely difficult to fix Lender's actual damages if any Payment is not paid when due or an Event of Default occurs, and such late charge and Default interest Rate represent a reasonable sum considering all of the circumstances and represent a fair and reasonable estimate of the costs that Lender will incur by reason of late payment or default. Acceptance of such late charge and interest at the Default Interest Rate shall not limit Lender's right to compel performance of any obligation or to exercise any of its rights or remedies under the Loan Documents. 4.4 Event of Default; Remedied. -------------------------- Borrower's failure to pay any principal, interest or other monies due under this Note within ten (10) days after such amount is due, or the occurrence of any "Event of Default" under any of the other Loan Documents (as "Event of Default" is defined therein), shall constitute an event of default (an "Event of Default") hereunder and under the other Loan Documents. Upon the occurrence of any Event of Default hereunder or under any of the Loan Documents (as "Event of Default" is defined in the other Loan Documents), Lender may, at its option, declare all principal, Interest and other indebtedness evidenced by this Note to be immediately due and payable without any presentment, demand, protest or notice of any kind, and Lender shall be entitled to exercise any and all remedies available to it under the Loan Documents or at law or equity. 4.5 Attorneys' Fees and Other Expenses. ---------------------------------- If Borrower fails to pay any amount owing under this Note or any of the other Loan Documents when due or if an Event of Default occurs under any of the Loan Documents, Borrower shall pay Lender, within ten (10) days after demand by Lender, a11 reasonable attorneys' fees and costs, and all other reasonable and necessary out-of-pocket expenses, including, without limitation, title, filing, recording, appraisal, environmental, trustee and other costs or fees, incurred by Lender in connection with this Note and the exercise of any right or remedy under this Note or any of the other Loan Documents. 4.6 Waivers. ------- Borrower hereby waives diligence, presentment, protest and demand, notice of protest, dishonor and repayment of this Note and, to the extent permitted by applicable law, the defense of the statute of limitations. Borrower expressly agrees that, without In any way affecting the liability of Borrower hereunder and without giving any notice to Borrower thereof, Lender may, at its option, extend the Maturity Date or the time for payment of any Payment due hereunder, accept additional security, release any party -6- liable hereunder, release any security now or hereafter securing this Note, accept a renewal of this Note or join in any subordination agreement. No provision in this Note (Including, without limitation, the provisions for the late charge or interest at the Default Interest Rate) shall be construed as in any way excusing Borrower from its obligation to make each Payment under this Note promptly when due. 4.7 Successors and Assigns. ---------------------- This Note and all of the obligations hereunder shall be the joint and several obligation of all makers of this Note (who are referred to jointly and severally as "Borrower" in this Note). This Note shall be binding upon and shall inure to the benefit of Borrower and Lander and their respective successors and assigns. 4.8 Notices. ------- All notices to be given under this Note shall be in writing and shall be given in the manner provided in the Loan Agreement. 4.9 Counterparts. ------------ This Note may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. Signature pages may be detached from the counterparts and attached to a single copy of this Note to physically form one document. 4.10 Governing Law. ------------- This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of California. 4.11 Full Recourse Obligations. ------------------------- The Loan shall be fully recourse to the Borrower, the Project, and the other collateral given as security for the Loan, without limitation or exculpation. -7- IN WITNESS WHEREOF, Borrower has executed and delivered this Note as of the date first above written. ASPECT COMMUNICATIONS REAL ESTATE HOLDINGS LLC, a Delaware limited liability company By: Aspect Communications Corporation, a California corporation Its Manager By: /s/ Betsy Rafael ---------------------------------------------- Name: Betsy Rafael ---------------------------------------------- Title: CFO & CAO ---------------------------------------------- By: /s/ Christine M. Gordans ---------------------------------------------- Name: Christine M. Gordans ---------------------------------------------- Title: VP Tax & Treasury ---------------------------------------------- S-1 EXHIBIT A Advance Terms and Conditions ---------------------------- 1. Advance Amounts. --------------- The Advances shall be made in the following maximum amounts: A. The Initial Advance shall be Twenty-Three Million Dollars ($23,000,000). B. The "Holdback for Construction" shall be Two Million Dollars ($2,000,000). 2. Advance Conditions for All Subsequent Advances. ---------------------------------------------- The following shall be conditions precedent to each Subsequent Advance: A. No Event of Default shall have occurred and no Potential Default shall have occurred and be continuing under any of the Loan Documents. B. Without limiting the provisions of the Loan Documents, no payment required to be made by Borrower under the Loan Documents shall have been made more than thirty (30) days after the due date under the Loan Documents which in the aggregate has a material adverse effect on (i) Borrower's ability to timely pay Monthly Installments or otherwise comply with the terms of the Loan Documents, or (ii) the operation of the Project. C. No material adverse change shall have occurred with respect to Borrower's or its members' assets, net worth, financial condition, or management of operational capability. D. Borrower shall have paid all reasonable costs incurred by Lender in connection with Lender's determination that the Advance Conditions have or have not been satisfied, including, without limitation, title insurance charges, credit reporting fees, attorneys' fees and costs, appraisal fees, inspection fees and engineering fees. E. Borrower shall have made a written request for the specific Subsequent Advance. 3. Advance Conditions for Specific Subsequent Advances. --------------------------------------------------- In addition to the Advance Conditions set forth in Section 2 above, the --------- following shall be conditions precedent to specific Subsequent Advances: A. Construction Holdback Advance. Subject to the terms and conditions hereinafter set forth, Lender shall make Construction Holdback Advances not more frequently than once each calendar month, exclusively for the payment of the following costs and expenses approved by Lender as hereinafter provided: (i) costs and expenses incurred in connection with the construction of the Improvements; (ii) other Project Costs: and (iii) costs and expenses incurred in connection with the Loan and Borrower's undertaking hereunder and under the Loan Documents, which proceeds shall be disbursed in accordance with the following terms and conditions: (i) Request for Advance. Borrower shall furnish to Lender, with ------------------- respect to each request for a Construction Holdback Advance, a request for advance ("Request for Advance"), on forms approved by Lender, duly signed and sworn to with all blanks appropriately filled in, setting forth such details concerning construction of the Improvements as Lender shall require, including without limitation A-1 (a) a detailed breakdown of the applicable percentages of completion and costs of the various phases of construction of the Improvements, showing the amounts expended to date for such construction and the amounts then due and unpaid, an itemized estimate of the amount necessary to complete construction of the Improvements in their entirety, and a certification by Borrower and Lender's inspector (as defined hereinafter) that construction of the Improvements to the date of such certificate substantially complies with the Plans and Sources and Uses Schedule, that no Event of Default has occurred and is continuing, and that all representations made by the Borrower in any of the Loan Documents are correct in all material respects as of the date of the Request for Advance; (b) a list of the names and addresses of all materials dealers, laborers and subcontractors with whom written agreements have been made by Borrower or Contractor; (c) receipted invoices or bills of sale and conditional partial releases of lien (on forms approved by Lender (e.g. the forms set forth on Schedule D attached hereto and made a part hereof)) from each materials dealer, - ---------- laborer and subcontractor who has done work or furnished materials for construction of the portion of the improvements covered by each such Request for Advance, together with unconditional releases of lien (on forms approved by Lender (e.g. the forms set forth on Schedule D attached hereto and made a part ---------- hereof)) from each materials dealer, laborer and subcontractor who has done work or furnished materials for construction of the portion of the Improvements covered by each prior Request for Advance theretofore funded by Lender, it being understood and agreed that the failure by Borrower to deliver such unconditional releases as to any Construction Holdback Advance as of the next succeeding Construction Holdback Advance shall entitle Lender, in Its sole discretion, to withhold all further Construction Holdback Advances until such time as unconditional releases of lien have been received from each materials dealer, laborer and subcontractor who has theretofore done work or furnished materials for construction of the Improvements; (d) a certificate or statement completed and duly executed by the Contractor and the Architect with respect to the status of construction and the amount of Construction Holdback Advance in the form of the Application and Certificate for Payment (AIA documents G702 and G703); (e) to the extent that any Request for Advance relates to costs for building materials, equipment or other Personal Property, evidence that such building materials, equipment or other Personal Property have been incorporated into the Improvements or have been delivered to Borrower and stored and insured in a manner satisfactory to Lender, (f) such endorsements to the Title Policy (including CLTA Indorsement No. 102.7 upon completion of foundations) and such other documents and information relating to the Project as Lender may reasonably request, and (g) If not previously furnished to Lender, evidence of all insurance required by the Loan Documents and construction bonding required hereunder. (ii) Additional Disbursement Conditions applicable to all Requests for ----------------------------------------------------------------- Advances. Subject to the provisions of this Note, Lender shall disburse - -------- Construction Holdback Advances directly to Borrower or, at Lender's option, directly to Contractor or to any subcontractor (or, at Lender's option, if an Event of Default has occurred under any of the Loan Documents, or if the Loan is "out of balance" under the terms of subparagraph(a) below, then to Lender itself --------------- and/or through Lender's Inspector; provided that nothing herein shall be deemed Lender's commitment to disburse a Construction Holdback Advance if the Loan is not "in balance" or if any other Event of Default shall have occurred), within seven (7) business days after (1) Lender has received Borrower's Request for Advance, completed to Lender's reasonable satisfaction with all required supporting documentation, (2) Lender has received a nonrefundable processing fee in immediately available funds in the amount of Two Hundred Dollars ($200) for processing the Request for Advance, which amount shall not be applied towards any of Borrower's obligations under this Note or the other Loan Documents, and (3) all of the following conditions have been satisfied with respect to such Construction Holdback Advance: (a) Loan Balancing. Lender shall be obligated to disburse -------------- the Construction Holdback Advance only when such portion of the Loan is "in balance." The Construction Holdback Advance portion of the Loan shall be "in balance" only at such times as Borrower has invested sufficient funds into the payment of Project Costs so that, in Lender's reasonable judgment, (a) taking into account the disbursement of the Interest Reserve Holdback Advance, the undisbursed portion of the Construction Holdback Advance shall be sufficient to complete and maintain the Project and pay all Project Costs until repayment in full of such portion of the Loan. A-2 and (b) the undisbursed portion of (i) the Construction Holdback Advance proceeds allocated to the cost category described in the Sources and Uses Schedule, plus (ii) the Construction Holdback Advance proceeds in the applicable contingency cost category (if any) of such Sources and Uses Schedule (to the extent such contingency funds have not theretofore been set aside by Lender for the payment of overruns in other cost categories) shall be sufficient to pay in full the costs to which such amount is allocated. The determination as to whether or not the Loan is "in balance" may be made by Lender at anytime, including with each Request for Advance. Upon twenty-one (21) days' written notice from Lender that the Construction Holdback Advance portion of the Loan is not "in balance", Borrower shall either (x) deposit with Lender, in cash or cash equivalents, the amount that Lender, in its reasonable opinion, deems necessary to put the Loan "in balance" or (y) furnish Lender with paid invoices, bills and receipts indicating that Borrower has paid, from Borrowers own funds, for the Project Costs in a sufficient amount to put the Loan "in balance." Any amounts which are deposited with Lender to put the Loan "in balance' shall be the next funds disbursed by Lender, subject to the terms and conditions of this Note. No interest shall be paid by Lender on such deposited funds. Any failure or refusal by Borrower to comply with the provisions of this subparagraph shall be deemed a material default under this Note and an Event of Default under the Loan Documents. (b) Completion of Project. Borrower is diligently --------------------- prosecuting to completion in a good and workmanlike manner the construction of the Improvements in substantial compliance with the Sources and Uses Schedule, Plans and all applicable laws (including, without limitation, city, county, state and federal laws, building ordinances or regulations including, without limitation, all laws, ordinance and regulations relating to zoning, fire, life-safety systems and earthquakes), and the Improvements covered by the subject Request for Advance shall have been so completed. The progress of Borrower's construction shall be, in Lender's reasonable estimation, sufficient so that the Improvements shall be completed on or prior to the Completion Date (as defined in the Loan Agreement). Subject to the terms and conditions of the Loan Documents, any damage to the Project shall have been promptly repaired or restored to its condition prior to such damage, reasonable wear and tear excepted, in accordance with the Loan Documents. (c) Taxes and Liens. All property taxes, assessments and --------------- senior liens, if any are permitted by the terms of the Loan Documents, on the Project shall be paid current, and no liens, encumbrances, or other matters of record which have not been previously approved in writing by Lender or expressly permitted by the terms of the Deed of Trust shall have been recorded against the Project. (d) Eminent Domain. There shall have been no action taken -------------- against the Project with regard to the powers of, eminent domain. (e) Bankruptcy. There shall have been no filing by or ---------- against Borrower, of any petition for bankruptcy, for reorganization, for the appointment of a receiver or trustee or for the making of an assignment for the benefit of creditor, which petition is not withdrawn or dismissed, or which appointment or assignment is not canceled and terminated prior to the funding of such Construction Holdback Advance. The parties acknowledge and agree that this Agreement is a contract to make a loan (extend debt financing or ------------------------------------------------------ finance accommodations) within the meaning of the Bankruptcy Code 11 -------------------------------------------------------------------- U.S.C. Section 365(c)(2) and Section 365(e)(2)(B). ------------------------------------------------- (f) Plans, Sources and Uses. Lender shall have received and ----------------------- approved the Plans, Sources and Uses Schedule and any modifications thereto. (g) [Intentionally Omitted.] A-3 (h) Payment of Project Costs. Lender shall have received ------------------------ evidence that either (i) all Project Costs have been paid in full (including, but not limited to, copies of paid invoices and unconditional lien releases), or (ii) unpaid Project Costs shall be paid from the proceeds of the requested Construction Holdback Advance (including, but not limited to, copies of invoices and conditional lien releases). (i) Lender's Inspector. Throughout the course of ------------------ construction of the Improvements, Lender shall have the right to employ, at Borrower's sole cost end expense, a third-party construction consultant ("Lender's Inspector") to review as agent for Lender all construction activities, undertaken in regard to the Property, which inspector shall certify or otherwise indicate to Lender that construction of the Improvements to the date of each Request for Advance and certificate submitted by Borrower, and that such construction complies with the Plans and Sources and Uses Schedule, with such certificate and indication from such inspector to be a further condition precedent to Lender's approval of Borrower's then-submitted Request for Advance. In addition, Lender may elect to have its in-house construction consultant review such construction activities, and if Lender so elects then Borrower shall pay to Lender the imputed fee for such consultant, which fee shall be calculated to be twenty percent (20%) of the fee of Lender's Inspector, or, if Lender has not employed a Lender's Inspector, such fee shall be Five Hundred Dollars($500). j) Documents. To the extent not previously provided to --------- Lender, Borrower shall have delivered to Lender: i) Building Permits: Assignment. The building ---------------------------- permit(s) and any other permits, licenses and approvals (collectively, the "Permits") which may be required by the governmental authorities having or exercising jurisdiction over the construction of the Improvements, in form and substance satisfactory to Lender, and, if requested by Lender, an assignment to Lender on Lender's form of Borrower's interest in all such Permits, whether already issued to Borrower or to be obtained by Borrower in the future. ii) Conditional Use Permits. Evidence satisfactory ----------------------- to Lender that all conditions under any conditional use permit relating to the Project have been satisfied. iii) Plans: Architect's Agreement. The first page ---------------------------- of a copy of the Plans signed, and all other pages thereof initialed, by Borrower, Contractor and, if required by Lender, any tenant under a major lease, together with a copy of Borrower's agreements with the applicable Architects (such agreements, collectively, the "Architect's Agreement"), each in form acceptable to Lender. iv) Construction Contract. An executed copy of the --------------------- general construction contract and a copy of each subcontract entered into by Borrower or by the Contractor, as the case may be, having a contract price equal to or greater than $10,000 (such agreements, collectively, the "Construction Contract"), each in form acceptable to Lender. v) Assignment of Plans and Architect's Agreement. --------------------------------------------- An assignment to Lender on Lender's form of Borrower's interest in the Plans and the Architect's Agreement, containing each Architect's written consent thereto. vi) Assignment of Construction Contract. An ----------------------------------- assignment to Lender on Lender's form of the Construction Contract, containing the consent thereto of Contractor and each other party to each Construction Contract. A-4 vii) Utilities. Letters from local utility --------- companies or the governmental authorities having or exercising jurisdiction over the Project stating that electric, gas, sewer, water and telephone facilities will be available to the Project upon completion of the Improvements. viii) Project Schedule. A project schedule for ---------------- completion of the Improvements, updated monthly with each request for a Construction Holdback Advance, initialed by Borrower, Contractor, and, if requested, any tenant under a major lease. (iii) Change Orders. Neither Borrower nor Contractor shall permit any ------------- material amendments or modifications of the Plans, the Construction Contract or any subcontracts, or the performance of any work pursuant to such amendments or modifications without Lender's prior written consent thereto. Any such amendment or modification shall be deemed "material" if (a) it would result in an increase in the price payable under the Construction Contract or under any of the subcontracts in excess of Twenty-Five Thousand Dollars ($25,000), or (b) when added to the cumulative amount of all net increases in the prices payable under such Construction Contract or under all such subcontracts resulting from all such amendments and modifications theretofore permitted by Borrower or Contractor, it would result in a net increase in the total price payable to Contractor under its Construction Contract or the total price payable under all such subcontracts in excess of Twenty-Five Thousand Dollars ($25,000), or (c) it would involve a material structural or square footage change. Regardless of whether Lenders consent to any such amendment or modification is required hereunder, Borrower shall deposit with Lender, promptly upon Borrower's receipt of a written request from Lender, cash or current funds in an amount equal to any increase in the contract price resulting from such amendment or modification; such funds shall be disbursed by Lender in accordance with the terms set forth in this Note. (iv) Interest on Construction Holdback Advance. Each Construction ----------------------------------------- Holdback Advance shall include specific requested amounts for interest payable hereunder for the remaining portion of the calendar month in which the Advance is made, plus any fees, costs, expenses and other amounts payable to Lender in connection with such Advance, including without limitation Lender's Inspector's fees; provided, however, that with respect to any Request for Advance submitted to Lender that is otherwise acceptable to Lender and complies with the requirements hereof, but does not include such additional amounts, Lender may, but shall not be obligated to, determine the amount of such interest, fees, costs, expenses and other amounts due or payable to Lender and, at Lender's discretion, increase the amount of the Construction Holdback Advance, and upon Lender's delivery of written notice of such determination to Borrower, the subject Request for Advance shall be deemed to have been amended to increase its amount by the amount of such additional Items and amounts. (v) Final Construction Holdback Advances. Subject to the provisions of ------------------------------------ the Loan Documents, and so long as Borrower is not in default in the due, prompt and complete performance or observance of any of the conditions, covenants, or obligations applicable to Borrower contained in the Loan Documents, a disbursement of the Loan proceeds totaling ten percent (10%) of the amount of the Construction Contract, comprising the Contractor's final draw request thereunder, will be disbursed upon the satisfaction of the following: (a) the Improvements shall have been completed in accordance with the terms of this Note (including, without limitation, the disbursement conditions set forth in subparagraph (iii) above) and the Loan Agreement, and (b) Borrower shall have - ------------------ delivered or caused to be delivered to Lender (i) unconditional lien releases covering all Construction Holdback Advances previously delivered to or on account of Borrower together with conditional lien releases covering the final Construction Holdback Advance, (ii) such additional title insurance with endorsements thereto as Lender may require, with a liability limit of not less than the Loan Amount, issued by the Title Insurer, with coverage and in form satisfactory to Lender, insuring Lender's interest under the Deed of Trust as a valid lien on the Project, excepting only such items as shall have been approved in writing by lender and providing affirmative insurance therein against mechanics' liens, materialmen's liens or claims or liens in the nature thereof on account of any construction of the Improvements, (iii) a certificate of occupancy acceptable to Lender A-5 covering the improvements, and (iv) the Architect's written certification that the Improvements have been completed in accordance with the Plans therefor, that all utility connections for the Improvements have been completed and the Improvements are otherwise fully operational and fully ready for occupancy and use. (vi) Excess Portions of Holdback for Construction. Without limiting -------------------------------------------- the foregoing, any and all portions of the Holdback for Construction remaining undisbursed following the final disbursement pursuant to subparagraph (v) above shall be disbursed to Borrower once Lender shall have received (a) unconditional lien releases with respect to all of the Improvements and all Construction Holdback Advances, and (b) evidence satisfactory to Lender in its sole and absolute discretion, but acting in good faith, that all of the conditions set forth in Section 2 of this Exhibit A have been satisfied and that all of the improvements have been completed pursuant to the Sources and Uses Schedule, in a good or workmanlike manner, in accordance with all Laws, and otherwise in a manner acceptable to Lender in its sole discretion. A-6 SCHEDULE C SOURCES AND USES Aspect Communications 9/21/01 Budget Line Item Budget SOURCES: Borrower Cash Equity $ 22,435,000 Lender: Initial Funding $ 23,000,000 Holdback for Construction $ 2,000,000 Holdback for Interest Reserve $0 Holdback for Occupancy Earnout $0 Holdback for Leasing $0 Total Funding: $ 2,565,000 USES: HOLDBACK FOR CONSTRUCTION Hard Costs - DPR Retentions $ 1,254,000 HVAC - Electrical - Miscellaneous Allowances 204,000 Others (43,000) ------------ Total Hard Costs $ 1,415,000 Soft Costs: Architectural & Engineering 130,000 Permits and Fees - Performance Bond - Others 52,000 Developer Overhead - ------------ Total Soft Costs $ 182,000 Improvements: Interior Construction - Interior Finishes - ------------ Total Improvement Costs $ - Total Costs $ 1,597,000 Lender Contingency 403,000 28% ------------ HOLDBACK FOR CONSTRUCTION $ 2,000,000 Initial Funding: $ 23,000,000 Borrower Equity: $ 22,435,000 Total Uses: $ 2,565,000 SCHEDULE D Approved Forms CONDITIONAL WAIVER AND RELEASE UPON PROGRESS PAYMENT Upon receipt by the undersigned of a check from ________ in the sum of $_______ payable to ______________________ and when the check has been properly endorsed and has been paid by the bank upon which it is drawn, this document shall become effective to release any mechanic's lien, stop notice, or bond right the undersigned has on the job of __________________ located at ________________ to the following extent. This release covers; a progress payment for labor, services, equipment or material furnished to __________________ through ______________, 20____,only, and does not cover any retentions retained before or after the release date; extras furnished before the release date for which payment has not been received; extras or items furnished after the release date. Rights based upon work performed or items furnished under a written change order which has been fully executed by the parties prior to the release date are covered by this release unless specifically reserved by the claimant in this release. This release of any mechanic's lien, stop notice, or bond right shall not otherwise affect the contract rights, including rights between parties to the contract based upon a rescission, abandonment, or breach of the contract, or the right of the undersigned to recover compensation for furnished labor, services, equipment, or material covered by this release if that furnished labor, services, equipment, or material was not compensated by the progress payment. Before any recipient of this document relies on it, said party should verify evidence of payment to the undersigned. Dated; _______________,20 __ ____________________________ (Company Name) By:_______________________ (Title) UNCONDITIONAL WAIVER AND RELEASE UPON PROGRESS PAYMENT NOTICE: THIS DOCUMENT WAIVES RIGHTS UNCONDITIONALLY AND STATES THAT YOU HAVE BEEN PAID FOR GIVING UP THOSE RIGHTS, THIS DOCUMENT IS ENFORCEABLE AGAINST YOU IF YOU SIGN IT, EVEN IF YOU HAVE NOT BEEN PAID. IF YOU HAVE NOT BEEN PAID, USE A CONDITIONAL RELEASE FORM. The undersigned has been paid and has received a progress payment in the sum of $___________ for labor, services, equipment or material furnished to _____________ [Your customer] on the job of __________________ [Owner] located at _______________ [Job Description] and does hereby release any mechanics' lien, stop notice or bond right that the undersigned has on the above-referenced job to the following extent. This release covers a progress payment for labor, services, equipment, or materials furnished to __________________ [Your Customer] through _________________, 20 __ [Date] only, and does not cover any retentions retained before or after the release date; extras furnished before the release date for which power has not been received; extras or item furnished after the release date. Rights based upon work performed or items furnished under a written change order which has been fully executed by the parties prior to the release date are covered by this release unless specifically reserved by the claimant in this release. This release of any mechanic's lien, stop notice, or bond right shall not otherwise affect the contract rights, including rights between parties to the contract based upon a rescission, abandonment, or breach of the contract, or the right of the undersigned to recover compensation for furnished labor, services, equipment, or material covered by this release if that furnished labor, services, equipment, or material was not compensated by the progress payment. Dated;_______________, 20 __ __________________________ (Company Name) By:__________________ (Title) CONDITIONAL WAIVER AND RELEASE UPON FINAL PAYMENT Upon receipt by the undersigned of check No.____ from ___________ in the sum of $ ____________ payable to ____________, and when the check has been properly endorsed and has been paid by the bank upon which it is drawn, this document shall become effective to release any mechanic's lien, stop notice or bond right the undersigned has on the job of ______________ located at ________________ . This release covers the final payment to the undersigned for all labor, services, equipment or material furnished on the job, except for disputed claims for additional work in the amount of $_________. Before any recipient of this document relies on it, said party should verify evidence of payment to the undersigned. DATED:_________________ __________________________________ (Company Name) By: __________________________ Title: __________________________ UNCONDITIONAL WAIVER AND RELEASE UPON FINAL PAYMENT -------------------------- The undersigned has been paid in full for all labor, services, equipment, or material furnished to ______________ on the job of ________________ located at __________________, and does hereby waive and release any right to a mechanic's lien, stop notice, or any right against a labor or material bond on the job, except for disputed claims for extra work in the amount of $__________. DATED:_________________ __________________________________ (Company Name) By: __________________________ Title: __________________________ NOTICE: THIS DOCUMENT WAIVERS RIGHTS UNCONDITIONALLY AND STATES THAT YOU HAVE BEEN PAID FOR GIVING UP THOSE RIGHTS. THIS DOCUMENT IS ENFORCEABLE AGAINST YOU IF YOU SIGN IT, EVEN IF YOU HAVE NOT BEEN PAID. IF YOU HAVE NOT BEEN PAID, USE A CONDITIONAL RELEASE FORM. EX-10.87 6 dex1087.txt AMENDMENTS TO THE COMERICA BANK CREDIT AGREEMENT Exhibit 10.87 AMENDMENT NO. 1 AMENDMENT TO CREDIT AGREEMENT ----------------------------- This Amendment dated as of the 13th day of November, 2001 by and between Aspect Communications Corporation, a California corporation ("Company") and Comerica Bank-California, a California banking corporation ("Bank"). WITNESSETH: WHEREAS, Company and Bank entered into a Credit Agreement dated June 15, 2001 ("Agreement"). WHEREAS, Company and Bank desire to amend the Agreement as set forth herein. NOW, THEREFORE, the Company and the Bank agree as follows: 1. The definition of "Cash Equivalents" set forth in Section 1 of the Agreement is amended to read in its entirety as follows: "'Cash Equivalents' shall mean (i) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof, and federal agencies such as Federal Home Loan Bank, Fannie Mae, Federal Home Home Loan Mortgage Corp, and Federal Farm Credit Banks; all having maturities of not more than three years from the date of acquisition all of which would be classified as investments available for sale in accordance with FASB 115 and GAAP. (ii) marketable direct obligations issued by any State of the United States of America or any local government or other political subdivision thereof rated (at the time acquisition of such security) at least A- by Standard & Poor's Ratings Group ("S&P") or the equivalent thereof by Moody's Investors Service, Inc. ("Moody's") having maturities of not more than three years from the date of acquisition all of which would be classified as investments available for sale in accordance with FASB 115 and GAAP. (iii) U.S. dollar denominated time deposits, certificates of deposit and bankers' acceptances of (x) Bank, (y) any domestic commercial bank of recognized standing having capital and surplus in excess of $500,000,000 or (z) any bank whose short-term commercial paper rating (at the acquisition of such security) by S&P is at least A-1 or the equivalent thereof or by Moody's is at least P-1 or the equivalent thereof (any such bank, an "Approved Bank"). These U.S. dollar denominated time deposits and bankers' acceptances should have maturities of not more than six months from the date of acquisition, while the certificates of deposit should have a maximum maturity of 1 year. (iv) commercial paper and variable or fixed rate notes issued by Bank or any Approved Bank or by the parent company of Bank or any Approved Bank and commercial paper and variable fixed rate notes issued by, or guaranteed by, any industrial or financial company with a short-term commercial paper rating (at the time acquisition of such security) of at least A 1 or the equivalent thereof by S&P or at least P 1 or the equivalent thereof by Moody's, or issued by or guaranteed by any industrial or financial company with a long-term unsecured debt rating (at the time of acquisition of such security) of at least A- or the equivalent thereof by S&P or the equivalent thereof by Moody's having maturities of not more than three years from the date of acquisition all of which would be classified as investments available for sale in accordance with FASB 115 and GAAP. (v) repurchase agreements with Bank or any Approved Bank maturing within one year from the date of acquisition that are fully collateralized by investment instruments that would otherwise be Cash Equivalents. (vi) Asset backed securities with a AAA rating minimum, as rated by 2 Nationally Recognized Securities Rating Organizations, at time of acquisition, having maximum effective durations or expected average lives of not more than three years from the date of acquisition all of which would be classified as investments available for sale in accordance with FASB 115 and GAAP. (vii) Asset backed commercial paper with a long-term rating of AAA or a short term rating of A1/P1 by S&P, at time of acquisition all of which would be classified as investments available for sale in accordance with FASB 115 and GAAP. (viii) All of the above which would be classified as investments available for sale in accordance with FASB 115 and GAAP. B. For securities with announced calls, put dates, remarketing dates or auction dates, the maturity shall be deemed to be the announced call date, put date, remarketing date or auction date provided that the principal value of the security to be received on the call date, put date, remarketing date or auction date shall be a fixed amount." 2. Company hereby represents and warrants that, after giving effect to the amendment contained herein, (a) execution, delivery and performance of this Amendment and any other documents and instruments required under this Amendment or the Agreement are within Company's corporate powers, have been duly authorized, are not in contravention of law or the terms of Company's Certificate of Incorporation or Bylaws, and do not require the consent or approval of any governmental body, agency, or authority; and this Amendment and any other documents and instruments required under this Amendment or the Agreement, will be valid and binding in accordance with their terms; (b) the continuing representations and warranties of Company set forth in Sections 6.1 through 6.5 and 6.7 through 6.10 of the Agreement are true and correct on and as of the date hereof with the same force and effect as made on and as of the date hereof; (c) the continuing representations and warranties of Company set forth in Section 6.6 of the Agreement are true and correct as of the date hereof with respect to the most recent financial statements furnished to the Bank by Company in accordance with Section 7.1 of the Agreement; and (d) no event of default, or condition or event which, with the giving of notice or the running of time, or both, would constitute an event of default under the Agreement, has occurred and is continuing as of the date hereof. 3. This Amendment shall be effective upon execution of this Amendment by Company and Bank. 4. Except as modified hereby, all of the terms and conditions of the Agreement shall remain in full force and effect. WITNESS the due execution hereof on the day and year first above written. COMMERCIAL BANK-CALIFORNIA ASPECT COMMUNICATIONS CORPORATION By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE] --------------------------------- ------------------------------- Its: V.P. Its: CFO --------------------------------- ------------------------------- AMENDMENT NO. 2 AMENDMENT TO CREDIT AGREEMENT ----------------------------- This Amendment dated as of the 26th day of December, 2001 by and between Aspect Communications Corporation, a California corporation ("Company") and Comerica Bank- California, a California banking corporation ("Bank"). WITNESSETH: WHEREAS, Company and Bank entered into a Credit Agreement dated June 15, 2001, as amended by an Amendment dated November 13, 2001 ("Agreement"). WHEREAS, Company and Bank desire to amend the Agreement as set forth herein. NOW, THEREFORE, the Company and the Bank agree as follows: 1. The definition of "Base Adjusted Tangible Net Worth" set forth in Section 1 of the Agreement is amended to read in its entirety as follows: "'Base Adjusted Tangible Net Worth' shall initially mean $165,000,000. On the last day of each fiscal quarter of Company (beginning December 31, 2001), Base Adjusted Tangible Net Worth shall increase by seventy five percent (75%) of Net Income for the quarter then ended; provided that for purposes of determining Base Adjusted Tangible Net Worth if Net Income is less than zero for any fiscal quarter, it shall be deemed to be zero for such fiscal quarter. In addition effective upon the issuance after December 31, 2000 by Company or any of its Subsidiaries of any Equity Interests (other than Equity Interests issued to sellers in connection with a Permitted Acquisition) or the incurrence of any Subordinated Debt, Base Adjusted Tangible Net Worth shall increase by an amount equal to one hundred percent (100%) of the Net Cash Proceeds of such equity issuance or issuance of Subordinated Debts." 2. The definition of "Unrestricted Cash" set forth in Section 1 of the Agreement is Amended to read in its entirety as follows: "'Unrestricted Cash' shall means as of any date of determination, aggregate cash and Cash Equivalents of Company and its Subsidiaries which is not subject to any lien or security in favor of any person." 3. Section 7.12 of the Agreement is amended to read in its entirety as follows: "7.12--Maintain EBITDA of not less than the following amounts for fiscal quarters specified below: Fiscal Quarter Ending Amount ---------------------------------------------------------------------- March 31, 2002 $0 June 30, 2002 $2,500,000 September 30, 2002 and each fiscal quarter and thereafter $5,000,000" 4. Section 7.14 of the Agreement is amended to read in its entirety as follows: "Maintain as of the end of each month a Leverage Ration of not more than 1.25 to 1.0." 5. Company has informed the bank that it may violate the provision of Section 7.12 for the period ended December 31, 2001. The Bank hereby waives any default arising from any violation of the provisions of Section 7.12 for the period ended December 31, 2001. This waiver shall not act as a consent or waiver of any other transaction, act or omission, whether related or unrelated thereto, including any noncompliance with such covenant for any period other than the period ending December 31, 2001. This waiver shall not extend to or affect any obligation, covenant, agreement or default not expressly waived hereby. 6. Company hereby represents and warrants that, after giving effect to the amendments and waivers contained herein, (a) execution, delivery and performance of this Amendment and any other documents and instruments required under this Amendment or the Agreement are within Company's corporate powers, have been duly authorized, are not in contravention of law or the terms of Company's Certificate of Incorporation or Bylaws, and do not require the consent or approval of any governmental body, agency, or authority; and this Amendment and any other documents and instruments required under this Amendment or the Agreement, will be valid and binding in accordance with their terms; (b) the continuing representations and warranties of Company set forth in Sections 6.1 through 6.5 and 6.7 through 6.10 of the Agreement are true and correct on and as of the date hereof with the same force and effect as made on and as of the date hereof; (c) the continuing representations and warranties of respect to the most recent financial statements furnished to the Bank by Company in accordance with Section 7.1 of the Agreement; and (d) no event of default, or condition or event which, with the giving of notice or the running of time, or both, would constitute an event of default under the Agreement, has occurred and is continuing as of the date hereof. 7. This Amendment shall be effective upon execution of this Amendment by Company and Bank and payment by Company to Bank of a non-refundable amendment fee in the amount of $5,000.00. 8. Except as modified hereby, all of the terms and conditions of the Agreement shall remain in full force and effect. WITNESS the due execution hereof on the day and year first above written. COMMERCIAL BANK-CALIFORNIA ASPECT COMMUNICATIONS CORPORATION By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE] --------------------------------- ------------------------------- Its: V.P. Its: EVP, CFO & CAO --------------------------------- ------------------------------- EX-21.1 7 dex211.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 ASPECT COMMUNICATIONS CORPORATION SUBSIDIARIES OF THE REGISTRANT--JURISDICTION OF INCORPORATION Aspect Communications AG Switzerland Aspect Communications A/S Denmark Aspect Communications B.V. The Netherlands Aspect Communications Europe B.V. The Netherlands Aspect Communications Canada Company Canada Aspect Communications GmbH Germany Aspect Communications (HK) Ltd. Hong Kong Aspect Communications UK Limited United Kingdom Aspect Communications N.V. Belgium Aspect Communications (S) PTE Ltd. Singapore Aspect Communications Pty. Ltd. Australia Applications Specific Solutions for Telecommunications SAS France Aspect Telecommunications Technology Ltd. Cayman Islands Aspect Communications de Mexico, S. de R.L. de C.V. Mexico Aspect Telecommunications International Corporation United States Aspect Teleservices Corporation United States Aspect Telecommunications FSC, Inc. United States Aspect Communications K.K. Japan EX-23.1 8 dex231.txt INDEPENDENT AUDITOR'S CONSENT EXHIBIT 23.1 ASPECT COMMUNICATIONS CORPORATION INDEPENDENT AUDITORS' CONSENT 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, 333-38041, 333-91681, 333-53195, 333-33646, 333-50178, and 333-57545 on Form S-8 and Nos. 333-19893, 333-31381, 333-38909, 333-52093, 333-66461 and 333-74603 on Form S-3 of Aspect Communications Corporation of our report dated January 21, 2002 (March 9, 2002 as to Note 20), included in this Annual Report on Form 10-K of Aspect Communications Corporation for the year ended December 31, 2001. /s/ DELOITTE & TOUCHE LLP San Jose, California March 25, 2002 -----END PRIVACY-ENHANCED MESSAGE-----