SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
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[X]Definitive Proxy Statement
[_]Definitive Additional Materials
[_]Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
Aspect Communications Corporation
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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or the Form or Schedule and the date of its filing.
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Notes:
[LOGO OF ASPECT COMMUNICATION]
April 6, 2001
To Our Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders of
Aspect Communications Corporation, to be held on May 16, 2001. Enclosed are
the Secretary's notice of this meeting, a proxy statement, and a form of
proxy. Please note that the meeting will be held at 4:00 p.m., at the
Company's facilities located at 1310 Ridder Park Drive, San Jose, California
95131.
Details of the business to be conducted at the meeting are given in the
attached Notice of Annual Meeting of Shareholders and Proxy Statement.
It is important that your shares be represented at the meeting, so please
complete and return the enclosed proxy card as soon as possible.
Sincerely,
/s/ Beatriz V. Infante
Beatriz V. Infante
Chairman, President,
and Chief Executive Officer
ASPECT COMMUNICATIONS CORPORATION
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Notice of Annual Meeting of Shareholders
May 16, 2001
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Aspect
Communications Corporation (the Company), a California corporation, will be
held on May 16, 2001 at 4:00 p.m., at 1310 Ridder Park Drive, San Jose,
California 95131, for the following purposes:
1. To elect seven directors to serve for the ensuing year and until their
successors are elected.
2. To approve an amendment to the 1999 Equity Incentive Plan to increase
the number of shares of common stock reserved for issuance thereunder by
2,450,000 shares.
3. To approve an amendment to the Aspect Incentive Plan.
4. To ratify the appointment of Deloitte & Touche LLP as independent
auditors of the Company for the fiscal year ending December 31, 2001.
5. To transact such other business as may properly come before the meeting
and any adjournment(s) thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on March 19, 2001, are
entitled to notice of and to vote at the Annual Meeting and any adjournment(s)
thereof.
To assure your representation at the Annual Meeting, you are urged to mark,
sign, date, and return the enclosed proxy card as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. Any shareholder attending
the Annual Meeting may vote in person even if such shareholder returned a
proxy card.
/s/ Betsy Rafael
Betsy Rafael,
Executive Vice President, Finance,
Chief Financial Officer, and Secretary
San Jose, California
April 6, 2001
ASPECT COMMUNICATIONS CORPORATION
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 16, 2001
and
ANNUAL FINANCIAL REPORT TO SHAREHOLDERS
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TABLE OF CONTENTS
PROXY STATEMENT
Page
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INFORMATION CONCERNING SOLICITATION AND VOTING........................... 1
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS.................................. 2
PROPOSAL NO. 2 -- AMENDMENT TO THE 1999 EQUITY INCENTIVE PLAN............ 5
PROPOSAL NO. 3 -- AMENDMENT TO THE ASPECT INCENTIVE PLAN................. 9
PROPOSAL NO. 4 -- RATIFICATION OF THE APPOINTMENT OF INDEPENDENT
AUDITORS................................................................ 10
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT.............. 11
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 14
EXECUTIVE COMPENSATION................................................... 15
COMPENSATION COMMITTEE REPORT............................................ 18
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.............. 19
AUDIT COMMITTEE REPORT................................................... 20
AUDITOR FEES............................................................. 21
COMPANY STOCK PRICE PERFORMANCE.......................................... 22
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934..... 23
STOCK OPTION PLAN INFORMATION............................................ 23
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS............................ 24
OTHER MATTERS............................................................ 24
APPENDIX A -- AUDIT COMMITTEE CHARTER.................................... A-1
ANNUAL FINANCIAL REPORT TO SHAREHOLDERS
SELECTED CONSOLIDATED FINANCIAL DATA..................................... F-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... F-2
CONSOLIDATED BALANCE SHEETS as of December 31, 2000 and 1999............. F-14
CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31,
2000, 1999 and 1998..................................................... F-15
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY for the years ended
December 31, 2000, 1999 and 1998........................................ F-16
CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31,
2000, 1999 and 1998..................................................... F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... F-18
INDEPENDENT AUDITORS' REPORT............................................. F-35
SELECTED QUARTERLY FINANCIAL DATA (unaudited)............................ F-36
CORPORATE INFORMATION
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ASPECT COMMUNICATIONS CORPORATION
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PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
General
The enclosed proxy is solicited on behalf of the Board of Directors of Aspect
Communications Corporation (Aspect or the Company) for use at the Annual
Meeting of Shareholders (Annual Meeting) to be held May 16, 2001, at 4:00
p.m., or at any adjournment(s) thereof, for the purposes set forth herein and
in the accompanying Notice of Annual Meeting of Shareholders. The Annual
Meeting will be held at the Company's facilities located at 1310 Ridder Park
Drive, San Jose, California 95131. The telephone number at that location is
(408) 325-2200.
These proxy solicitation materials were mailed on or about April 6, 2001, to
all shareholders entitled to vote at the Annual Meeting. The cost of
soliciting these proxies will be paid by the Company. The Company has retained
the services of Georgeson Shareholder Communications Inc. (Georgeson) to
solicit proxies and distribute materials to brokerage houses, banks,
custodians, and other institutional owners. The Company will pay Georgeson a
fee of approximately $7,500 for these services, plus expenses. In addition,
the Company will reimburse brokerage firms and other persons representing
beneficial owners of shares for their expenses in forwarding solicitation
materials to such beneficial owners. The Company may conduct further
solicitation personally, by telephone, or by facsimile through its officers,
directors, and regular employees, none of whom will receive additional
compensation for assisting with the solicitation.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use, by delivering to the Company, at its
principal office at 1310 Ridder Park Drive, San Jose, California 95131
(Attention: Betsy Rafael, Executive Vice President, Finance, Chief Financial
Officer, and Secretary), a written notice of revocation or a duly executed
proxy card bearing a later date, or by attending the Annual Meeting and voting
in person.
Voting and Solicitation
Every shareholder voting for the election of directors may cumulate such
shareholder's votes and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of shares held by
such shareholder or distribute the shareholder's votes on the same principle
among as many candidates as the shareholder thinks fit, provided that votes
may not be cast for more than seven candidates. However, no shareholder shall
be entitled to cumulate votes for a candidate unless the candidate's name has
been placed in nomination prior to the voting and the shareholder, or any
other shareholder, has given notice at the Annual Meeting prior to the voting
of the intention to cumulate the shareholder's votes. On all other matters,
each share has one vote.
Only shareholders of record at the close of business on March 19, 2001, are
entitled to notice of and to vote at the Annual Meeting. At the record date,
51,614,450 shares of the Company's common stock, with a par value of $.01 per
share, were issued and outstanding.
The required vote for approval of each proposal submitted at the Annual
Meeting is indicated in the section entitled "Required Vote" for each item.
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the Inspector of Elections with the assistance of the Company's transfer
agent. The Inspector of Elections will also determine whether or not a quorum
is present. The required quorum is a majority of the shares issued and
outstanding on the record date, represented either in person or by proxy.
Votes that are cast for or against a
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proposal, abstentions, and broker non-votes are counted as present for the
purpose of determining the presence of a quorum for the transaction of
business. For purposes of determining the number of shares voting on a
particular proposal, votes cast for or against a proposal and abstentions are
counted as shares voting, whereas broker non-votes are not counted as shares
voting. Accordingly, an abstention will have the same effect as a vote against
the proposal, and broker non-votes can have the effect of preventing approval
of certain proposals where the number of affirmative votes, though a majority
of the votes cast, does not constitute a majority of the required quorum.
Any proxy which is returned using the proxy card enclosed and which is not
marked as to the particular item will be voted for the election of directors,
for the amendment to the 1999 Equity Incentive Plan, for the approval of the
Aspect Incentive Plan, for the ratification of the appointment of the
designated independent auditors and as the proxy holders deem advisable on
other matters that may come before the meeting, as the case may be with
respect to the item not marked.
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
Nominees
A board of seven directors will be elected at the meeting. Unless otherwise
instructed, the proxy holders will vote the proxies received by them for the
seven nominees named below. In the event that any nominee of the Company is
unable to or declines to serve as a director at the time of the Annual
Meeting, the proxies will be voted for any nominee who shall be designated by
the present Board of Directors to fill the vacancy. In the event that
additional persons are nominated for election as directors, the proxy holders
intend to vote all proxies received by them in such a manner in accordance
with cumulative voting as will assure the election of as many of the nominees
listed below as possible, and, in such event, the specific nominees to be
voted for will be determined by the proxy holders. It is not expected that any
nominee listed below will be unable to or will decline to serve as a director.
The term of office of each person elected as a director will continue until
the next Annual Meeting of Shareholders or until his or her successor has been
elected and qualified.
The names of the nominees, their ages, and certain other information about
them as of February 28, 2001 are set forth below:
Director
Name of Nominee Age Principal Occupation Since
--------------- --- -------------------- --------
Donald P. Casey......... 55 President and Chief Operating Officer, 2001
Exodus Communications, Inc.
Debra J. Engel.......... 48 Investor and Advisor; former SVP, 1996
Corporate Services, 3Com Corporation
Norman A. Fogelsong..... 49 General Partner, Institutional Venture 1985
Partners
Beatriz V. Infante...... 47 Chairman, President, and Chief 2000
Executive Officer
Christopher B. Paisley.. 48 Dean's Executive Professor, Leavey 2000
School of Business, Santa Clara
University
John W. Peth............ 52 President and Chief Executive Officer, 1992
Business Resource Group
David B. Wright......... 51 President and Chief Executive Officer, 2001
Legato Systems, Inc.
Except as set forth below, each of the nominees has been engaged in his or her
principal occupation set forth above during the past five years. There are no
family relationships among the directors or executive officers of the Company.
Mr. Casey is President and Chief Operating Officer of Exodus Communications,
Inc. Mr. Casey joined Exodus in June 2000. Prior to Exodus, Mr. Casey was
Chief Technology Officer and President of U.S. Services of Wang
2
Global, Inc. He joined Wang in October 1991 as a member of a turnaround
management team. Mr. Casey has been a director of the Company since February
2001.
Ms. Engel has been a director of the Company since May 1996. Until August
1998, Ms. Engel served as Senior Vice President of Corporate Services of 3Com
Corporation, a data networking products and services company. Prior to joining
3Com in November 1983, as Vice President, Human Resources, Ms. Engel was with
Hewlett-Packard Company for seven years, most recently as Corporate Staffing
Manager at Hewlett-Packard's corporate headquarters.
Mr. Fogelsong has been a director of the Company since September 1985. Since
March 1989, Mr. Fogelsong has been a General Partner with Institutional
Venture Partners, a venture capital investment firm. Between March 1980 and
February 1989, Mr. Fogelsong was a venture capitalist with Mayfield Fund, a
venture capital investment firm. Mr. Fogelsong is also a director of Concur
Technologies, Inc., as well as a privately owned technology company.
Ms. 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 and has been a
director of the Company since May 2000. She has served as Chairman of the
Company's Board of Directors since January 2001. Ms. Infante has previously
served as Co-President and Executive Vice President, Products. Prior to
joining the Company, Ms. Infante served as Senior Vice President, Application
Server, Vice President, Open Systems Division and Vice President, Digital
Products Division at Oracle Corporation, from January 1994 to October 1998,
and Director, Development at Taligent, Inc., from August 1992 to August 1993.
Mr. Paisley has been a director of the Company since May 2000. Mr. Paisley is
currently the Dean's Executive Professor of Accounting and Finance at the
Leavey School of Business at Santa Clara University. Prior to joining Santa
Clara University, Mr. Paisley served as the Senior Vice President, Finance and
Chief Financial Officer of 3Com Corporation, a data networking products and
services company, from September 1985 until July 2000. Mr. Paisley is a member
of the Board of Directors of Legato Systems, Inc. WJ Communications, Inc. and
Riverstone Networks, Inc. He also serves as a director of several privately
owned companies.
Mr. Peth has been a director of the Company since May 1992. Since December
1997, Mr. Peth has been the President and Chief Executive Officer of Business
Resource Group, a provider of office workspace products and services. He has
also served as a director of Business Resource Group since June 1995. From
April 1991 through March 1997, Mr. Peth served as an executive officer of TAB
Products Company (TAB), an office filing and furniture systems manufacturer
and distributor. He served on the Board of Directors of TAB from April 1991
through January 1997. From December 1989 to April 1991, Mr. Peth served as the
Office Managing Partner, San Jose Region, for Deloitte & Touche LLP, a public
accounting firm.
Mr. Wright has been a director of the Company since February 2001. Mr. Wright
joined Legato Systems, Inc. in October 2000 as President and Chief Executive
Officer. Mr. Wright moved to Legato following a thirteen-year career with
Amdahl Corporation, where he had served as President and Chief Executive
Officer since 1997. Mr. Wright joined Amdahl in 1987 as Vice President for
Sales and Service in the Northeast region of the United States. Mr. Wright is
a member of the Board of Directors of Inrange Technologies Corporation and
Legato Systems, Inc. as well as a privately owned company.
Board Meetings and Committees
The Board of Directors held a total of twelve meetings during the year ended
December 31, 2000. The Board of Directors has an Audit Committee, a
Compensation Committee and a Nominating Committee.
The Audit Committee of the Board of Directors (the Audit Committee) currently
consists of Mr. Paisley (Committee Chair), Mr. Fogelsong and Mr. Peth, and
held six meetings during the last fiscal year. The Audit Committee recommends
engagement of the Company's independent auditors and is primarily responsible
for
3
approving the services performed by the Company's independent auditors, and
for reviewing and evaluating the Company's accounting principles and its
system of internal accounting controls. The charter of the Audit Committee is
attached to this Proxy Statement as Appendix A and describes the Audit
Committee's functions in greater detail.
The Compensation Committee of the Board of Directors (the Compensation
Committee) consisted, as of December 31, 2000, of Ms. Engel (Committee Chair)
and Mr. Fogelsong and held thirteen meetings during the last fiscal year. Mr.
Casey, upon joining the Board of Directors in February 2001, was also elected
to the Compensation Committee. Mr. Casey did not participate in any
compensation decisions in the year ended December 31, 2000. The Compensation
Committee determines policy on executive compensation, administers the
Company's stock and option plans, and from time to time makes recommendations
to the Board of Directors concerning changes to such plans.
The Nominating Committee of the Board of Directors (the Nominating Committee)
currently consists of Mr. Fogelsong (Committee Chair), Mr. Casey and Mr. Peth.
The Nominating Committee was established late in fiscal 2000 and held no
meetings during the last fiscal year. The Nominating Committee is responsible
for nominating new members to be considered for the Board of Directors. Prior
to the establishment of the Nominating Committee, the full Board of Directors
recommended candidates to the Company's Board. The Nominating Committee will
consider nominees recommended by shareholders. Although there are no formal
procedures for shareholders to nominate persons to serve as directors,
shareholders wishing to submit nominations should notify the Company at its
principal office at 1310 Ridder Park Drive, San Jose, California 95131
(Attention: Betsy Rafael, Executive Vice President, Finance, Chief Financial
Officer, and Secretary) of their intent to do so. To be considered by the
Nominating Committee, nominations must be received on or before the deadline
for receipt of shareholder proposals. See "Deadline for Receipt of Shareholder
Proposals."
During the last fiscal year, each director attended at least 75% of the
meetings of the Board of Directors and the meetings of the committees of the
Board of Directors on which he or she serves, except Mr. Casey and Mr. Wright,
who joined the Board of Directors in February 2001.
Nonemployee directors are compensated for their service to the Company as
follows:
1. They are reimbursed for out-of-pocket travel expenses associated with their
attendance at Board meetings.
2. Each member receives payments under the Annual Retainer Compensation Plan
for the Board of Directors. This plan allows eligible nonemployee directors
to elect to receive compensation in either cash or stock initially valued
at $24,000 per year. Each director who elects to receive compensation in
stock, also receives a cash payment in the amount of $1,200 per quarter.
This compensation structure was designed to induce the Company's directors
to accept payment in stock and to help offset the tax liability associated
with the stock grant.
3. Nonemployee directors who are newly appointed to the Board of Directors
receive options to purchase 24,000 shares of common stock upon election to
the Company's Board of Directors. All nonemployee directors are granted
options to purchase 6,000 shares of common stock annually under the 1998
Directors' Stock Option Plan as long as they meet the eligibility
requirements of the plan.
Required Vote
The seven nominees receiving the highest number of affirmative votes of the
shares entitled to be voted shall be elected as directors of the Company.
Votes against any nominee and votes withheld have no legal effect under
California law.
THE BOARD OF DIRECTORS RECOMMENDS VOTING FOR PROPOSAL NO. 1.
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PROPOSAL NO. 2 -- AMENDMENT TO THE 1999 EQUITY INCENTIVE PLAN
At the Annual Meeting, the Company's shareholders are being asked to amend the
1999 Equity Incentive Plan to reserve an additional 2,450,000 shares of common
stock for issuance thereunder.
General
The 1999 Equity Incentive Plan was adopted by the Board of Directors in
February 1999 and was approved by the Company's shareholders in May 1999. A
total of 1,500,000 shares of common stock were initially reserved for
issuance. In March 2001, the Board of Directors amended the 1999 Equity
Incentive Plan, subject to shareholder approval, to increase the number of
shares of common stock reserved for issuance thereunder by 2,450,000 shares,
for a total of 3,950,000 reserved shares.
As of February 28, 2001, options to purchase an aggregate of 1,242,500 shares
of common stock (net of options canceled) had been granted pursuant to the
1999 Equity Incentive Plan and 257,500 shares remained available for future
grant (not including the additional 2,450,000 shares reserved by the Board of
Directors, for which shareholder approval is being requested).
All of such outstanding options were held by employees who are executive
officers of the Company. As of February 28, 2001, the fair market value of all
shares of common stock subject to outstanding options under the 1999 Equity
Incentive Plan was $12,777,188 based on the closing sale price of $11.0625 for
the Company's common stock as reported on the Nasdaq National Market on such
date.
Summary of the 1999 Equity Incentive Plan
The following is a summary of the principal features of the 1999 Equity
Incentive Plan, as amended. The summary, however, does not purport to be a
complete description of all the provisions of the 1999 Equity Incentive Plan.
Any shareholder of the Company who wishes to obtain a copy of the actual plan
document may do so upon written request to Betsy Rafael, Executive Vice
President, Finance, Chief Financial Officer, and Secretary, at the Company's
principal offices at 1310 Ridder Park Drive, San Jose, California 95131.
Purpose
The 1999 Equity Incentive Plan provides for grants to employees (including
officers and employee directors) of incentive stock options within the meaning
of Section 422 of the Internal Revenue Code of 1986 (the "Code"), as amended,
and for grants of nonstatutory stock options to employees (including officers
and employee directors) and consultants of the Company or any subsidiary or
any affiliate of the Company. The purpose of the 1999 Equity Incentive Plan is
to attract and retain the best available individuals for positions of
substantial responsibility, to provide additional incentive to employees and
consultants of the Company and to promote the success of the Company's
business.
The 1999 Equity Incentive Plan is not a qualified deferred compensation plan
under Section 401(a) of the Code, and is not subject to the provision of the
Employee Retirement Income Security Act of 1974, as amended.
Administration
The 1999 Equity Incentive Plan may be administered by the Board of Directors
or a committee appointed by the Board. All questions of interpretation or
application of the 1999 Equity Incentive Plan are determined by the Board of
Directors or its appointed committee, and its decisions are final, conclusive
and binding upon all participants.
5
Eligibility
The 1999 Equity Incentive Plan provides that incentive stock options may be
granted only to employees (including officers and employee directors) of the
Company or any subsidiary or any affiliate of the Company, while nonstatutory
stock options may be granted to employees (including officers and employee
directors), and consultants of the Company or any subsidiary or any affiliate
of the Company.
Grant and Exercise of Option
The 1999 Equity Incentive Plan provides that the maximum number of shares of
common stock which may be granted under options to any employee during any
fiscal year shall be 500,000, subject to adjustment as provided in the Plan.
In addition, no person may hold in a calendar year more than $100,000 worth of
incentive stock options that first become exercisable in that calendar year.
To the extent options have been issued to a person above the $100,000 limit,
such options are treated as nonstatutory stock options.
Unless otherwise determined by the Board of Directors or its appointed
committee at the time of grant, an option granted under the 1999 Equity
Incentive Plan is not transferable by the optionee other than by will or the
laws of descent or distribution. Each option is exercisable, during the
lifetime of the optionee, only by such optionee, or by a transferee permitted
under the 1999 Equity Incentive Plan.
The Board of Directors or its appointed committee determines when options may
be exercised. Options generally remain exercisable for up to 30 days (or, such
other period of time as is determined by the Board of Directors or its
appointed committee, but in the case of an incentive stock option, not to
exceed three (3) months, with such determination being made at the time of
grant) following the optionee's termination of service as an employee or
consultant of the Company or any subsidiary or any affiliate of the Company,
unless such termination is a result of death or of total and permanent
disability, in which case the options remain exercisable for up to a six-month
period.
Exercise Price and Term of Options
The exercise price of stock options granted under the 1999 Equity Incentive
Plan shall be equal to the fair market value of a share of the Company's
common stock on the date of grant of the option provided that the exercise
price of an incentive stock option granted to an optionee who immediately
before the grant of such option owns more than 10% or the total combined
voting power of all classes of stock of the Company or any parent or
subsidiary (a "10% Shareholder") may not be less than 110% of the fair market
value of a share of the Company's common stock on the date of grant of the
option. Fair market value is defined in the 1999 Equity Incentive Plan to be
the closing sale price of the Company's common stock on the Nasdaq National
Market (or such other stock exchange on which the common stock is listed) on
the date of grant (or, in the event that the common stock is not traded on
such date, on the last preceding trading date for which such quotation
exists). Incentive stock options may not have a term of more than 10 years.
Furthermore, the maximum term for an incentive stock option granted to a 10%
Shareholder is five years. No option may be exercised by any person after its
term expires.
Adjustments upon Changes in Capitalization
In the event any change such as a stock split or stock dividend is made in the
Company's capitalization that results in an increase or decrease in the number
of outstanding shares of common stock without receipt of consideration by the
Company, appropriate adjustment shall be made in the exercise price, in the
number of shares subject to each option, and in the limitation on grants to
employees, as well as in the number of shares available for issuance under the
1999 Equity Incentive Plan.
Merger or Sale of Assets
In the event of a sale of all or substantially all of the assets of the
Company, the merger or consolidation of the Company with or into another
corporation in which the Company is not the surviving corporation, or any
other
6
capital reorganization in which more than 50% of the shares of the Company
entitled to vote are exchanged, each option shall be assumed or an equivalent
option substituted by the successor corporation, unless the successor
corporation does not agree to assume the options or to substitute equivalent
options, in which case such options shall accelerate and the options shall
become exercisable in full (including with respect to shares as to which the
options would not otherwise be vested and exercisable) prior to consummation
of the transaction at such time and on such conditions as the Board of
Directors shall determine.
Amendment and Termination
The Board may amend the 1999 Equity Incentive Plan at any time or from time to
time or may terminate it without approval of the shareholders, except that
shareholder approval shall be obtained as required by applicable laws.
However, no action by the Board or shareholders may alter or impair any option
previously granted under the 1999 Equity Incentive Plan, unless the optionee
consents. In addition, shareholder approval shall be obtained prior to the
reduction of the exercise price of outstanding options to the then current
fair market value. The 1999 Equity Incentive Plan shall terminate on February
23, 2009. Any options outstanding at that time under the 1999 Equity Incentive
Plan shall remain outstanding until they expire by their own terms.
U.S. Federal Income Tax Information
The following is a brief summary of the effect of U.S. federal income taxation
on the optionee and the Company with respect to the grant and exercise of
options under the 1999 Equity Incentive Plan. This summary does not purport to
be complete, and does not discuss the income tax laws of any municipality,
state, or foreign country in which an optionee may reside. The Company advises
all eligible employees and consultants to consult their own tax advisors
concerning tax implications of option grants and exercises, and the
disposition of stock acquired upon such exercises under the 1999 Equity
Incentive Plan.
Options granted under the 1999 Equity Incentive Plan may be either incentive
stock options, as defined in Section 422 of the Code, or nonstatutory stock
options.
If an option granted under the 1999 Equity Incentive Plan is an incentive
stock option, the optionee will recognize no income upon grant of the
incentive stock option and incur no tax liability upon its exercise, except to
the extent that such exercise causes the optionee to incur alternative minimum
tax (see discussion below). The Company will not be allowed a deduction for
federal income tax purposes as a result of the exercise of an incentive stock
option regardless of the applicability of the alternative minimum tax. Upon
the sale or exchange of the shares more than two years after grant of the
option and more than one year after exercise of the option by the optionee,
any gain will be treated as long-term capital gain. If both of these holding
periods are not satisfied (a "disqualifying disposition"), the optionee
generally will recognize ordinary income equal to the difference between the
exercise price and the lower of the fair market value of the stock at the date
of the option exercise or the sale price of the stock. The Company will be
entitled to a deduction in the same amount as the ordinary income recognized
by the optionee. Any gain recognized on such a disqualifying disposition of
the shares in excess of the amount treated as ordinary income will be
characterized as long-term capital gain if the sale occurs more than one year
after exercise of the option or as short-term capital gain if the sale is made
earlier. The maximum tax rate on long-term capital gain under current federal
income tax laws is 20%. Capital losses are allowed in full against capital
gains plus $3,000 of other income.
All other options which do not qualify as incentive stock options are referred
to as nonstatutory stock options. An optionee will not recognize any taxable
income under U.S. tax laws at the time he or she is granted a nonstatutory
stock option. However, upon its exercise, the optionee generally will
recognize ordinary income for tax purposes generally measured as the excess of
the then fair market value of the shares over the option exercise price. The
taxable income recognized in connection with an option exercise by an optionee
who is also an employee of the Company will be subject to income and
employment tax withholding by the Company. The optionee's holding period for
long-term capital gain purposes commences as of the date he or she recognizes
7
ordinary income with respect to an option exercise. Upon the sale of such
shares by the optionee, any difference between the sale price and the fair
market value of the shares as of the date of exercise of the option, will be
treated as capital gain or loss, and will qualify for long-term capital gain
or loss treatment if the shares have been held for more than one year from the
date of exercise.
The Company will be entitled to a tax deduction in the amount and at the time
that the optionee recognizes ordinary income with respect to shares acquired
upon exercise of a nonstatutory stock option.
Alternative Minimum Tax
The exercise of an incentive stock option may subject the optionee to the
alternative minimum tax under Section 55 of the Code. The alternative minimum
tax is calculated by applying a tax rate of 26% to alternative minimum taxable
income of joint filers up to $175,000 ($87,500 for married taxpayers filing
separately) and 28% to alternative minimum taxable income above that amount.
Alternative minimum taxable income is equal to (i) taxable income adjusted for
certain items, plus (ii) items of tax preference less (iii) an exemption
amount of $45,000 for joint returns, $33,750 for unmarried individual returns
and $22,500 in the case of married taxpayers filing separately (which
exemption amounts are phased out for upper income taxpayers). Alternative
minimum tax will be due if the tax determined under the foregoing formula
exceeds the regular tax of the taxpayer for the year.
In computing alternative minimum taxable income, shares purchased upon
exercise of an incentive stock option are treated as if they had been acquired
by the optionee pursuant to exercise of a nonstatutory stock option. As a
result, the optionee recognizes alternative minimum taxable income equal to
the excess of the fair market value of the common stock on the date of
exercise over the option exercise price. Because the alternative minimum tax
calculation may be complex, optionees should consult their own tax advisors
prior to exercising incentive stock options.
If an optionee pays alternative minimum tax, the amount of such tax may be
carried forward as a credit against any subsequent year's regular tax in
excess of the alternative minimum tax for such year.
Required Vote
The amendment to the 1999 Equity Incentive Plan to increase the number of
shares of common stock reserved for issuance thereunder by 2,450,000 shares
requires the affirmative vote of the holders of a majority of the shares of
the Company's common stock who are present at the Annual Meeting in person or
by proxy and entitled to vote at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL NO. 2.
8
PROPOSAL NO. 3--AMENDMENT TO THE ASPECT INCENTIVE PLAN
At the Annual Meeting, the Company's shareholders are being asked to approve
an amendment to the Aspect Incentive Plan, (the Incentive Plan).
General
The Incentive Plan was adopted by the Board of Directors in March 2000 and is
intended to qualify under Section 162(m) of the Code. The Incentive Plan was
amended in March 2001, to set an annual maximum payout for any one employee of
$5,000,000. Prior to this amendment, no maximum payout was specified under the
Incentive Plan. Shareholder approval is sought for this amendment to the
Incentive Plan.
Summary of the Aspect Incentive Plan
The following is a summary of the principal features of the Incentive Plan.
The summary, however, does not purport to be a complete description of all the
provisions of the Incentive Plan. Any shareholder of the Company who wishes to
obtain a copy of the actual Incentive Plan document may do so upon written
request to Betsy Rafael, Senior Vice President, Finance, Chief Financial
Officer, and Secretary, at the Company's principal offices at 1310 Ridder Park
Drive, San Jose, California 95131.
The Incentive Plan is a formula-driven, performance-based incentive plan which
is available to the Company's non-sales employees. The Incentive Plan's
performance goals for each year are reviewed and approved by the Compensation
Committee prior to the start of that year. The Incentive Plan is intended to:
. Provide a common framework for managing and rewarding performance across
the organization,
. Clearly establish and communicate the goals and objectives for the
Company and each participating employee,
. Motivate and reward performance supporting Aspect's critical business
goals,
. Link rewards with individual performance, and
. Provide upside compensation opportunity along with downside risk.
The funding for the Incentive Plan is determined by the Company's performance
against a set of performance goals and measurements as determined by the
Compensation Committee. These goals and measurements include revenue growth
and operating profit margins, excluding the amortization of intangible assets,
and may include total shareholder return, stock price, value-added measures,
asset turnover, return on investment, earnings per share, customer
satisfaction measures, internal operational criteria and other goals and
measurements deemed appropriate by the Compensation Committee. The
Compensation Committee has determined that more specific disclosure of the
material terms of the Incentive Plan's performance goals could adversely
affect the Company because such information is confidential, commercial or
business information.
Prior to any payout from the Incentive Plan, the Compensation Committee
certifies that the established goals have been attained. Under the terms of
the Incentive Plan, once the amount to be paid to an employee under the
Incentive Plan has been determined, no adjustments to that amount can be made.
The maximum annual payment that can be made to any employee under the
Incentive Plan is $5,000,000.
The Incentive Plan was also designed to meet the exclusion requirements of
Section 162 (m) of the Code as described below. The 1993 Omnibus Budget
Reconciliation Act (OBRA) established a $1,000,000 ceiling for deductions for
compensation paid to any of the five most highly compensated executive
officers identified in the Company's Proxy Statement (although performance-
related compensation as defined by OBRA in excess of $1,000,000 will remain
deductible). Because none of the cash compensation figures for the five most
highly compensated executive officers identified in the Company's Proxy
Statement approached the limitation in 2000, there has been no requirement on
the part of the Company to use any of the available exemptions from the
deduction limit.
9
However, cash compensation levels for the highest paid executives are
beginning to approach the threshold of this limitation. The Compensation
Committee wants to take steps to ensure that performance-related compensation
continues to be deductible by the Company.
Required Vote
Adoption of the Incentive Plan requires the affirmative vote of the holders of
a majority of the shares of the Company's common stock who are present at the
Annual Meeting in person or by proxy and entitled to vote at the Annual
Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF PROPOSAL NO. 3.
PROPOSAL NO. 4 -- RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected Deloitte & Touche LLP, independent
auditors, to audit the consolidated financial statements of the Company for
the year ending December 31, 2001, and recommends that the shareholders vote
for ratification of such appointment. In the event the shareholders do not
ratify such appointment, the Board of Directors will reconsider its selection.
Deloitte & Touche LLP has audited the Company's consolidated financial
statements since 1986. One or more representatives of Deloitte & Touche LLP
are expected to be present at the meeting, with the opportunity to make a
statement if they desire to do so and to be available to respond to
appropriate questions.
Required Vote
The ratification of the appointment of Deloitte & Touche LLP requires the
affirmative vote of the holders of a majority of the shares of the Company's
common stock who are present at the Annual Meeting in person or by proxy and
entitled to vote at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL NO. 4.
10
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table sets forth information known to the Company with respect
to the beneficial ownership of the Company's common stock, as to (i) each
person who is known by the Company to beneficially own 5% or more of the
Company's common stock, (ii) each of the Company's directors and nominees for
director, (iii) each of the Company's Named Executive Officers (as defined
hereafter) and (iv) all directors and executive officers as a group. The
information set forth below is as of February 28, 2001.
Shares
Beneficially
5% Shareholders, Directors, Nominees for Director, Named Owned (1)
Executive Officers, and Directors and Executive Officers as -----------------
a Group Number Percent
- ----------------------------------------------------------- --------- -------
Entities affiliated with FMR Corporation (2)................ 5,441,020 10.5%
82 Devonshire Street
Boston, MA 02109
Stephen F. Mandel, Jr. (3).................................. 4,865,200 9.4%
Lone Pine Capital LLC
Two Greenwich Plaza
Greenwich, CT 06830
EnTrust Capital Incorporated (4)............................ 4,606,672 8.9%
717 Fifth Avenue
New York, NY 10022
Capital Group International Incorporated (5)................ 4,250,700 8.2%
11100 Santa Monica Boulevard, 15th Floor
Los Angeles, CA 90025
Peter A. Wright (6)......................................... 3,397,100 6.6%
P.A.W. Capital Corporation
10 Glenville Street
Greenwich, CT 06831
Donald P. Casey............................................. -- --
Debra J. Engel (7).......................................... 38,027 *
Norman A. Fogelsong (8)..................................... 1,368,000 2.7%
Beatriz V. Infante (9)...................................... 228,019 *
Christopher B. Paisley...................................... 1,210 *
John W. Peth (10)........................................... 67,027 *
David B. Wright............................................. -- --
Gary E. Barnett (11)........................................ 113,833 *
Rod Butters (12)............................................ 57,013 *
James R. Carreker (13)...................................... 1,208,068 2.3%
Kevin T. Parker (14)........................................ 250 *
Gary L. Smith (15).......................................... 64,650 *
Barry Wright (16)........................................... 22,250 *
All directors and executive officers as a group (11 persons)
(17)....................................................... 1,937,779 3.7%
- --------
* Less than 1%
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of common
stock.
(2) Includes 5,441,020 shares of common stock owned by investment funds (the
Funds) managed by Fidelity Management & Research Company (Fidelity), a
wholly owned subsidiary of FMR Corp. and an investment adviser registered
under the Investment Advisers Act of 1940. Edward C. Johnson III,
11
FMR Corp. and the Funds each have sole power to dispose of the shares
owned by the Funds, but neither Mr. Johnson nor FMR has the sole power to
vote or direct the voting of the shares owned directly by the funds, which
power resides with the funds' boards of trustees and is carried out by
Fidelity. Fidelity Growth Company Fund, a wholly-owned subsidiary of FMR,
is the beneficial owner of 2,481,820 shares. This information is based on
information as of December 31, 2000, set forth in a Schedule 13G dated
February 14, 2001, as filed by FMR Corp. with the Securities and Exchange
Commission.
(3) The 4,865,200 shares reported by Lone Pine Capital LLC may be deemed to
be beneficially owned by Stephen F. Mandel, Jr., including (a) 880,608
shares of Common Stock beneficially owned by Lone Pine Associates LLC, of
which (i) 175,148 shares of Common Stock are beneficially owned by Lone
Spruce, L.P. (Lone Spruce), (ii) 384,356 shares of Common Stock are
beneficially owned by Lone Balsam, L.P. (Lone Balsam) and (iii) 321,104
shares of Common Stock are beneficially owned by Lone Sequoia, L.P. (Lone
Sequoia) and (b) 3,984,592 shares of Common Stock beneficially owned by
Lone Pine Capital LLC. Lone Pine Associates LLC is the general partner of
Lone Spruce, Lone Sequoia and Lone Balsam, and has the power to direct
the affairs of Lone Spruce, Lone Sequoia and Lone Balsam, including
decisions respecting the disposition of the proceeds from the sale of
shares. Mr. Mandel is the Managing Member of Lone Pine Associates LLC and
in that capacity directs its operations. This information is based on
information as of December 31, 2000, set forth in a Schedule 13G dated
February 15, 2001, as filed by Stephen F. Mandel, Jr. with the Securities
and Exchange Commission.
(4) EnTrust Capital Incorporated has sole voting power and sole dispositive
power over 777,750 shares, shared voting power over 3,131,487 shares and
shared dispositive power over 3,828,922 shares. This information is based
on information as of December 31, 2000, set forth in a Schedule 13G dated
February 14, 2001, as filed by EnTrust Capital Incorporated with the
Securities and Exchange Commission.
(5) Capital Group International, Inc. has sole voting power over 3,226,800
shares and sole dispositive power over 4,250,700 shares. This information
is based on information as of December 29, 2000, set forth in a Schedule
13G dated February 9, 2001, as filed by Capital Group International Inc.
with the Securities and Exchange Commission.
(6) Peter A. Wright has sole voting power over 53,100 shares, shared voting
power over 3,344,000 shares, sole dispositive power over 53,100 shares
and shared dispositive power over 3,344,000 shares. P.A.W. Capital
Corporation has shared voting power and shared dispositive power over
3,344,000 shares. This information is based on information as of December
31, 2000, set forth in a Schedule 13G dated February 14, 2001, as filed
by Peter A. Wright with the Securities and Exchange Commission.
(7) Includes 24,000 shares issuable pursuant to options that are exercisable
by Ms. Engel within 60 days of February 28, 2001.
(8) Includes 1,112,000 shares held by the Fogelsong Family Trust. Also
includes 250,000 shares held of record by Institutional Venture Partners,
for which Mr. Fogelsong works as a venture capitalist, as to which Mr.
Fogelsong disclaims beneficial ownership except to the extent of his
pecuniary interest therein. Also includes 6,000 shares issuable pursuant
to options that are exercisable by Mr. Fogelsong within 60 days of
February 28, 2001.
(9) Includes 213,019 shares issuable pursuant to options that are exercisable
by Ms. Infante within 60 days of February 28, 2001.
(10) Includes 6,000 shares issuable pursuant to options that are exercisable
by Mr. Peth within 60 days of February 28, 2001.
(11) Includes 38,083 shares issuable pursuant to options that are exercisable
by Mr. Barnett within 60 days of February 28, 2001.
(12) Includes 54,061 shares issuable pursuant to options that are exercisable
by Mr. Butters within 60 days of February 28, 2001.
12
(13) Includes 1,177,068 shares held by the Carreker Family Trust. Also
includes 31,000 shares held by the Arbutus Educational Trust, a
charitable remainder trust of which Mr. Carreker is the trustee. Mr.
Carreker resigned as Chief Executive Officer of the Company in April
2000. Mr. Carreker remained as Chairman and as an employee of the Company
until his resignation on January 26, 2001.
(14) Mr. Parker resigned as an employee of the Company on October 16, 2000.
(15) Includes 62,500 shares issuable pursuant to options that are exercisable
by Mr. Smith within 60 days of February 28, 2001.
(16) In April 2000, Mr. Wright transitioned from being an executive officer to
being a non-executive officer. Mr. Wright provided certain advisory
services until June 2, 2000, at which time he ceased being an employee of
the Company.
(17) Includes 403,663 shares issuable pursuant to options that are exercisable
by all directors and executive officers within 60 days of February 28,
2001.
13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Officer Employment Agreements
The Company has entered into employment agreements with its executive
officers. Pursuant to the terms of the agreements, if an individual officer is
involuntarily terminated other than for cause or is constructively terminated
beginning 3 months prior to a change of control of the Company and ending
thirteen months following a change of control of the Company, the officer is
entitled to certain severance benefits, including acceleration of vesting and
continuation of salary, annual target bonus and other benefits for up to
twenty-four months. The terms of the current agreements superceded the terms
of any prior employment agreements with the Company.
Gary Smith
In April 2000, the Company entered into an employment agreement with Gary
Smith. In addition to the provisions set forth above, Mr. Smith's agreement
provides that he is eligible to receive a quarterly cash bonus targeted at
100% of his base salary from the Aspect Incentive Plan in the event that he
achieves certain performance goals. Payment of this bonus was guaranteed for
the first year of Mr. Smith's employment with the Company, provided that the
Company achieved certain targets. As of February 28, 2001, $294,564 of this
bonus has been paid to Mr. Smith. In addition, the Company agreed to pay a
special cash bonus to Mr. Smith of $100,000, payable in four $25,000
installments during his first 4 quarters of employment with the Company. As of
February 28, 2001, $75,000 of this bonus has been paid. In April 2000, as part
of his employment agreement, the Company made available to Mr. Smith certain
relocation benefits, including a loan of up to $4.5 million at a fixed annual
interest rate of 7% towards the purchase of a home in the San Francisco Bay
Area. Three percent of the annualized interest will be paid in monthly
installments and the remaining 4% will accrue for up to five years. The
principal and interest are due and payable on the 5-year anniversary of the
loan, but may become due earlier under certain circumstances. No amount has
been loaned to date. In addition, the Company has agreed to pay Mr. Smith a
net cash bonus of $17,500 per quarter over 20 quarters following his
relocation to the Bay Area. Payment of these amounts is contingent upon Mr.
Smith's continued employment with the Company. No amounts related to this cash
bonus have been paid to date.
Severance Agreements
In August 1999, in connection with the commencement of his employment with the
Company, the Company loaned former Co-President Barry Wright $809,890 pursuant
to a full recourse promissory note which bears interest at 6% per annum,
compounded annually. The note is due and payable on June 1, 2001. As of
February 28, 2001, $163,000 (less withholdings) has been paid on the loan.
Also in connection with the commencement of his employment, the Company
entered into a five-year cash bonus agreement with Mr. Wright. Mr. Wright
received a cash bonus of $38,000 on June 1, 2000. This payment was remitted to
the Company to offset Mr. Wright's obligations under the promissory note. This
cash bonus agreement was terminated in connection with Mr. Wright's severance
agreement. In April 2000, the Company entered into a severance agreement with
Mr. Wright which provides for the continuation of Mr. Wright's monthly base
pay and benefits through his termination date in exchange for his continued
provision of certain advisory services to the Company. In addition, Mr.
Wright's severance agreement provided for the payment of a cash bonus of
$125,000 on June 1, 2000. This payment was remitted to the Company to offset
Mr. Wright's obligations under the promissory note. Mr. Wright's severance
agreement also provided for the payment of a milestone bonus due to Mr. Wright
under the terms of his offer letter with the Company.
In addition to the severance agreement described above, during 2000, the
Company entered into severance agreements with former executive officers
Deborah E. Barber and William H. Delevati. As they continued to provide
certain advisory services as employees of the Company, they received monthly
base pay and benefits through their termination dates.
14
EXECUTIVE COMPENSATION
The following table presents compensation paid by the Company for services
rendered during fiscal years 2000, 1999 and 1998 for (i) all individuals
serving as the Company's Chief Executive Officer (CEO) during the last
completed fiscal year, regardless of compensation level, (ii) the three most
highly compensated executive officers (other than the CEO) serving at the end
of the last fiscal year whose salary plus bonus exceeded $100,000 in fiscal
2000 and (iii) two former executive officers who would have been included in
the category described in subsection (ii) had they still been executive
officers of the Company at the end of fiscal 2000 (the group of seven
individuals collectively referred to hereinafter as the "Named Executive
Officers"). The information set forth below is for fiscal years ended December
31.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
-------------------------- ------------
Securities All Other
Other Underlying Compensation
Name and Principal Position Year Salary Bonus (1) Options (2)
- --------------------------- ---- ------ -------- -------- ------------ ------------
Beatriz V. Infante (3)... 2000 $440,342 $174,688 -- 400,000 $5,100
Chairman, President, and
Chief 1999 $354,550 $296,771 -- 150,000 $4,800
Executive Officer 1998 $ 69,027 $ 40,833 -- 100,000 --
James R. Carreker (4).... 2000 $333,679 $150,833 -- 75,000 $5,088
Former Chairman and
Chief 1999 $304,512 $258,641 -- 100,000 $4,800
Executive Officer 1998 $299,363 $119,475 -- 50,000 $4,800
Gary E. Barnett (5)...... 2000 $270,942 $ 81,310 -- 145,000 --
Executive Vice
President, eCRM 1999 $179,272 $ 53,006 -- 52,000 --
Applications, and Chief 1998 $163,445 $ 29,501 -- 20,000 $ 962
Technical Officer
Rod Butters (6).......... 2000 $281,455 $ 88,827 -- 165,000 $5,100
Executive Vice
President, Product 1999 $208,227 $ 44,124 -- 25,000 $5,000
Strategy and Portal
Platform, and 1998 $ 13,621 -- -- 40,000 --
Chief Strategy Officer
Gary L. Smith (7)........ 2000 $296,098 $367,564 $137,721 420,000 $5,100
Chief Operating Officer 1999 -- -- -- -- --
1998 -- -- -- -- --
Kevin T. Parker (8)...... 2000 $287,514 $136,023 -- 60,000 $3,654
Former Senior Vice
President, 1999 $104,364 $ 41,984 -- 100,000 --
Finance and Chief
Financial Officer 1998 -- -- -- -- --
Barry Wright (9)......... 2000 $178,875 $300,303 -- 50,000 $5,100
Former Co-President 1999 $177,465 $379,259 -- 150,000 $1,521
1998 -- -- -- -- --
- --------
(1) The amount in this column consists of $74,708 in compensation paid by the
Company to Mr. Smith in 2000 for relocation-related benefits, $17,027 in
transportation-related benefits and $45,986 in amounts reimbursed during
2001 for the payment of taxes for 2000.
(2) The amounts in this column consist of matching contributions made by the
Company to individual 401(k) savings accounts.
(3) Ms. Infante joined the Company on October 5, 1998. The amounts included in
1998 reflect retroactive pay adjustments effected in 1999. Ms. Infante was
elected Chief Executive Officer effective April 2000 and Chairman
effective January 2001.
(4) Mr. Carreker resigned as Chief Executive Officer of the Company in April
2000 and remained as Chairman and an employee of the Company until his
resignation on January 26, 2001.
15
(5) Mr. Barnett joined the Company on October 21, 1996. Mr. Barnett became an
executive officer on April 6, 2000.
(6) Mr. Butters joined the Company on December 2, 1998. Mr. Butters became an
executive officer on April 6, 2000.
(7) Mr. Smith joined the Company on April 10, 2000.
(8) Mr. Parker joined the Company on October 15, 1999. Mr. Parker resigned as
an employee of the Company on October 16, 2000.
(9) In April 2000, Mr. Wright transitioned from being an executive officer to
being a non-executive officer. Mr. Wright provided certain advisory
services until June 2, 2000, at which time he ceased being an employee of
the Company.
Option Grants in 2000
The Company's 1999 Equity Incentive Plan and 1996 Employee Stock Option Plan
provide for the grant of options to executive officers of the Company. Options
granted to Named Executive Officers under the 1999 Equity Incentive Plan were
incentive stock options to the extent allowable under Section 422 of the
Internal Revenue Code and were otherwise nonstatutory stock options, while all
options granted under the 1996 Employee Stock Option Plan were nonstatutory
stock options. The options were granted at a price equal to the fair market
value of the Company's common stock on the date of grant. Such options
typically expire ten years from the date of grant. The following table
presents stock option grants made during 2000 to the Named Executive Officers.
Individual Grants
--------------------------------------------------
Potential Realizable
Value at Assumed
Number of Annual Rates of Stock
Securities % of Total Appreciation for
Underlying Options Granted Exercise or Option Term (3)
Options to Employees in Base Price Expiration ----------------------
Name Granted (1) Fiscal Year (2) Per Share Date 5% 10%
---- ----------- --------------- ----------- ---------- ---------- -----------
Beatriz. V. Infante..... 90,000 1.3% $45.88 01/13/2010 $2,596,549 $ 6,580,164
160,000 2.3% $32.13 04/06/2010 $3,232,518 $ 8,191,836
150,000 2.1% $10.75 12/14/2010 $1,014,093 $ 2,569,910
James R. Carreker....... 75,000 1.0% $45.88 01/13/2010 $2,163,791 $ 5,483,470
Gary E. Barnett......... 20,000 0.3% $45.88 01/13/2010 $ 577,011 $ 1,462,259
25,000 0.4% $18.50 07/27/2010 $ 290,864 $ 737,106
100,000 1.4% $10.75 12/14/2010 $ 676,062 $ 1,713,273
Rod Butters............. 25,000 0.4% $45.88 01/13/2010 $ 721,264 $ 1,827,823
50,000 0.7% $18.50 07/27/2010 $ 581,728 $ 1,474,212
90,000 1.3% $10.75 12/14/2010 $ 608,456 $ 1,541,946
Gary L. Smith........... 250,000 3.5% $33.69 04/10/2010 $5,296,472 $13,422,300
50,000 0.7% $18.50 07/27/2010 $ 581,728 $ 1,474,212
120,000 1.7% $17.25 11/06/2010 $1,301,812 $ 3,299,047
Kevin T. Parker......... 10,000 0.1% $45.88 01/13/2010 $ 288,505 $ 731,129
50,000 0.7% $18.50 07/27/2010 $ 581,728 $ 1,474,212
Barry Wright............ 50,000 0.7% $45.88 01/13/2010 $1,442,527 $ 3,655,647
- --------
(1) Options become exercisable at the rate of 25% on the first anniversary of
the grant date, and 2.0833% each month thereafter.
(2) The Company granted options representing 7,085,476 shares to employees and
non-employee directors in 2000.
(3) The 5% and the 10% assumed rates of appreciation are mandated by the rules
of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future common stock price.
16
Aggregated Option Exercises in 2000 and
December 31, 2000 Option Values
The following table presents information on stock options exercised during
2000 and the value of all stock options held on December 31, 2000, for the
Named Executive Officers.
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Shares Value December 31, 2000 December 31, 2000 (2)
Acquired Realized ------------------------- -------------------------
Name on Exercise (1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ---------- ----------- ------------- ----------- -------------
Beatriz V. Infante...... -- -- 129,686 520,314 -- --
James R. Carreker....... -- -- 665,102 134,898 $762,480 --
Gary E. Barnett......... 19,749 $ 777,844 28,334 168,917 -- --
Rod Butters............. -- -- 42,083 187,917 -- --
Gary L. Smith........... -- -- -- 420,000 -- --
Kevin T. Parker......... -- -- -- -- -- --
Barry Wright............ 37,500 $1,195,344 -- -- -- --
- --------
(1) The amount shown represents the difference between the fair market value
of the shares on the date of exercise and the exercise price of the
option.
(2) With the exception of 160,000 of Mr. Carreker's total exercisable options,
all options held at December 31, 2000 by the Named Executive Officers have
exercise prices in excess of the closing sale price of the Company's
common stock as reported on the Nasdaq National Market on December 29,
2000, $8.0468 per share.
17
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933 or the Securities Exchange
Act of 1934 that might incorporate future filings, including this Proxy
Statement, in whole or in part, the following Compensation Committee report
and the Company stock price performance graph shall not be incorporated by
reference into any such filings.
COMPENSATION COMMITTEE REPORT
The Company's compensation for executive officers is determined by the
Compensation Committee. The Compensation Committee is composed of two non-
employee directors intended to qualify as "outside directors" under Section
162(m) of the Code and employs independent authorities on executive
compensation to assist them in determining appropriate executive pay. The
Compensation Committee meets on a scheduled basis to evaluate the
effectiveness of the program strategy as well as current and proposed fiscal
year Company performance and executive pay. Additionally, the Compensation
Committee is routinely consulted to approve the compensation package of a
newly hired executive or of an executive whose scope of responsibility has
significantly changed. During 2000, the Compensation Committee met on thirteen
occasions.
The objective of the Company's executive compensation program is to align
executive compensation with the Company's long- and short-term business
objectives and performance. In the high technology marketplace where the
Company competes for executive talent, it is imperative that executive
compensation enables the Company to attract, retain and motivate qualified
executives able to contribute to the long-term business success of the
Company. The following specific strategies are used to guide the Company's
executive compensation decisions:
. Key Stakeholder Alignment. Executive compensation is designed to align
management's interests with shareholders' interests and the creation of
shareholder value.
. Risk and Reward. A significant portion of an executive's compensation is
tied to his or her performance and contributions to the success of the
Company.
. Pay for Performance. The achievement of higher levels of performance is
rewarded by higher levels of compensation. Similarly, performance below
minimum expectations may result in low or no variable compensation to
the executives.
. Compensate Competitively. The Company regularly compares its
compensation programs to those of other companies of comparable size
within similar industries to place target pay substantially at market.
The Compensation Committee meets with the CEO and the Senior Vice President,
Human Resources to consider potential long-term executive compensation and to
propose specific compensation plans for the next fiscal year. They evaluate
current executive compensation from independent market surveys supplied by
independent human resource consultants, and evaluate the performance of
individual executives. The Compensation Committee also independently reviews
the individual performance of the CEO based upon the data and the Compensation
Committee's evaluation of the CEO's performance and expected future
contributions in leading the Company and recommends appropriate compensation
actions to be approved by the full Board of Directors of Aspect.
During 2000, the Company's executive compensation program included these key
elements:
. Base Salary. The Company established the base salaries of its executive
officers based on competitive market practices derived from comparisons
with companies of similar size in similar industries. The approach is to
target base salary levels around the 50th percentile of such data.
Actual pay decisions are based on performance, responsibility, future
potential and experience of the individual executive. The Compensation
Committee exercised its judgment based on all the factors described. No
specific formula was applied to determine the value of each criterion,
and, once established, base salary does not vary with the Company's
performance.
18
. Cash-Based Incentives. During 2000, Company executive officers
participated in a cash incentive program under which payment was
contingent upon the achievement of specific Company-wide goals based on
operating results and revenue performance. Cash-based incentives are
designed to range from no bonus payment when performance is below
established targets to bonus amounts somewhat above market levels when
performance is well above established targets.
. Equity-Based Incentives. Each year, the Compensation Committee considers
the grant of stock options to executives. The Compensation Committee
believes that stock options provide added incentive for executives to
influence the strategic direction of the Company and to create and grow
value for customers, shareholders and employees. Options are granted at
exercise prices equal to the stock's fair market value at the time of
grant and, typically, have four-year vesting periods to encourage
retention. The number of stock options that are granted to individual
executives is based on demonstrated sustained performance and
independent survey data reflecting competitive stock option practices.
CEO Compensation
On April 16, 2000, Beatriz Infante's base salary was raised to $450,000 to
reflect her promotion from Co-President to President and CEO. Ms. Infante's
increased salary reflects her increased responsibilities within the Company
and is competitive with salaries being paid to the CEO's of comparably sized
software companies. The Compensation Committee determined that Ms. Infante
earned $174,688 for her contributions to the Company as Co-President and CEO,
as cash-based incentives for fiscal 2000.
James Carreker's (the Company's retiring CEO) base salary of $400,000 for
2000, was based on competitive market rates and the Compensation Committee's
review of his past performance. On April 16, 2000, Mr. Carreker's salary was
reduced to $350,000 which reflected his continued role as an employee and
Chairman of the Company's Board. The Compensation Committee determined that
Mr. Carreker earned $150,833, as cash-based incentives for fiscal 2000. Mr.
Carreker resigned from the Company and his role as Chairman of the Company's
Board of Directors in January 2001.
Executive Compensation
As described in Proposal No. 3, the Compensation Committee has also
implemented the Incentive Plan. The Compensation Committee will continue to
monitor the issue of deductibility of compensation payments.
COMPENSATION COMMITTEE
Debra J. Engel (Chair)
Norman A. Fogelsong
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2000, the Compensation Committee consisted of directors Engel and
Fogelsong. Neither of these persons has ever been an officer or employee of
the Company or any of its subsidiaries, nor were there any Compensation
Committee interlocks or other relationships during 2000 requiring disclosure
under Item 402(j) of Regulation S-K of the Securities and Exchange Commission.
19
AUDIT COMMITTEE REPORT
In accordance with its written charter adopted by the Board of Directors, a
copy of which is attached as Appendix A, the Audit Committee assists the Board
in fulfilling its responsibility for oversight of the quality and integrity of
the accounting, auditing and financial reporting practices of the Company.
During the fiscal year, the Audit Committee discussed the interim financial
information contained in each quarterly earnings announcement with the Chief
Financial Officer, controller and independent auditors prior to public
release. The Audit Committee recommends to the Board of Directors, subject to
shareholder approval, the selection of the Company's independent auditors.
Management is responsible for the Company's internal controls. The Company's
independent auditors are responsible for performing an independent audit of
the Company's consolidated financial statements in accordance with auditing
standards generally accepted in the United States of America and to issue a
report thereon. The Audit Committee has general oversight responsibility with
respect to the Company's financial reporting, and reviews the results and
scope of the audit and other services provided by the Company's independent
auditors.
In this context, the Audit Committee has met and held discussions with
management and the Company's independent auditors. Management represented to
the Audit Committee that the Company's consolidated financial statements were
prepared in accordance with accounting principles generally accepted in the
United States of America, and the Audit Committee has reviewed and discussed
the consolidated financial statements with management and the Company's
independent auditors. The Audit Committee discussed with the independent
auditors matters required to be discussed by Statement on Auditing Standards
No. 61 (Communication with Audit Committees), as amended, by the Auditing
Standards Board of the American Institute of Certified Public Accountants.
The Company's independent auditors also provided to the Audit Committee the
written disclosures required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees), and the Audit Committee
discussed with the independent auditors' their independence and satisfied
itself as to the auditors' independence.
Based upon the Audit Committee's discussion with management and the
independent auditors and the Audit Committee's review of the representations
of management and the report of the independent auditors to the Audit
Committee, the Audit Committee recommended to the Board of Directors that the
Company's audited consolidated financial statements be included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000
filed with the Securities and Exchange Commission.
Finally, the Audit Committee believes that each of the members of the Audit
Committee is "independent" within the meaning of Rule 4200 of the National
Association of Securities Dealers, Inc.
AUDIT COMMITTEE
Christopher B. Paisley (Chair)
Norman A. Fogelsong
John W. Peth
20
AUDITOR FEES
Audit Fees
The aggregate fees billed by Deloitte & Touche LLP and their respective
affiliates (collectively, "D&T") for professional services rendered for the
audit of the Company's annual consolidated financial statements for the fiscal
year ended December 31, 2000 and for the reviews of the financial statements
included in the Company's Quarterly Reports on Form 10-Q for that fiscal year
were $527,154.
Financial Information Systems Design and Implementation Fees
The Company did not engage D&T for professional services relating to financial
information systems design and implementation for the fiscal year ended
December 31, 2000.
All Other Fees
The aggregate fees billed by D&T for services rendered to the Company, other
than the services described above under "Audit Fees" and "Financial
Information Systems Design and Implementation Fees" for the fiscal year ended
December 31, 2000 were $100,854.
The Audit Committee has considered whether the provision of non-audit services
is compatible with maintaining the principal auditor's independence and
believes such services are compatible with maintaining the auditor's
independence.
21
COMPANY STOCK PRICE PERFORMANCE
The following graph compares cumulative total shareholder returns for the
Company during the preceding five years to the JP Morgan H&Q Technology Index,
the Nasdaq Stock Market US Index, the S&P 500 Index and the S&P High
Technology Composite Index.
Beginning this year, the Company has decided to change the indices against
which it compares its cumulative shareholder returns from the S&P 500 Index
and the S&P High Technology Composite Index to the JP Morgan H&Q Technology
Index (JP Morgan Index) and the Nasdaq Stock Market U.S. Index (Nasdaq Index).
The Company believes that the companies included in the JP Morgan Index and
Nasdaq Index are more comparable to the Company than those included in the
indices we have used historically and that the comparison of the Company's
cumulative shareholder returns to these new indices will more accurately
reflect the Company's performance as compared to similarly situated companies.
COMPARISON OF CUMULATIVE TOTAL RETURN* SINCE DECEMBER 1995
Aspect Communications Corporation, the JP Morgan H&Q Technology Index, the
Nasdaq Stock Market US Index, the S&P 500 Index and the S&P High Technology
Composite Index.
[GRAPH]
12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
-------- -------- -------- -------- -------- --------
Aspect Communications
Corporation............ 100 190 125 103 234 48
JP Morgan H&Q Technology
Index.................. 100 124 146 227 506 327
Nasdaq Stock Market US
Index.................. 100 123 151 213 395 238
S&P High Technology
Composite Index........ 100 142 179 309 542 325
S&P 500 Index........... 100 123 164 211 255 232
- --------
* Assumes that the value of the investment in Aspect Communications
Corporation common stock and each index was $100 on December 31, 1995, and
that all dividends were reinvested.
22
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the
Securities and Exchange Commission (SEC) initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors, and greater than ten percent shareholders
are required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file.
To the Company's knowledge, based solely upon review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 2000, all
Section 16(a) filing requirements applicable to its officers, directors, and
greater than ten percent beneficial owners were satisfied.
STOCK OPTION PLAN INFORMATION
The Company maintains three stock option plans: the 1999 Equity Incentive Plan
(1999 Plan), the 1996 Employee Stock Option Plan (1996 Plan) and the 1998
Directors' Stock Option Plan (Directors' Plan). Executive officers are
eligible to receive grants under the 1999 Plan and under the 1996 Plan, as
amended in July 2000. Options granted under the 1999 Plan are usually granted
as incentive stock options to the extent allowable under Section 422 of the
Internal Revenue Code, with the remaining options being nonstatutory stock
options, while all options granted under the 1996 Plan and the Directors' Plan
are nonstatutory stock options. In addition, the Company assumed stock option
plans and options granted thereunder in connection with its acquisitions of
Commerce Soft, Inc., Voicetek Corporation and PakNetX Corporation. No further
grants have been made under the assumed plans since their assumption.
The terms of the 1999 Plan require that options be granted at a price not less
than 100% of fair market value of the Company's stock on the date of grant.
The 1996 Plan provides that the exercise price will be determined by the plan
administrator. Options are typically granted with a four-year vesting schedule
and typically expire 30 days after the optionee's termination date or seven to
ten years after the grant date, whichever is sooner. The maximum number of
shares that may be granted to any individual during a fiscal year, under the
1999 Plan or the 1996 Plan, is 500,000 shares, subject to adjustment for stock
splits.
In July 2000, the Company's Board of Directors amended the 1996 Plan to allow
for the grant of options and restricted stock to employees at a price less
than 100% of fair market value of the Company's stock on the date of grant. To
date, no options have been granted below fair market value but the company has
granted restricted stock at prices below fair market value on the date of
grant. In July 2000, the Company granted 165,000 shares of restricted stock to
certain employees below fair market value. 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, 2000, 13,000 shares were
forfeited.
In May, July and December 2000, the Board of Directors authorized share
increases of 1,500,000, 1,000,000 and 2,000,000 shares, respectively, to the
shares available under the 1996 Plan. As of February 28, 2001, 1,500,000,
11,550,000 and 300,000 shares were reserved for issuance and 257,500,
1,279,970 and 222,000 were available for grant under the 1999 Plan, the 1996
Plan and the Directors' Plan, respectively.
23
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS
Proposals by shareholders of the Company that are intended to be presented by
such shareholders at the Company's 2002 Annual Meeting of Shareholders must be
received by the Company no later than December 6, 2001, in order that they may
be included in the proxy statement and form of proxy relating to that meeting.
If the Company is not notified of a shareholder proposal by February 20, 2002,
then the proxies held by management of the Company provide discretionary
authority to vote against such shareholder proposal, even though such proposal
is not discussed in the proxy statement.
OTHER MATTERS
The Company knows of no other matters to be submitted to shareholders at the
meeting. If any other matters properly come before the meeting, it is the
intention of the persons named in the enclosed proxy card to vote the shares
they represent as the Board of Directors may recommend.
THE BOARD OF DIRECTORS
ASPECT COMMUNICATIONS CORPORATION
April 6, 2001
24
APPENDIX A
AUDIT COMMITTEE CHARTER
Purpose
The purpose of the Audit Committee established pursuant to this charter will
be to make such examinations as are necessary to monitor the corporate
financial reporting and the internal and external audits of Aspect
Communications (the "Company"), to provide to the Board of Directors (the
"Board") the results of its examinations and recommendations derived there
from, to outline to the Board improvements made, or to be made, in internal
accounting controls, to nominate independent auditors, to supervise the
financial function of the Company (which will include, among other matters,
the Company's investment activities) and to provide the Board such additional
information and materials as it may deem necessary to make the Board aware of
significant financial matters which require Board attention.
In addition, the Audit Committee will undertake those specific duties and
responsibilities listed below and such other duties as the Board may from
time-to-time prescribe.
Charter Review
The Audit Committee will review and reassess the adequacy of this charter at
least once per year, which will include the appointment of a Chairman of the
Audit Committee. This review is initially intended to be conducted at the
first Audit Committee meeting following the company's Annual Meeting of
Stockholders, but may be conducted at any time the Audit Committee desires to
do so. Additionally, to the extent and in the manner that the Company is
legally required to do by the rules of the Securities and Exchange Commission
(the "SEC"), this charter (as then constituted) shall be publicly filed.
Membership
The Audit Committee must be comprised of at least three members of the Board.
Such members will be elected and serve at the pleasure of the Board. The
members of the Audit Committee will not be employees of the Company. Each
member of the Audit Committee shall be an independent director to the extent
required by Rule 4310 and Rule 4460 of the National Association of Securities
Dealers, Inc. ("NASD").
Further, each member of the Audit committee must be able to read and
understand fundamental financial statements, including the Company's balance
sheet, income statement, and cash flow statement, or must become able to do so
within a reasonable period of time after his or her appointment to the Audit
Committee. Additionally, at least one member of the Audit Committee must have
past employment experience in finance or accounting, requisite professional
certification in accounting, or any other comparable experience or background
which results in the individual's financial sophistication, including being or
having been a chief executive officer, chief financial officer or other senior
officer with financial oversight responsibilities. Notwithstanding the
foregoing, one director who is not independent, as defined in the NASD Rules,
and who is not a current employee or an immediate family member of such
employee, may be appointed to the Audit Committee, if the board, under
exceptional and limited circumstances, determines that membership on the Audit
Committee by the individual is required by the best interests of the Company
and its stockholders, and the Board discloses, in the next annual proxy
statement subsequent to such determination, the nature of the relationship and
the reasons for that determination.
A-1
Meetings
The Audit Committee will meet separately with the Principal Executive Officer
annually, and separately with the Principal Financial Officer of the Company,
at least 4 times per year, to review the financial affairs of the Company. The
Audit Committee will meet with the independent auditors of the Company upon
the completion of the annual audit, and at such other times as it deems
appropriate, to review the independent auditors' examination and management
report.
At each of its meetings, to the extent appropriate based on the point in time
of the meeting during the Company's fiscal year, the Audit Committee shall
take such actions as may be necessary or desirable to carry out its
responsibilities (as set forth below).
Responsibilities
The responsibilities of the Audit Committee shall include:
1. Nominating the independent auditors for annual approval by the Board and
ratification by the stockholders;
2. Reviewing the plan for the audit and related services at least annually;
3. Reviewing audit results and annual interim financial statements;
4. Ensuring the receipt of, and reviewing, a written statement from the
Company's auditors delineating all relationships between the auditor and
the Company, consistent with Independent Standards Board Standard 1;
5. Reviewing and actively discussing with the Company's auditors any
disclosed relationship or service that may impact the objectivity and
independence of the auditor;
6. Taking, or recommending that the Board take, appropriate action to oversee
the independence of the outside auditor;
7. Overseeing the adequacy of the Company's system of internal accounting
controls, including obtaining from the independent auditors management
letters or summaries on such internal accounting controls, and overseeing
the effectiveness of the internal audit function (when applicable);
8. Overseeing the Company's compliance with the Foreign Corrupt Practices
Act;
9. Overseeing the Company's compliance with SEC requirements for disclosure
of auditor's services and Audit Committee members and activities; and
10. Overseeing the Company's financial function, which may include the
adoption from time-to-time of a policy with regard to the investment of
the Company's Assets. This includes approving the investment policy and
any proposed changes as well as reviewing the results of such activities
on a regular basis.
In addition to the above responsibilities, the Audit Committee will undertake
such other duties as the Board delegates to it.
Finally, the Audit Committee shall ensure that the Company's auditors
understand both (i) their ultimate accountability to the Board and the Audit
Committee, as representatives of the Company's stockholders, and (ii) the
Board's and the Audit Committee's ultimate authority and responsibility to
select, evaluate and, where appropriate, replace the Company's independent
auditors (or to nominate the outside auditor to be proposed for stockholder
approval in any proxy statement).
A-2
Reports
The Chairman of the Audit Committee will provide an update from the Audit
Committee of its summaries of recommendations to the Board subsequent to each
meeting. To the extent required, the Audit Committee will also prepare and
sign a Report of the Audit Committee for inclusion in the Company's proxy
statement for its Annual Meeting of Stockholders.
Charter Reviewed and Approved by the Audit Committee of Aspect Communications:
Christopher B. Paisley (Chair)
Norman A. Fogelsong
John W. Peth
A-3
ASPECT COMMUNICATIONS CORPORATION
ANNUAL FINANCIAL REPORT TO SHAREHOLDERS
SELECTED CONSOLIDATED FINANCIAL DATA
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands, except per share and employee
YEARS ENDED DECEMBER 31,(a) data)
Net revenues............... $590,521 $489,112 $512,316 $390,642 $308,703
Gross margin............... 306,296 245,943 284,132 221,669 174,781
(% of net revenues)...... 52% 50% 55% 57% 57%
Research and development... 109,427 86,890 67,877 45,723 34,585
(% of net revenues)...... 18% 18% 13% 12% 11%
Selling, general and
administrative............ 235,390 199,050 150,118 104,431 82,478
(% of net revenues)...... 40% 40% 29% 27% 27%
Income (loss) from
operations................ (43,539) (39,997) 56,238 52,605 57,718
(% of net revenues)...... (7%) (8%) 11% 13% 19%
Net income (loss).......... $(35,321) $(28,851) $ 32,490 $ 35,182 $ 37,633
(% of net revenues)...... (6%) (6%) 6% 9% 12%
Earnings (loss) per share:
Basic.................... $ (0.69) $ (0.60) $ 0.64 $ 0.71 $ 0.86
Diluted.................. $ (0.69) $ (0.60) $ 0.61 $ 0.67 $ 0.75
Pro forma diluted(b)..... $ (0.40) $ (0.29) $ 1.01 $ 1.05 $ 0.77
AS OF DECEMBER 31,
Cash, cash equivalents,
short-term investments,
and marketable equity
securities................ $180,958 $338,805 $196,111 $146,216 $115,797
Working capital............ 188,380 313,262 258,177 169,814 140,079
Total assets............... 635,498 636,212 560,659 370,343 283,093
Long-term debt(c).......... 173,893 163,107 153,744 6,531 4,500
Shareholders' equity(c).... $283,525 $331,199 $298,157 $267,795 $219,448
Shares outstanding(c)...... 51,125 49,462 49,309 49,997 48,807
Capital spending........... $ 66,584 $ 33,292 $ 28,884 $ 24,922 $ 33,210
Regular full-time
employees................. 2,740 2,360 2,280 1,610 1,330
- --------
(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.
During 1996, Aspect acquired Envoy Holdings Limited and Prospect Software,
Inc. The transactions were accounted for as pooling of interests.
(b) Pro forma diluted earnings per share has been adjusted for non-recurring
charges for purchased in-process technology, stock-based compensation,
amortization of intangible assets purchased in connection with
acquisitions, gains on sales of appreciated equity securities and the
settlement with Lucent Technologies Inc.
(c) Long-term debt includes the 1998 convertible subordinated debentures and
the capital lease obligation.
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.
In October 1996, Aspect converted a previously issued $55 million of
convertible subordinated debentures into approximately 6 million shares of
common stock.
F-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The matters discussed in this report including, but not limited to, statements
relating to expansion of service infrastructure, anticipated spending levels
for capital equipment in research and development, and selling, general and
administrative expenses, anticipated service margins, adoption of SFAS No.
133, 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" below. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. Aspect undertakes no
obligation to publicly release any revision to these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof.
Background
Aspect Communications Corporation (Aspect or the Company) is the leading
provider of customer relationship portals, contact servers for managing
dynamic customer contact transactions across wired and wireless communication
channels. The Aspect Customer Relationship Portal allows businesses to manage
customer contacts dynamically and turn them into relationships, opportunities
and customer loyalty. The Aspect Customer Relationship Portal synchronizes all
customer contact points, including live and self-service, with demonstrated
customer return on investment. Aspect's leadership in electronic customer
relationship management (eCRM) solutions is based on more than 15 years of
experience and over 7,600 implementations deployed worldwide. Aspect powers
approximately 78 percent of the Fortune 50. Aspect was incorporated on August
16, 1985 in California, and is headquartered in San Jose, California, with
offices in major cities around the world.
In February 2001, the Company announced that as part of its continuing effort
to better optimize operations, the workforce would be reduced by 6% and
selected facilities will be consolidated. Aspect expects that the reduction
will result in a one-time restructuring charge of $4 million to $6 million in
the first quarter of 2001.
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 our products and services,
developing and launching new software based products and services, changing
our internal processes and systems, establishing key systems integration and
technology partnerships, enhancing our senior management team, and retaining
key employees. While the transformation is not complete, significant progress
was made during FY2000. Remaining efforts are focused on completing the sales
force transformation and enhancing the internal infrastructure.
In August 1998, Aspect completed a private placement of $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 Aspect common stock anytime prior to
maturity at a conversion rate of 8.713 shares per $1,000 principal amount.
F-2
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 customer relationship portal software and strengthen the Company's
eCRM 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.
In May 1998, Aspect acquired Voicetek Corporation (Voicetek), a leading
supplier of interactive voice response (IVR) applications. The transaction was
accounted for as a purchase. Aspect recorded a one-time charge of $10 million
in 1998, or $0.19 per diluted share, for purchased in-process technology
related to two development projects that had not reached technological
feasibility, had no alternative future use, and for which successful
development was uncertain.
F-3
Results of Operations
The following table sets forth statement of operations data for the three
years ended December 31, 2000, expressed as a percentage of total revenues:
Years Ended
December 31,
------------------
2000 1999 1998
---- ---- ----
Net revenues:
Product................................................... 57% 58% 67%
Services.................................................. 43 42 33
--- --- ---
Total net revenues...................................... 100 100 100
--- --- ---
Cost of revenues:
Cost of product revenues.................................. 20 19 22
Cost of services revenues................................. 28 31 23
--- --- ---
Total cost of revenues.................................. 48 50 45
--- --- ---
Gross margin................................................ 52 50 55
Operating expenses:
Research and development.................................. 18 18 13
Selling, general and administrative....................... 40 40 29
Purchased in-process technology........................... 1 0 2
--- --- ---
Total operating expenses................................ 59 58 44
--- --- ---
Income (loss) from operations............................... (7) (8) 11
Interest and other income (expense), net.................... 3 0 1
--- --- ---
Income (loss) before income taxes........................... (4) (8) 12
Benefit (provision) for income taxes........................ (2) 2 (6)
--- --- ---
Net income (loss)........................................... (6)% (6)% 6%
=== === ===
Revenues
The Company markets its products in the United States largely through its
direct sales force and internationally has a direct sales force supplemented
through distribution partners in various countries. Net revenues outside of
North America as a percentage of total net revenues over the periods presented
were 31% in 2000, 34% in 1999, and 32% in 1998.
Net revenues increased 21% to $591 million in 2000 from $489 million in 1999,
and 1999 revenues decreased by 5% from $512 million in 1998.
Product revenues increased by 18% to $335 million in 2000 from $282 million in
1999, and 1999 product revenues decreased by 18% from $343 million in 1998.
Product revenues consist of both software license and platform (hardware)
revenues. The increase in product revenues for 2000 was primarily due to the
growth in software license revenues in North America and large hardware
purchases from government customers. The decrease in 1999 related primarily to
the decline in the growth of the Company's traditional business. Product
revenues as a percentage of total revenues were 57%, 58% and 67% in 2000, 1999
and 1998, respectively. On a forward-looking basis, we anticipate that
software license revenues will represent an increasing percentage of product
revenues.
Services revenues increased 24% to $256 million in 2000 from $207 million in
1999, and 1999 services revenues increased 22% from $169 million in 1998.
Service revenues consist primarily of maintenance and support revenues,
consulting services, and educational fees. Growth in services revenues for
both periods
F-4
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 institution of first year software support.
Gross Margins
Gross margin on product revenues was 65% in 2000, 67% in 1999, and 68% in
1998. The product gross margins are a blend of both license and platform
margins. Cost of license revenues includes third party software royalties,
product packaging, and documentation. Cost of platform revenues includes
labor, materials, overhead, and other directly allocated costs involved in the
manufacture and delivery of the products. The decrease in product margins from
1999 to 2000 was primarily due to the decline in platform margins from the
lower overall volume of platform revenues. The decline in product margins from
1998 to 1999 was attributed to higher growth in fixed costs in proportion to
the growth in product revenues during the first three quarters of 1999. The
Company expects overall product margins to increase as the proportion of
license revenues increase.
Gross margin on services revenues was 35% in 2000, 27% in 1999, and 29% in
1998. 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 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. The decrease in services
margins from 1998 to 1999 reflects pricing for services not growing
proportionately with the costs associated with providing the related services.
On a forward-looking basis, we anticipate that services margins will fluctuate
from period to period due to fluctuations in services revenues (since many of
the costs of providing services do not vary proportionately with related
revenues) and ongoing efforts to expand services infrastructure.
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 increased 26% to $109
million in 2000 from $87 million in 1999, and 28% in 1999 from $68 million in
1998. R&D expenditures reflect our 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, 18% in 1999, and
13% in 1998. Excluding amortization of intangible assets, R&D expenses were
$100 million in 2000, $83 million in 1999, and $65 million in 1998. As a
percentage of net revenues, R&D expenses, excluding amortization of intangible
assets, were 17% in 2000, 17% in 1999 and 13% in 1998. We anticipate, on a
forward-looking basis, that such expenses in absolute dollars will remain
relatively flat in 2001, although such expenses as a percentage of net
revenues may fluctuate between periods.
Selling, general and administrative (SG&A) expenses consist primarily of
employee salaries and benefits, commissions, facilities, systems costs and
administrative support. SG&A increased 18% to $235 million in 2000 from $199
million in 1999, and 33% in 1999 from $150 million in 1998. The increases
across the periods were primarily due to increases in direct sales headcount,
sales training efforts, and sales support infrastructure. These increases were
required primarily to support the 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,
41% in 1999, and 29% in 1998. Excluding amortization of intangible assets,
SG&A expenses were $220 million in 2000, $188 million in 1999, and $141
million in 1998. As a percentage of net revenues, SG&A expenses, excluding
amortization of intangible assets, were 37% in 2000, 38% in 1999, and 28% in
1998. We anticipate, on a forward-looking basis, that SG&A expenses will
continue to increase in absolute dollars, although such expenses as a
percentage of net revenues may fluctuate between periods.
F-5
Acquisition Related Expenses
Purchased in-process technology represented non-recurring charges of $5
million in 2000, or $0.10 per share on a diluted basis, related to the
acquisition of PakNetX; and $10 million in 1998, or $0.19 per share on a
diluted basis, related to the acquisition of Voicetek. 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. As of
December 31, 2000, some components of this technology had been incorporated
into Aspect products, while the remaining components are expected to reach
technological feasibility in fiscal year 2001. Failure to successfully
complete the remaining components of this project could result in impairment
of the associated capitalized intangible assets and could require the Company
to accelerate the time period over which the intangibles are being amortized,
which could have a material adverse effect on the Company's business or
operating results. At December 31, 2000, we incurred $3.5 million 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%. As of December 31,
2000, no significant departures from the assumptions included in the valuation
analysis had occurred.
Interest and Other Income/Expense
Interest and other income increased to $31 million in 2000 from $9 million in
1999, and increased in 1999 from $7 million in 1998. The increase in 2000 from
1999 resulted primarily from a pretax gain of $20 million on the sale of
appreciated marketable equity securities. The increase in 1999 from 1998 was
due to the increase in interest income from short-term investments.
Interest and other expense remained virtually unchanged in 2000 from 1999, and
increased to $10 million in 1999 from $4 million in 1998. The increase in 1999
resulted primarily from the full year impact of interest expense associated
with the issuance of $150 million of convertible subordinated debentures in
August 1998.
Benefit (Provision) 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 30% in 1999 and a provision at
45% in 1998. 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 tax rates in all periods presented vary from the
statutory rate of 35% due to nondeductible expenses related to acquisitions
(primarily goodwill amortization) and research credits. The tax rates in 2000
and 1998 also reflect the tax effect of nondeductible purchased in-process
technology charges from the acquisitions of PakNetX and Voicetek,
respectively; and in 2000 and 1999, the tax rates reflect the tax effect of
foreign losses on which no tax benefit can be realized.
Impact of SFAS 133
Statement of Financial Accounting Standards (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 will adopt SFAS No. 133 effective January 1, 2001. Management does not
expect the adoption of SFAS No. 133 to have a significant impact on the
consolidated financial position, results of operations, or cash flows of the
Company.
F-6
Impact of SAB 101
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which summarizes certain views of the SEC staff in applying
generally accepted accounting principles to revenue recognition in financial
statements. Specifically, SAB No. 101 clarified delivery criteria, which
affected the Company's revenue recognition policy. In the quarter ended
December 31, 2000, the Company appropriately applied the provisions of SAB No.
101 effective as of the beginning of the fiscal year. The impact of adoption
of SAB No. 101 in fiscal 2000 resulted in approximately $4 million of revenue
being deferred to future periods.
Recent Developments
On February 27, 2001, Aspect announced that as part of its continuing effort
to better optimize operations, the workforce would be reduced by 6% and
selected facilities would be consolidated. Aspect expects that the reduction
would result in a one-time restructuring charge of $4 million to $6 million in
the first quarter of 2001.
Additionally, on March 20, 2001, Aspect announced revised revenue expectations
for the quarter ending March 31, 2001. In that announcement, based on current
forecasts, the Company estimated that revenue for the March quarter would be
between $110 million and $115 million. The Company also announced that its pro
forma loss from operations for the quarter, excluding the amortization of
intangible assets, stock-based compensation and one-time charges relating to
restructuring, was estimated to be between $37 million and $41 million. Based
on this information, together with the related impact on the full fiscal year,
the Company determined the need for a full valuation allowance against its
deferred tax assets as of December 31, 2000 fiscal year end. The valuation
allowance is described above in "Benefit (Provision) for Income Taxes" and
detailed in Note 13 to the Company's consolidated financial statements.
Liquidity and Capital Resources
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 27% of total assets. The fair market
value of the marketable equity securities was $10 million. These securities
are available for sale at Aspect's discretion and are subject to market
prices, which have historically fluctuated significantly.
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 repurchases of our common stock. We currently anticipate lower
spending levels for capital equipment in 2001.
The primary sources of cash during 1999 were $86 million from operating
activities, predominantly a result of significant net collections of accounts
receivable, and proceeds from the issuance of common stock under various stock
plans of $27 million. The primary uses of cash during 1999 were net purchases
of short-term investments of $40 million, $22 million for repurchases of
common stock, and $33 million for the purchase of property and equipment,
primarily the purchase of computer software and hardware.
At December 31, 2000, outstanding borrowings totaled $174 million, and is
comprised of $173 million in convertible debentures and $1 million in a
capital lease (of which $500,000 is included in "other accrued liabilities" in
the accompanying consolidated balance sheet.)
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, 2000, 1,350,000 shares have been repurchased at a weighted
average price of $18.56 per share. All shares repurchased have been retired.
The Company is currently constructing a new facility and is committed to pay a
minimum of an additional $16 million to complete construction of the new
building.
F-7
On a forward-looking basis, cash, cash equivalents, short-term investments,
and marketable equity securities will be sufficient to meet presently
anticipated cash requirements during at least the next twelve months.
We operate in a rapidly changing environment that involves a number of risks,
some of which are beyond our 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
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 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 eCRM 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 eCRM
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 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
F-8
agreements, like 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 our efforts.
Doing Business Internationally 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;
. 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.
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. A recent example that
had no material impact for the year ended December 31, 2000, was the
implementation of SFAS No. 133.
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. For example, in March 2000, Aspect initiated legal action for
alleged trade secret violations and other intellectual property issues against
eConvergent, Inc.
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.
F-9
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. 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.
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 contact server
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. For example, a delay in awarding multi-
million dollar government contracts had an impact on our business in the
second quarter of 2000. Recent changes in general economic conditions may also
result in many of our customers delaying and/or reducing their capital
spending related to information systems.
We May Experience Difficulty Managing Our Growth and Related Changes: Growth
may place a significant strain on our operational and financial systems. We
are upgrading these systems and may experience substantial disruption and
incur significant expenses and write-offs during these transitions. 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. Our recent sales force
expansion (during the last two quarters of fiscal year 2000) resulted in
higher operating expenses.
F-10
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 broaden original
equipment manufacturer distribution channels, as well as expand third-party
distributor, systems integrator, 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 of contact server
software, and associated software applications. Further, we have recently
increased the size of our sales force. New personnel require extensive
training and initially tend to be less productive than those with greater
experience. Any delays or difficulties we encounter in recruiting, training,
or retention could impair our ability to sell products and services, may be
disruptive to our operations, and may make retention of highly qualified
personnel increasingly challenging.
We Are Dependent on Third Parties: We subcontract substantial elements of our
manufacturing and other support functions 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 subcontract various support
functions to third parties. If any of these vendors experience difficulty
meeting our requirements for components we may be unable to meet development
or delivery commitments.
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 engineering,
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
We Are Exposed to Fluctuations in Foreign Currency Exchange Rates, Interest
and Investment Income, Marketable Equity Securities, 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. We also evaluate
our marketable equity securities portfolio against a 50% adverse change in
price/value. 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
F-11
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, this volatility
could be exacerbated by the relatively low trading volume of our common stock
and debentures.
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. This debt
resulted in a ratio of long-term debt to total shareholders' equity of
approximately 61% at December 31, 2000. As a result of this sale, 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 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.
Quantitative and Qualitative Disclosures About Financial Market Risk
We are exposed to financial market risk from fluctuations in foreign currency
exchange rates, interest rates, and stock prices of marketable equity
securities. With the exception of the stock price volatility of our marketable
equity securities, 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 nonperformance 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 in the costs to manufacture and deliver our products and in our
customers' buying practices. We have not substantially changed our risk
management practices during 2000 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.
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, 2000, our primary net foreign currency
market exposures included Euros and British pounds. At December 31, 1999, our
primary net foreign currency market exposures included British pounds, German
marks, and Dutch guilders.
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, 2000 and 1999, 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 2000 and 1999, 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, 2000 and
1999, 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.
F-12
Marketable Equity Securities: We are exposed to market price risks on our
marketable equity securities. These investments are in publicly traded
companies in the volatile high-technology and Internet software industry
sectors. We do not attempt to reduce or eliminate our market exposure on these
securities. A 50% adverse change in the equity price would result in an
approximate $5 million decrease in the fair value of our marketable equity
securities as of December 31, 2000 ($43 million decrease at December 31,
1999).
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. 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, 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%. Based upon a hypothetical immediate
50-basis-point increase in interest rates at December 31, 1999, the market
value of our fixed-rate long-term debt would decrease by approximately 1.0%.
Conversely, a 50-basis-point decrease in interest rates at December 31, 1999,
would increase the market value of our fixed-rate long-term debt outstanding
by approximately 1.0%. 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, 2000 (none in 1999), indicated that such market
movement would not have a material effect on our business, operating results
or financial condition.
F-13
ASPECT COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
------------------
2000 1999
-------- --------
(in thousands,
except share
amounts)
Assets
------
Current assets:
Cash and cash equivalents................................. $ 84,544 $ 84,826
Short-term investments.................................... 86,869 167,840
Marketable equity securities.............................. 9,545 86,139
Accounts receivable (net of allowance for doubtful
accounts: $9,059 in 2000 and $7,180 in 1999) ............ 135,243 77,138
Inventories............................................... 19,940 16,636
Other current assets...................................... 26,925 17,475
-------- --------
Total current assets.................................... 363,066 450,054
Property and equipment, net................................. 108,780 79,397
Intangible assets, net...................................... 146,394 98,711
Other assets................................................ 17,258 8,050
-------- --------
Total assets............................................ $635,498 $636,212
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable.......................................... $ 33,553 $ 14,525
Accrued compensation and related benefits................. 28,483 25,866
Other accrued liabilities................................. 67,609 59,437
Deferred revenue.......................................... 45,041 36,964
-------- --------
Total current liabilities............................... 174,686 136,792
Deferred taxes.............................................. 3,394 5,114
Convertible subordinated debentures......................... 173,041 163,107
Capital lease obligations................................... 852 --
Commitments and contingencies (Note 11)
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: 51,125,114 in 2000 and
49,462,303 in 1999 ...................................... 190,947 155,277
Deferred stock compensation............................... (2,421) --
Accumulated other comprehensive income.................... 2,726 48,328
Retained earnings......................................... 92,273 127,594
-------- --------
Total shareholders' equity.............................. 283,525 331,199
-------- --------
Total liabilities and shareholders' equity.............. $635,498 $636,212
======== ========
See Notes to Consolidated Financial Statements.
F-14
ASPECT COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(in thousands, except per
share amounts)
Net revenues:
Product....................................... $334,570 $282,342 $342,903
Services...................................... 255,951 206,770 169,413
-------- -------- --------
Total net revenues.......................... 590,521 489,112 512,316
-------- -------- --------
Cost of revenues:
Cost of product revenues...................... 117,902 92,991 108,397
Cost of services revenues..................... 166,323 150,178 119,787
-------- -------- --------
Total cost of revenues...................... 284,225 243,169 228,184
-------- -------- --------
Gross margin.................................... 306,296 245,943 284,132
Operating expenses:
Research and development...................... 109,427 86,890 67,877
Selling, general and administrative........... 235,390 199,050 150,118
Purchased in-process technology............... 5,018 -- 9,899
-------- -------- --------
Total operating expenses.................... 349,835 285,940 227,894
-------- -------- --------
Income (loss) from operations................... (43,539) (39,997) 56,238
Interest and other income....................... 31,247 8,877 7,317
Interest and other expense...................... (10,339) (10,095) (4,306)
-------- -------- --------
Income (loss) before income taxes............... (22,631) (41,215) 59,249
Benefit (provision) for income taxes............ (12,690) 12,364 (26,759)
-------- -------- --------
Net income (loss)............................... $(35,321) $(28,851) $ 32,490
======== ======== ========
Basic earnings (loss) per share................. $ (0.69) $ (0.60) $ 0.64
Weighted average shares outstanding............. 51,166 48,375 50,459
Diluted earnings (loss) per share............... $ (0.69) $ (0.60) $ 0.61
Weighted average shares outstanding--assuming
dilution....................................... 51,166 48,375 53,146
See Notes to Consolidated Financial Statements.
F-15
ASPECT COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common Stock Deferred Other
-------------------- Stock Comprehensive Retained
Shares Amount Compensation Income (Loss) Earnings Total
---------- -------- ------------ ------------- -------- --------
(in thousands, except per share amounts)
BALANCES, JANUARY 1,
1998................... 49,996,731 $144,524 -- $ (684) $123,955 $267,795
Comprehensive income:
Net income............. -- -- -- -- 32,490 32,490
Net unrealized loss on
securities (net of
tax of $569).......... -- -- -- (873) -- (873)
Accumulated
translation
adjustments (net of
tax of $741).......... -- -- -- 1,137 -- 1,137
--------
Comprehensive
income.............. 32,754
--------
Issuance of common stock
under stock purchase
plans.................. 172,435 3,078 -- -- -- 3,078
Issuance of common stock
under other stock
plans.................. 1,150,217 10,193 -- -- -- 10,193
Value of stock options
issued in Voicetek
acquisition............ -- 11,184 -- -- -- 11,184
Income tax benefit for
employee stock option
transactions........... -- 4,755 -- -- -- 4,755
Stock repurchased under
stock repurchase
program................ (2,010,000) (31,602) -- -- -- (31,602)
---------- -------- ------- -------- -------- --------
BALANCES, DECEMBER 31,
1998................... 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 stock purchase
plans.................. 940,427 5,748 -- -- -- 5,748
Issuance of common stock
under other stock
plans.................. 2,202,493 21,102 -- -- -- 21,102
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 stock purchase
plans.................. 435,093 5,512 -- -- -- 5,512
Issuance of common stock
under other stock
plans.................. 2,425,718 33,585 -- -- -- 33,585
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
========== ======== ======= ======== ======== ========
See Notes to Consolidated Financial Statements.
F-16
ASPECT COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
(in thousands)
Cash flows from operating activities:
Net income (loss)............................ $ (35,321) $ (28,851) $ 32,490
Reconciliation of net income (loss) to cash
provided by operating activities:
Depreciation................................ 35,893 23,087 20,228
Amortization of intangible assets........... 29,360 20,341 15,387
Amortization of deferred stock
compensation............................... 391 -- --
Purchased in-process technology............. 5,018 -- 9,899
Gain on the sale of equity securities....... (20,402) -- --
Noncash interest expense on debentures...... 9,934 9,363 3,530
Deferred taxes.............................. (4,387) (5,749) 3,359
Changes in assets and liabilities; net of
effects from companies acquired in 2000
and 1998:
Accounts receivable......................... (60,238) 52,405 (40,649)
Inventories................................. (3,479) 2,129 (3,701)
Other current assets and other assets....... (4,801) 5,119 (2,630)
Accounts payable............................ 18,651 (3,749) 5,309
Accrued compensation and related benefits... 2,110 12,688 10,311
Accrued intellectual property settlement.... -- -- (14,000)
Other accrued liabilities................... 21,205 (10,352) (6,949)
Deferred revenue............................ 8,609 9,539 10,459
--------- --------- ---------
Cash provided by operating activities...... 2,543 85,970 43,043
Cash flows from investing activities:
Short-term investment purchases.............. (273,941) (279,513) (266,511)
Short-term investment sales and maturities... 378,591 239,615 177,641
Acquisition of intellectual property......... (200) -- (3,284)
Property and equipment purchases............. (66,584) (33,292) (28,884)
Purchase of company, net of cash acquired.... (55,203) -- (71,382)
--------- --------- ---------
Cash used in investing activities.......... (17,337) (73,190) (192,420)
Cash flows from financing activities:
Repurchase of common stock................... (25,057) (21,708) (31,602)
Other common stock transactions, net......... 39,097 26,849 13,271
Payments on capital lease obligation......... (245) -- --
Payments on notes payable.................... (1,676) (1,624) (16,944)
Net proceeds from issuance of debentures..... -- -- 145,708
--------- --------- ---------
Cash provided by financing activities...... 12,119 3,517 110,433
Effect of exchange rate changes on cash and
cash equivalents............................. 2,393 1,458 (31)
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents.................................. (282) 17,755 (38,975)
Cash and cash equivalents:
Beginning of year............................ 84,826 67,071 106,046
--------- --------- ---------
End of year.................................. $ 84,544 $ 84,826 $ 67,071
========= ========= =========
Supplemental disclosure of cash flow
information:
Cash paid for income taxes................... $ 3,708 $ 2,529 $ 32,438
Supplemental schedule of noncash investing and
financing activities:
Stock options issued in conjunction with
acquisitions................................ $ 10,422 $ -- $ 11,184
Income tax benefit from employee stock
transactions................................ $ 8,396 $ 8,003 $ 4,755
Property acquired under capital lease........ $ 1,596 $ -- $ --
Deferred stock compensation, net of
forfeitures................................. $ 2,812 $ -- $ --
Unrealized gain/(loss) from securities, net
of tax...................................... $ (45,244) $ 50,170 $ (873)
See Notes to Consolidated Financial Statements.
F-17
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization and Significant Accounting Policies
Organization
Aspect Communications Corporation (the Company) is the leading provider of
customer relationship portals, contact servers for managing dynamic customer
contact transactions across wired and wireless communication channels. The
Aspect Customer Relationship Portal allows businesses to manage customer
contacts dynamically and turn them into relationships, opportunities and
customer loyalty. The Aspect Customer Relationship Portal synchronizes all
customer contact points, including live and self-service, with demonstrated
customer return on investment.
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.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity date of three months or less to be cash equivalents.
Investments in Debt and Equity Securities
The Company has classified all of its 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, 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.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed once
assets are placed into service, using the straight-line method over estimated
useful lives of two to thirty years. Leasehold improvements are amortized over
the shorter of the lease term or the estimated useful life.
Intangible Assets
Intangible assets are amortized on a straight-line basis over useful lives of
two to ten years.
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.
F-18
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Beginning in 1998, the Company adopted Statement of Position 97-2, "Software
Revenue Recognition," as amended by Statements of Position 98-4 and 98-9. The
effect of adoption did not have a material impact on the Company's financial
position or results of operations. The Company generally recognizes product
and license revenue upon delivery under an executed agreement, when the fee is
fixed and determinable, and when collection is probable. Services revenues
include: ongoing maintenance and software support contract revenues, which are
recognized ratably over the contract period; consulting revenues, which are
recognized on a percentage of completion basis or upon designated milestone
completions; and installation revenues, which are recognized at the time the
service is provided. Revenues are recorded net of sales returns and
allowances. Product warranty costs are accrued when revenue is recognized.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," 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 year ended December 31, 2000, is reflected in
accordance with SAB No. 101. Had the Company applied the provisions of SAB No.
101 at the beginning of 1998, unaudited pro forma results of operations for
1999 and 1998 would have been as follows (in thousands, except per share
amounts):
1999 1998
-------- -------
Net income (loss) as reported........................... $(28,851) $32,490
Adjustment for the change in accounting principle
applied retroactively.................................. 2,044 (2,044)
-------- -------
Net income (loss) as adjusted........................... $(26,807) $30,446
======== =======
Basic earnings (loss) per share as reported............. $ (0.60) $ 0.64
Effect of change per share.............................. 0.05 (0.04)
-------- -------
Basic earnings (loss) per share as adjusted............. $ (0.55) $ 0.60
======== =======
Diluted earnings (loss) per share as reported........... $ (0.60) $ 0.61
Effect of change per share.............................. 0.05 (0.04)
-------- -------
Diluted earnings (loss) per share as adjusted........... $ (0.55) $ 0.57
======== =======
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
F-19
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 2000, 1999,
and 1998, were approximately $8 million, $10 million, and $3 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 is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share
further includes the dilutive impact, if any, of stock options and restricted
stock awards.
Foreign Currency Translation and Foreign Exchange Contracts
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. Foreign currency transaction
gains and losses, which are included in the consolidated statements of
operations, have not been material in any of the three years presented. 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.
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.
F-20
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 2000) 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. Contributions made by the Company to the plan were
approximately $3 million in 2000, $3 million in 1999, and $2 million in 1998.
Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) at December 31 is comprised of
(in thousands):
2000 1999 1998
------- ------- -----
Accumulated unrealized gains on available-for-sale
securities, net.................................. $ 5,320 $50,564 $ 394
Accumulated translation adjustments, net.......... (2,594) (2,236) (814)
------- ------- -----
Accumulated other comprehensive income (loss)... $ 2,726 $48,328 $(420)
======= ======= =====
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. Actual results could differ from
those estimates and assumptions.
Reclassifications
Certain prior-year amounts in the accompanying Consolidated Financial
Statements have been reclassified to conform to the current-year presentation.
New Accounting Pronouncements
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 will adopt SFAS No. 133 effective January 1, 2001.
Management does not expect the adoption of SFAS No. 133 to have a significant
impact on the consolidated financial position, results of operations, or cash
flows of the Company.
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
eCRM 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 $45 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
F-21
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$10 million and incurred transaction costs of approximately $2 million. As of
December 31, 2000, the Company made an additional $10 million in milestone
payments. This amount was added to goodwill and is being amortized over the
remaining useful life of the intangible asset. 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 and the $10 million in milestone payments are summarized as follows
(in thousands):
Total purchase price:
Total cash
consideration.......... $54,948
Value of options
assumed................ 10,422
Transaction costs....... 1,850
-------
$67,220
=======
Amortization
Purchase price period
allocation: (years)
------------
Tangible assets...... $ 301
Intangible assets:
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
========
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.
As of December 31, 2000, some components of this technology had been
incorporated into Aspect products, while the remaining components are expected
to reach technological feasibility in fiscal year 2001. Failure to
successfully complete the remaining components of this project could result in
impairment of the associated capitalized intangible assets and could require
the Company to accelerate the time period over which the intangibles are being
amortized, which could have a material adverse effect on the Company's
business, financial condition, results of operations, or cash flows. At
December 31, 2000, we incurred $3.5 million 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%. As of December 31,
2000, no significant departures from the assumptions included in the valuation
analysis had occurred.
F-22
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In May 1998, the Company acquired Voicetek Corporation (Voicetek), a leading
supplier of interactive voice response (IVR) applications. The transaction was
accounted for as a purchase. The Company paid approximately $72 million in
cash for all Voicetek common and preferred shares outstanding and converted
all outstanding Voicetek options to purchase approximately 450,000 shares of
Aspect common stock with a fair value of approximately $11 million plus
transaction costs of approximately $3 million, and assumed certain operating
assets and liabilities. In connection with the acquisition, the Company
recorded approximately $90 million of intangible assets, which are being
amortized over a period of four to seven years. The Company recorded a one-
time charge of approximately $10 million in 1998 for purchased in-process
technology. The operating results of Voicetek have been included in the
consolidated statements of operations since the date of acquisition. Had the
acquisition taken place at the beginning of 1998, the unaudited pro forma
results of operations would have been as follows for the year ended December
31 (in thousands, except per share data):
1998
--------
Net revenues....................................................... $520,383
Net income......................................................... $ 31,656
Basic earnings per share........................................... $ 0.63
Diluted earnings per share......................................... $ 0.60
The unaudited pro forma results of operations give effect to certain
adjustments, including amortization of purchased intangibles and goodwill,
interest income associated with funding the acquisition, and entries to
conform to the Company's accounting policies. The approximate $10 million
charge for purchased in-process technology has been excluded from the
unaudited pro forma results, as it is a material non-recurring charge.
Note 3: Investments
Short-term investments in marketable debt and equity securities at December 31
consist of the following (in thousands):
2000
----------------------------------------
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
======== ======= ======= ========
1999
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
Corporate notes and bonds.......... $ 65,176 $ -- $ (620) $ 64,556
Municipal obligations.............. 45,113 15 (140) 44,988
Government obligations............. 58,648 -- (352) 58,296
-------- ------- ------- --------
Total short-term investments... 168,937 15 (1,112) 167,840
Marketable equity securities....... 2,150 83,989 -- 86,139
-------- ------- ------- --------
Total.......................... $171,087 $84,004 $(1,112) $253,979
======== ======= ======= ========
F-23
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The maturity of short-term investments in marketable debt securities at
December 31, 2000, was as follows (in thousands):
Market Value
---------------
Within One to
One Three
Year Years
------- -------
Corporate notes and bonds................................... $16,930 $11,061
Municipal obligations....................................... -- 37,614
Government obligations...................................... 7,263 14,001
------- -------
Total..................................................... $24,193 $62,676
======= =======
During 2000, the Company realized pretax gains of approximately $20 million
(cost basis of approximately $2 million) on the sale of appreciated marketable
equity securities. Realized gains and losses on debt and equity securities
were not significant in 1999 or 1998.
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):
2000 1999
------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Assets:
Cash and cash equivalents........ $84,544 $84,544 $ 84,826 $ 84,826
Short-term investments........... 86,869 86,869 167,840 167,840
Marketable equity securities..... 9,545 9,545 86,139 86,139
Other investments in equity
securities...................... 10,450 10,450 1,450 1,450
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, 2000 and 1999, the Company had outstanding forward
foreign exchange sale contracts with aggregate notional amounts of
approximately $50 million and $48 million, respectively, that had remaining
maturities of one month or less. At December 31, 2000, forward foreign
exchange sale contracts were primarily for Euros and British pounds. At
December 31,
F-24
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1999, forward foreign exchange sale contracts were primarily for British
pounds, German marks, and Dutch guilders. 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), and offset
foreign exchange gains or losses from revaluation of foreign currency
denominated balance sheet items and intercompany balances. At December 31,
2000 and 1999, the estimated fair values of forward foreign exchange sale
contracts were $51 million and $49 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, investments in marketable equity securities, 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):
2000 1999
--------- ---------
Raw materials.......................................... $ 14,779 $ 9,816
Work in progress....................................... 3,404 3,529
Finished goods......................................... 1,757 3,291
--------- ---------
Total.............................................. $ 19,940 $ 16,636
========= =========
Note 6: Other Current Assets
Other assets at December 31 consist of (in thousands):
2000 1999
--------- ---------
Prepaid expenses....................................... $ 10,143 $ 6,337
Other receivables...................................... 13,388 11,138
Deferred tax asset..................................... 3,394 --
--------- ---------
Total.............................................. $ 26,925 $ 17,475
========= =========
Note 7: Property and Equipment
Property and equipment at December 31 consist of (in thousands):
2000 1999
--------- ---------
Land................................................... $ 3,914 $ 3,914
Buildings and improvements............................. 12,315 11,930
Computer and development equipment..................... 134,021 92,852
Field spares........................................... 21,524 19,469
Office equipment....................................... 31,664 34,171
Leasehold improvements................................. 23,083 23,582
Construction in process................................ 15,375 5,135
--------- ---------
Total................................................ 241,896 191,053
Accumulated depreciation and amortization.............. (133,116) (111,656)
--------- ---------
Property and equipment, net............................ $ 108,780 $ 79,397
========= =========
F-25
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company began capitalizing interest costs relating to the construction of
a new building during the third quarter of 2000. As of December 31, 2000,
approximately $300,000 was capitalized into construction in progress.
During the year, the Company entered into an equipment capital lease of
approximately $2 million. At December 31, 2000, accumulated amortization under
this lease was approximately $300,000. The Company had no equipment leased
under capital leases at December 31, 1999.
Note 8: Intangible Assets
Intangible assets at December 31 consist of (in thousands):
2000 1999
-------- -------
Goodwill, net.............................................. $ 66,727 $44,021
Other intangible assets, net............................... 79,667 54,690
-------- -------
Total intangible assets, net............................. $146,394 $98,711
======== =======
Other intangible assets include purchased existing technology, intellectual
property, assembled workforce, customer relationships and sales channels.
Accumulated amortization at December 31, 2000 and 1999, was approximately $74
million and $45 million, respectively.
Note 9: Other Accrued Liabilities
Other accrued liabilities at December 31 consist of (in thousands):
2000 1999
-------- -------
Advertising and marketing expenses......................... $ 2,919 $ 5,151
Accrued software license................................... 3,986 881
Accrued sales and use taxes................................ 11,854 5,852
Deferred taxes............................................. -- 16,817
Income taxes payable....................................... 16,590 --
Other accrued liabilities.................................. 32,260 30,736
-------- -------
Total.................................................... $ 67,609 $59,437
======== =======
Note 10: 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 Aspect common stock
anytime prior to maturity at a conversion rate of 8.713 shares per $1,000
principal amount at maturity. Holders can require Aspect to repurchase the
debentures on August 10, 2003, August 10, 2008, and August 10, 2013, for cash;
or at the election of Aspect, for Aspect common stock, if certain conditions
are met. The debentures are not secured by any Aspect assets and are
subordinated in right of payment to all of Aspect senior indebtedness and
effectively subordinated to the debt of Aspect's subsidiaries. At December 31,
2000 and 1999, debt issuance costs of approximately $4 million and $4 million,
respectively, net of amortization of approximately $550,000 and $350,000,
respectively, are included in other assets in the consolidated balance sheets
and are being amortized over the life of the debt.
F-26
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A note relating to the 1995 acquisition of TCS was payable on October 31,
1998. In 1999, $2 million was paid on this note, and the remaining balance of
$2 million was paid in 2000.
Note 11: Commitments
The Company leases its facilities and certain equipment under noncancelable
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, 2000 are as follows (in thousands):
Capital Operating
------- ---------
2001...................................................... $ 616 $ 18,351
2002...................................................... 616 20,414
2003...................................................... 308 18,397
2004...................................................... -- 17,095
2005...................................................... -- 16,492
2006 and thereafter....................................... -- 78,013
------ --------
Future minimum lease payments........................... 1,540 $168,762
========
Amounts representing interest (10%)..................... (189)
------
Present value of future minimum lease payments.......... 1,351
Current portion......................................... (499)
------
Capital lease obligations............................... $ 852
======
Rent expense incurred under the operating leases was approximately $11
million, $12 million, and $10 million, in 2000, 1999, and 1998, respectively.
Rent expense under the facilities lease is recognized on a straight-line basis
over the term of the lease.
The Company is currently constructing a new facility and is committed to pay a
minimum of an additional $16 million to complete construction of the new
building.
Note 12: Shareholders' Equity
Stock Option Plans
Under the Company's stock option plans, incentive and nonqualified stock
options may be granted to employees, officers, and directors. All options are
granted at fair market value. Options granted to nondirectors 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.
F-27
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of stock option activity follows:
Weighted-
Number of Average
Shares Exercise Price
---------- --------------
Outstanding, January 1, 1998...................... 8,948,532 $16.52
Granted........................................... 7,549,395 20.70
Canceled.......................................... (4,819,269) 25.52
Exercised......................................... (1,149,816) 8.92
----------
Outstanding, December 31, 1998.................... 10,528,842 15.55
Granted........................................... 5,310,584 11.41
Canceled.......................................... (3,221,773) 16.69
Exercised......................................... (2,192,175) 9.87
----------
Outstanding, December 31, 1999.................... 10,425,478 14.28
Granted........................................... 7,085,476 28.36
Canceled.......................................... (2,181,687) 22.07
Exercised......................................... (2,425,939) 13.63
----------
Outstanding, December 31, 2000.................... 12,903,328 $20.82
==========
The following table summarizes information about stock options outstanding at
December 31, 2000:
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding (in years) Price Exerciseable Price
--------------- ----------- ---------------- -------- ------------ --------
$ 0.16 - $ 5.63 271,497 2.71 $ 3.53 248,832 $ 3.67
6.31 - 8.25 1,181,592 7.59 7.89 655,182 7.97
8.50 - 12.19 2,222,526 7.91 10.38 863,425 9.79
12.56 - 18.50 5,325,851 7.90 16.74 2,442,827 16.76
18.63 - 24.31 886,465 8.66 21.67 128,378 21.52
24.75 - 40.75 1,467,651 8.63 33.13 238,047 27.81
45.88 - 62.44 1,440,350 8.85 49.35 -- --
64.84 - 67.88 107,396 8.36 66.72 -- --
---------- ---------
$ 0.16 - $67.88 12,903,328 8.01 $20.82 4,576,691 $14.18
========== =========
At December 31, 2000, 2,306,492 shares were available for future grant under
the Company's stock option plans. At December 31, 1999 and 1998, options to
purchase 3,009,237 and 3,967,930 shares, respectively, were exercisable at
weighted average exercise prices of $14.87 and $11.05, respectively.
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. 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.
F-28
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The Company
repurchased 2,990,000 shares in 1999, and 2,010,000 shares in 1998, at a
weighted average acquisition price of $7.26 and $15.72 per share,
respectively. A total of 5 million shares have been repurchased under this
program at a weighted average acquisition price of approximately $10.66. The
Company completed this program in June 1999 and all shares repurchased have
been retired.
1998 Stock Option Exchange Program
In October 1998, the Company's Board of Directors approved an option exchange
program for all current outstanding stock with exercise prices in excess of
$17.50 per share. Executive officers and nonemployee directors of the Company
were not eligible to participate in the exchange program. Under this program,
eligible employees could elect to exchange existing options with higher
exercise prices for the same number of replacement options with an exercise
price equal to the closing sale price of the Company's common stock on
November 21, 1998. Replacement options were granted with a one-year exercise
prohibition period. The vesting schedule for unvested shares and the final
expiration date of the replacement options remained the same as the expiring
option. On November 21, 1998, approximately 4 million options with exercise
prices ranging from $19.63 to $32.02 per share were exchanged for the same
number of options with an exercise price of $18.50 per share.
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 Aspect'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 May 11, 1999.
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. At December 31, 2000, 3,409,461 shares had been issued under this
plan.
Shares Reserved for Issuance
At December 31, 2000, the Company had reserved shares of common stock for
issuance as follows:
Stock option plans.............................................. 15,209,820
Stock purchase plans............................................ 2,590,539
Other stock plans............................................... 14,630
----------
17,814,989
==========
F-29
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 2000, 13,000 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 will amortize 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,
--------------------
2000 1999 1998
------ ----- -----
Employee Stock Options:
Expected life from vest date (in months)............... 9 14 7
Stock volatility....................................... 88% 74% 63%
Risk-free interest rate................................ 6% 5% 5%
Dividend yield......................................... -- -- --
Weighted-average fair value............................ $23.10 $7.90 $8.50
Employee Stock Purchase Plan:
Expected life from vest date (in months)............... 6 6 6
Stock volatility....................................... 122% 94% 72%
Risk-free interest rate................................ 5% 5% 5%
Dividend yield......................................... -- -- --
Weighted-average fair value............................ $15.45 $7.65 $9.00
F-30
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 income (loss) and earnings (loss) per share would
have been reduced to the pro forma amounts indicated below (in thousands,
except per share amounts):
2000 1999 1998
-------- -------- -------
Net income (loss)................... As reported $(35,321) $(28,851) $32,490
Pro forma $(84,211) $(46,709) $15,632
Basic earnings (loss) per share..... As reported $ (0.69) $ (0.60) $ 0.64
Pro forma $ (1.65) $ (0.97) $ 0.31
Diluted earnings (loss) per share... As reported $ (0.69) $ (0.60) $ 0.61
Pro forma $ (1.65) $ (0.97) $ 0.29
Note 13: Income Taxes
Income tax benefits (provisions) for the years ended December 31 consist of
(in thousands):
2000 1999 1998
-------- -------- --------
Current:
Federal...................................... $(10,909) $ 5,057 $(17,882)
State........................................ (1,247) 578 (3,533)
Foreign...................................... (2,171) 980 (1,985)
-------- -------- --------
Subtotal................................... (14,327) 6,615 (23,400)
Deferred:
Federal...................................... (4,605) 3,645 (3,159)
State........................................ 6,242 2,104 (200)
-------- -------- --------
Subtotal................................... 1,637 5,749 (3,359)
-------- -------- --------
Total.................................... $(12,690) $ 12,364 $(26,759)
======== ======== ========
Income (loss) before income taxes for the years ended December 31 consists of
(in thousands):
2000 1999 1998
-------- -------- --------
Domestic....................................... $(13,886) $(19,556) $ 57,348
Foreign, net................................... (8,745) (21,659) 1,901
-------- -------- --------
Total.................................... $(22,631) $(41,215) $ 59,249
======== ======== ========
F-31
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
2000 1999 1998
----- ----- ----
Tax at statutory rate.................................. (35.0)% (35.0)% 35.0%
State income taxes--net of federal effect.............. (4.0) (3.5) 4.1
Goodwill amortization.................................. 18.0 6.3 2.6
Research and development tax credits................... (9.7) (7.7) (1.5)
Tax-exempt investment income........................... (3.1) (1.4) (1.2)
Foreign sales corporation.............................. (3.1) (0.7) (1.0)
Foreign losses for which no benefit may be realized.... 12.7 13.4 --
Purchased in-process technology........................ 8.6 -- 6.5
Change in valuation allowance.......................... 70.9 -- --
Other.................................................. 0.8 (1.4) 0.7
----- ----- ----
Total.............................................. 56.1 % (30.0)% 45.2%
===== ===== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating
loss carryforwards and tax credits. Significant components of the Company's
deferred income tax assets and liabilities as of December 31 were as follows
(in thousands):
2000 1999
-------- --------
Deferred tax assets:
Accruals deductible in different periods................. $ 15,289 $ 10,153
Deferred revenue......................................... 1,178 --
Depreciation and amortization............................ 7,010 4,044
Net operating loss and tax credit carryovers of Aspect
and subsidiaries........................................ 23,026 --
Net operating loss and tax credit carryovers of purchased
companies............................................... 8,973 5,500
Costs capitalized for state tax purposes................. 4,516 2,000
Other deferred tax assets................................ 794 468
-------- --------
Total.................................................. 60,786 22,165
Valuation allowance...................................... (33,357) --
-------- --------
Total deferred tax assets.............................. $ 27,429 $ 22,165
======== ========
Deferred tax liabilities:
Unrealized gains on investments.......................... $ (3,508) $(32,328)
Purchased intangibles.................................... (23,247) (11,197)
Other deferred tax liabilities........................... (674) (571)
-------- --------
Total deferred tax liabilities......................... $(27,429) $(44,096)
-------- --------
Net deferred tax asset (liability)................... $ -- $(21,931)
======== ========
Deferred taxes included in:
Other current assets..................................... 3,394 --
Other assets............................................. -- --
Other accrued liabilities................................ -- (16,817)
Noncurrent deferred taxes................................ (3,394) (5,114)
-------- --------
Net deferred tax asset (liability)................... $ -- $(21,931)
======== ========
F-32
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 2000, approximately $17 million of the Company's
total deferred tax assets for net operating losses was created as the result
of deductions for employee stock option compensation. When recognized, the tax
benefit of these credit 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, 2000, the Company had approximately $60 million of federal and
state net operating losses, which will expire beginning in 2020. The net
operating losses related to foreign jurisdictions amounted to approximately $7
million.
At December 31, 2000, the Company had approximately $13 million of federal net
operating loss and $1 million of tax credit carryovers from its acquisition of
Voicetek and approximately $10 million of federal net operating loss from its
acquisition of PakNetX, both of 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 utilized in any given year to
reduce certain future taxable income may be limited.
The Voicetek and PakNetX net operating losses will begin expiring in 2004 and
2012, respectively. The Voicetek tax credit carryovers will begin expiring in
2004.
Note 14: Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share for the years ended December 31
are calculated as follows (in thousands, except per share amounts):
2000 1999 1998
-------- -------- -------
Weighted average shares outstanding............. 51,318 48,375 50,459
Restricted common stock........................ (152) -- --
-------- -------- -------
Shares used in calculation, basic............... 51,166 48,375 50,459
-------- -------- -------
Net income (loss)............................... $(35,321) $(28,851) $32,490
Basic earnings (loss) per share............... $ (0.69) $ (0.60) $ 0.64
======== ======== =======
Shares used in calculation, basic............... 51,166 48,375 50,459
Dilutive effect of options...................... -- -- 2,687
-------- -------- -------
Shares used in calculation, diluted........... 51,166 48,375 53,146
-------- -------- -------
Net income (loss)............................... $(35,321) $(28,851) $32,490
Diluted earnings (loss) per share............. $ (0.69) $ (0.60) $ 0.61
======== ======== =======
The Company had approximately 13 million and 10 million common stock options
outstanding for the period ended December 31, 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, 2000, 1999, and
1998, the Company had 4 million shares of common stock issuable upon
conversion of the convertible debentures. Additionally, the Company had
152,000 shares of restricted common stock outstanding at December 31, 2000.
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.
F-33
ASPECT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15: Segment, Geographic, and Customer Information
The Company adopted SFAS No. 131, "Disclosure About Segments of an Enterprise
and Related Information," at December 31, 1998, which establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products and services, major customers, and the
countries in which the entity holds material assets and reports revenue. Under
SFAS No. 131, the Company's operations are reported as one operating segment;
therefore, 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 2000, 1999, and 1998.
The following presents net revenues for the years ended December 31, 2000,
1999, and 1998; and property and equipment as of December 31, 2000, 1999, and
1998, by geographic area (in thousands):
2000 1999 1998
-------- -------- --------
Net revenues:
United States................................ $477,777 $415,562 $438,833
United Kingdom............................... 57,714 67,547 82,678
Other International (<10%)................... 144,030 72,895 60,468
Eliminations................................. (89,000) (66,892) (69,663)
-------- -------- --------
Total consolidated......................... $590,521 $489,112 $512,316
======== ======== ========
Long-lived assets (property and equipment):
United States................................ $ 91,741 $ 63,195 $ 54,523
United Kingdom............................... 13,413 12,639 9,319
Other International (<10%)................... 5,294 6,175 6,128
Eliminations................................. (1,668) (2,612) (778)
-------- -------- --------
Total consolidated......................... $108,780 $ 79,397 $ 69,192
======== ======== ========
Note 16: 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.
Note 17: Subsequent Events
In February 2001, the Company announced that as part of its continuing effort
to better optimize operations, the workforce would be reduced by 6% and
selected facilities would be consolidated. The Company expects that the
reduction will result in a one-time restructuring charge of $4 million to $6
million in the first quarter of 2001.
F-34
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, 2000 and 1999, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
San Jose, California
January 22, 2001
(February 27, 2001 as to Note 17)
F-35
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company adopted a change in accounting policy related to SAB No. 101,
"Revenue Recognition in Financial Statements" in the quarter ended December
31, 2000, retroactive to the beginning of fiscal year 2000. The retrospective
application of this change has no cumulative impact on the fiscal 2000 results
for the Company, but it does change the presentation of historical 2000
quarterly revenue and earnings per share. The information that follows has
been adjusted to reflect this change.
Dec. 31 Sept. 30 June 30 Mar. 31
-------- -------- -------- --------
(in thousands, except per share
amounts)
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)
Quarterly per share stock price:
High............................ $ 22.44 $ 43.88 $ 49.25 $ 67.97
Low............................. $ 7.53 $ 16.00 $ 28.25 $ 33.88
1999 Quarters Ended
Net revenues...................... $146,899 $129,942 $112,186 $100,085
Gross margin...................... 79,612 65,996 53,644 46,691
(% of net revenues)............. 54% 51% 48% 47%
Income (loss) from operations..... 1,173 (4,959) (17,458) (18,753)
Net income (loss)................. $ 597 $ (3,698) $(12,470) $(13,280)
(% of net revenues)............. 0% (3%) (11%) (13%)
Diluted earnings (loss) per
share............................ $ 0.01 $ (0.08) $ (0.26) $ (0.27)
Quarterly per share stock price:
High............................ $ 43.31 $ 17.06 $ 10.31 $ 17.06
Low............................. $ 15.44 $ 9.81 $ 6.13 $ 6.25
The information shown below has been adjusted for the $5 million non-recurring
charge for purchased in-process technology in the first quarter of 2000,
stock-based compensation, amortization of intangible assets purchased in
connection with acquisitions, and gains on sales of appreciated equity
securities.
Dec. 31 Sept. 30 June 30 Mar. 31
-------- -------- -------- --------
(in thousands, except per share
amounts)
2000 Quarters Ended
Pro forma net income (loss)....... $(15,299) $ (2,687) $ (5,633) $ 3,136
Pro forma diluted earnings (loss)
per share........................ $ (0.30) $ (0.05) $ (0.11) $ 0.06
1999 Quarters Ended
Pro forma net income (loss)....... $ 4,050 $ (114) $ (8,656) $ (9,438)
Pro forma diluted earnings (loss)
per share........................ $ 0.08 $ 0.00 $ (0.18) $ (0.19)
F-36
APPENDIX B
Aspect Communications Corporation
1999 EQUITY INCENTIVE PLAN
--------------------------
(AS AMENDED BY THE BOARD OF DIRECTORS, SUBJECT TO SHAREHOLDER APPROVAL)
1. Purposes of the Plan. The purposes of this Equity Incentive Plan are
--------------------
to attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to the Employees and Consultants
of the Company and to promote the success of the Company's business. Options
granted under the Plan may be either Incentive Stock Options (as defined under
Section 422 of the Code) or Nonstatutory Stock Options, as determined by the
Administrator at the time of grant of an Option and subject to the applicable
provisions of Section 422 of the Code and the regulations promulgated
thereunder.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or its Committee appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Affiliate" means an entity other than a Subsidiary (as defined
---------
below) in which the Company owns an equity interest or which, together with the
Company, is under common control of a third person or entity.
(c) "Applicable Laws" means the legal requirements relating to the
---------------
administration of stock option plans under applicable U.S. state corporate laws,
U.S. federal and applicable state securities laws, the Code, any Stock Exchange
rules or regulations and the applicable laws of any other country or
jurisdiction where Options are granted under the Plan, as such laws, rules,
regulations and requirements shall be in place from time to time.
(d) "Board" means the Board of Directors of the Company.
-----
(e) "Change of Control" means a sale of all or substantially all of
-----------------
the Company's assets, or any merger or consolidation of the Company with or into
another corporation other than a merger or consolidation in which the holders of
more than 50% of the shares of capital stock of the Company outstanding
immediately prior to such transaction continue to hold (either by the voting
securities remaining outstanding or by their being converted into voting
securities of the surviving entity) more than 50% of the total voting power
represented by the voting securities of the Company, or such surviving entity,
outstanding immediately after such transaction.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
----
(g) "Committee" means one or more committees or subcommittees
---------
appointed by the Board to administer the Plan in accordance with Section 4
below.
(g) "Common Stock" means the Common Stock of the Company.
------------
(h) "Company" means Aspect Communications Corporation, a California
-------
corporation.
(i) "Consultant" means any person, including an advisor, who is
----------
engaged by the Company or any Parent, Subsidiary or Affiliate to render services
and is compensated for such services.
(j) "Continuous Service Status" means the absence of any interruption
-------------------------
or termination of service as an Employee or Consultant to the Company or a
Parent, Subsidiary or Affiliate. Continuous Service Status shall not be
considered interrupted in the case of (i) sick leave; (ii) military leave; (iii)
any other leave of absence approved by the Administrator, provided that such
leave is for a period of not more than 90 days, unless reemployment upon the
expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time; or (iv)
in the case of transfers between locations of the Company or between the
Company, its Parent(s), Subsidiaries, Affiliates or their respective successors.
For purposes of this Plan, a change in status from an Employee to a Consultant
or from a Consultant to an Employee will not constitute a termination of
Continuous Service Status.
(k) "Corporate Transaction" means a sale of all or substantially all
---------------------
of the Company's assets, or a merger, consolidation or other capital
reorganization of the Company with or into another corporation.
(l) "Director" means a member of the Board.
--------
(m) "Employee" means any person (including, if appropriate, any Named
--------
Executive, Officer or Director) employed by the Company or any Parent,
Subsidiary or Affiliate of the Company. The payment by the Company of a
director's fee to a Director shall not be sufficient to constitute "employment"
of such Director by the Company.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(o) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
------
price for such stock as quoted on such system on the date of determination (if
for a given day no sales were reported, the closing sales price on the last
preceding trading date from which such quotation exists shall be used), as such
price is reported in The Wall Street Journal or such other source as the
Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but not
on the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the bid and asked prices for the Common Stock or;
2
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(p) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written Option Agreement.
(q) "Named Executive" means any individual who, on the last day of the
---------------
Company's fiscal year, is the chief executive officer of the Company (or is
acting in such capacity) or among the four most highly compensated officers of
the Company (other than the chief executive officer). Such officer status shall
be determined pursuant to the executive compensation disclosure rules under the
Exchange Act.
(r) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable Option
Agreement.
(s) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16(a) of the Exchange Act and the rules and regulations
promulgated thereunder.
(t) "Option" means a stock option granted pursuant to the Plan.
------
(u) "Option Agreement" means a written document, the form(s) of which
----------------
shall be approved from time to time by the Administrator, reflecting the terms
of an Option granted under the Plan and includes any documents attached to or
incorporated into such Option Agreement, including, but not limited to, a notice
of stock option grant and a form of exercise notice.
(v) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(w) "Optionee" means an Employee or Consultant who receives an Option.
--------
(x) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(y) "Plan" means this 1999 Equity Incentive Plan.
----
(z) "Reporting Person" means an Officer, Director or greater than 10%
----------------
shareholder of the Company within the meaning of Rule 16a-2 of the Exchange Act,
who is required to file reports pursuant to Rule 16a-3 of the Exchange Act.
(aa) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act,
----------
as amended from time to time, or any successor provision.
(bb) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
3
(cc) "Stock Exchange" means any stock exchange or consolidated stock
--------------
price reporting system on which prices for the Common Stock are quoted at any
given time.
(dd) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
(ee) "Ten Percent Holder" means a person who owns stock representing
------------------
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of shares that may be optioned and sold
under the Plan is 3,950,000 Shares of Common Stock. The shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares that were subject thereto
shall, unless the Plan has been terminated, become available for future grant
under the Plan. In addition, any Shares of Common Stock that are retained by
the Company upon exercise of an Option in order to satisfy the exercise price
for such Option, or any withholding taxes due with respect to such exercise,
shall be treated as not issued and shall continue to be available under the
Plan. Shares issued under the Plan and later repurchased by the Company
pursuant to any repurchase right that the Company may have shall not be
available for future grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) General. The Plan shall be administered by the Board or a
-------
Committee, or a combination thereof, as determined by the Board. The Plan may
be administered by different administrative bodies with respect to different
classes of Optionees and, if permitted by the Applicable Laws, the Board may
authorize one or more officers (who may (but need not) be Officers) to grant
Options to Employees and Consultants.
(b) Administration with respect to Reporting Persons. With respect to
------------------------------------------------
Options granted to Reporting Persons and Named Executives, the Plan may (but
need not) be administered so as to permit such Options to qualify for the
exemption set forth in Rule 16b-3 and to qualify as performance-based
compensation under Section 162(m) of the Code.
(c) Committee Composition. If a Committee has been appointed pursuant
---------------------
to this Section 4, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of any Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies (however caused) and remove all members of a Committee
and thereafter directly administer the Plan, all to the extent permitted by the
Applicable Laws and, in the case of a Committee administering the Plan pursuant
to Section 4(b) above, to the extent permitted or required by Rule 16b-3 and
Section 162(m) of the Code.
4
(d) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(o) of the Plan;
(ii) to select the Employees and Consultants to whom Options may
from time to time be granted;
(iii) to determine whether and to what extent Options are granted;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted;
(v) to approve forms of Option Agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder, which terms and
conditions include but are not limited to the exercise price, the time or times
when an Option may be exercised (which may be based on performance criteria),
the vesting schedule, any vesting acceleration or waiver of forfeiture
restrictions, and any restriction or limitation regarding any Option or Optioned
Stock, based in each case on such factors as the Administrator, in its sole
discretion, shall determine;
(vii) to determine when and under what circumstances an Option may
be settled in cash under Section 10(f) instead of Common Stock;
(viii) to make any amendments or adjustments to any Option that the
Administrator determines, in its discretion and under the authority granted to
it under the Plan, to be necessary or advisable, provided however that no
amendment or adjustment to an Option that would materially and adversely affect
the rights of any Optionee shall be made without the prior written consent of
the Optionee;
(ix) to construe and interpret the terms of the Plan and awards
granted under the Plan; and
(x) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options to Optionees who are foreign
nationals or employed outside of the United States in order to recognize
differences in local law, tax policies or customs.
(e) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees.
5. Eligibility.
-----------
(a) Recipients of Grants. Nonstatutory Stock Options may be granted
--------------------
to Employees and Consultants. Incentive Stock Options may be granted only to
Employees,
5
provided however that Employees of an Affiliate shall not be eligible to receive
Incentive Stock Options. An Employee or Consultant who has been granted an
Option may, if he or she is otherwise eligible, be granted an additional Option
or Options.
(b) Type of Option. Each Option shall be designated in the Option
--------------
Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of Shares with respect to which Incentive Stock Options are
exercisable for the first time by an Optionee during any calendar year (under
all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such
excess Options shall be treated as Nonstatutory Stock Options. For purposes of
this Section 5(b), Incentive Stock Options shall be taken into account in the
order in which they were granted, and the Fair Market Value of the Shares shall
be determined as of the time the Option with respect to such Shares is granted.
(c) No Employment Rights. The Plan shall not confer upon any Optionee
--------------------
any right with respect to continuation of employment or consulting relationship
with the Company, nor shall it interfere in any way with his or her right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by the
------------
Board. It shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided however that the term of an Option shall be no
more than ten (10) years from the date of grant thereof or such shorter term as
may be provided in the Option Agreement and provided further that, in the case
of an Incentive Stock Option granted to a person who at the time of such grant
is a Ten Percent Holder, the term of such Incentive Stock Option shall be five
(5) years from the date of grant thereof or such shorter term as may be provided
in the Option Agreement.
8. Limitation on Grants to Employees. Subject to adjustment as provided
---------------------------------
in Section 13 below, the maximum number of Shares which may be subject to
Options granted to any one Employee under this Plan for any fiscal year of the
Company shall be 500,000.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per Share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be such price as is determined by
the Administrator, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who at the time of grant is a
Ten Percent Holder, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant; or
6
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option granted to any
person, the per share Exercise Price shall be no less than 100% of the Fair
Market Value on the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price other than as required above pursuant to merger of
other corporate transaction.
(b) Permissible Consideration. The consideration to be paid for the
-------------------------
Shares to be issued upon exercise of an Option, including the method of payment,
shall be determined by the Administrator (and, in the case of an Incentive Stock
Option, shall be determined at the time of grant) and may consist entirely of
(1) cash, (2) check, (3) delivery of Optionee's promissory note with such
recourse, interest, security and redemption provisions as the Administrator
determines to be appropriate, (4) cancellation of indebtedness; (5) other Shares
that (i) in the case of Shares acquired upon exercise of an Option either have
been owned by the Optionee for more than six months on the date of surrender or
were not acquired, directly or indirectly, from the Company, and (ii) have a
Fair Market Value on the date of surrender equal to the aggregate exercise price
of the Shares as to which the Option is exercised, (6) authorization from the
Company to retain from the total number of Shares as to which the Option is
exercised that number of Shares having a Fair Market Value on the date of
exercise equal to the exercise price for the total number of Shares as to which
the Option is exercised, (7) delivery of a properly executed exercise notice
together with such other instructions as the Administrator and the broker, if
applicable, shall require to effect exercise of the Option and prompt delivery
to the Company of the sale or loan proceeds required to pay the exercise price
and any applicable withholding taxes, (8) any combination of the foregoing
methods of payment, or (9) such other consideration and method of payment for
the issuance of Shares to the extent permitted under the Applicable Laws. In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company and the Administrator may refuse to
accept a particular form of consideration at the time of any Option exercise if,
in its sole discretion, acceptance of such form of consideration is not in the
bests interests of the Company at such time.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, consistent with the terms of the Plan, and
reflected in the Option Agreement, including vesting requirements and/or
performance criteria with respect to the Company and/or the Optionee. The
Administrator shall have the discretion to determine whether and to what extent
the vesting of Options shall be tolled during any unpaid leave of absence;
provided however that in the absence of such determination, vesting of Options
shall be tolled during any such leave.
7
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 9(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 13 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Status as an Employee or Consultant. In the event
--------------------------------------------------
of termination of an Optionee's Continuous Service Status, such Optionee may,
but only within sixty (60) days (or such other period of time, as is determined
by the Administrator, with such determination in the case of an Incentive Stock
Option being made at the time of grant of the Option) after the date of such
termination (but in no event later than the date of expiration of the term of
such Option as set forth in the Option Agreement), exercise his or her Option to
the extent that he or she was entitled to exercise it at the date of such
termination. To the extent that the Optionee was not entitled to exercise the
Option at the date of such termination, or if the Optionee does not exercise the
Option to the extent so entitled within the time specified above, the Option
shall terminate and the Optioned Stock underlying the unexercised portion of the
Option shall revert to the Plan. No termination shall be deemed to occur and
this Section 10(b) shall not apply if (i) the Optionee is a Consultant who
becomes an Employee, or (ii) the Optionee is an Employee who becomes a
Consultant.
(c) Disability of Optionee. Notwithstanding Section 10(b) above, in
----------------------
the event of termination of an Optionee's Continuous Service Status as a result
of his or her total and permanent disability (as defined in Section 22(e)(3) of
the Code), such Optionee may, but only within six (6) months (or such other
period of time not exceeding twelve (12) months as is determined by the
Administrator, with such determination in the case of an Incentive Stock Option
being made at the time of grant of the Option) from the date of such termination
(but in no event later than the date of expiration of the term of such Option as
set forth in the Option Agreement), exercise the Option to the extent he or she
was entitled to exercise it at the date of such termination. To the extent that
the Optionee was not entitled to exercise the Option at the date of termination,
or if the Optionee does not exercise the Option to the extent so entitled within
the time specified above, the Option shall terminate and the Optioned Stock
underlying the unexercised portion of the Option shall revert to the Plan.
8
(d) Death of Optionee. In the event of the death of an Optionee:
-----------------
(i) during the term of the Option who is at the time of his
death an Employee or Consultant of the Company and who shall have been in
Continuous Service Status since the date of grant of the Option, the Option may
be exercised, at any time within six (6) months following the date of death (but
in no event later than the date of expiration of the term of such Option as set
forth in the Option Agreement), by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent of the right to exercise that would have accrued had the Optionee
continued living and remained in Continuous Status as an Employee or Consultant
six (6) months after the date of death, subject to the limitation set forth in
Section 5(b); or
(ii) within thirty (30) days (or such other period of time not
exceeding three (3) months as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option being made at the time of
grant of the Option) after the termination of Continuous Service Status, the
Option may be exercised, at any time within six (6) months following the date of
death (but in no event later than the date of expiration of the term of such
Option as set forth in the Option Agreement), by the Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that had accrued at the date of
termination
(e) Extension of Exercise Period. The Administrator shall have full
----------------------------
power and authority to extend the period of time for which an Option is to
remain exercisable following termination of an Optionee's Continuous Service
Status from the periods set forth in Sections 10(b), 10(c) and 10(d) above or in
the Option Agreement to such greater time as the Board shall deem appropriate,
provided that in no event shall such Option be exercisable later than the date
of expiration of the term of such Option as set forth in the Option Agreement.
(f) Buy-Out Provisions. The Administrator may at any time offer to
------------------
buy out for a payment in cash or Shares an Option previously granted under the
Plan based on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time such offer is made.
11. Taxes.
-----
(a) As a condition of the exercise of an Option granted under the
Plan, the Optionee (or in the case of the Optionee's death, the person
exercising the Option) shall make such arrangements as the Administrator may
require for the satisfaction of any applicable federal, state, local or foreign
withholding tax obligations that may arise in connection with the exercise of
Option and the issuance of Shares. The Company shall not be required to issue
any Shares under the Plan until such obligations are satisfied.
(b) In the case of an Employee and in the absence of any other
arrangement, the Employee shall be deemed to have directed the Company to
withhold or collect from the Optionee's compensation an amount sufficient to
satisfy such tax obligations from the next payroll payment otherwise payable
after the date of an exercise of the Option.
9
(c) In the case of an Optionee other than an Employee (or in the case
of an Employee where the next payroll payment is not sufficient to satisfy such
tax obligations, with respect to any remaining tax obligations), in the absence
of any other arrangement and to the extent permitted under the Applicable Laws,
the Optionee shall be deemed to have elected to have the Company withhold from
the Shares to be issued upon exercise of the Option that number of Shares having
a Fair Market Value determined as of the applicable Tax Date (as defined below)
equal to the minimum statutory withholding rates for federal and state tax
purposes, including payroll taxes, applicable to the exercise. For purposes of
this Section 11, the Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
under the Applicable Laws (the "Tax Date").
--------
(d) If permitted by the Administrator, in its discretion, an Optionee
may satisfy his or her tax withholding obligations upon exercise of an Option by
surrendering to the Company Shares that (i) in the case of Shares previously
acquired from the Company, have been owned by the Optionee for more than six (6)
months on the date of surrender, and (ii) have a Fair Market Value determined as
of the applicable Tax Date on the date of surrender equal to the minimum
statutory withholding rates for federal and state tax purposes, including
payroll taxes, applicable to the exercise.
(e) Any election or deemed election by an Optionee to have Shares
withheld to satisfy tax withholding obligations under Section 11(c) or (d) above
shall be irrevocable as to the particular Shares as to which the election is
made and shall be subject to the consent or disapproval of the Administrator.
Any election by an Optionee under Section 11(d) above must be made on or prior
to the applicable Tax Date.
(f) In the event an election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option is exercised but such
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the applicable Tax Date.
12. Non-Transferability of Options. An Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution; provided that the Administrator
may in its discretion grant transferable Nonstatutory Stock Options pursuant to
Option Agreements specifying (i) the manner in which such Nonstatutory Stock
Options are transferable and (ii) that any such transfer shall be subject to the
Applicable Laws. The designation of a beneficiary by an Optionee will not
constitute a transfer. An Option may be exercised, during the lifetime of the
Optionee, only by the Optionee or a transferee permitted by this Section 12.
13. Adjustments Upon Changes in Capitalization, Corporate Transactions,
-------------------------------------------------------------------
Change of Control and Certain Other Transactions.
- ------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, the number of Shares set forth in Section 3 above, and
the number of shares
10
of Common Stock that have been authorized for issuance under the Plan but as to
which no Options have yet been granted or that have been returned to the Plan
upon cancellation or expiration of an Option, the maximum number of shares of
Common Stock for which Options may be granted to any Employee under Section 8
above, as well as the price per Share of Common Stock covered by each such
outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination, recapitalization or
reclassification of the Common Stock (including any change in the number of
Shares of Common Stock effected in connection with a change of domicile of the
Company), or any other increase or decrease in the number of issued Shares of
Common Stock effected without receipt of consideration by the Company; provided
however that conversion of any convertible securities of the Company shall not
be deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Administrator, whose determination in that
respect shall be final, binding and conclusive. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, each outstanding Option shall
terminate immediately prior to the consummation of the transaction, unless
otherwise provided by the Administrator.
(c) Corporate Transactions; Change of Control. In the event of a
-----------------------------------------
Corporate Transaction, each outstanding Option shall be assumed or an equivalent
option shall be substituted by the successor corporation or a Parent or
Subsidiary of such successor corporation (such entity, the "Successor
Corporation"), unless the Successor Corporation does not agree to such
assumption or substitution, in which case such Options shall terminate upon the
consummation of the transaction. Notwithstanding the preceding sentence, in the
event of a Change of Control, each outstanding Option shall be assumed or an
equivalent option substituted by the Successor Corporation, unless the Successor
Corporation does not agree to such assumption or substitution, in which case,
the vesting of each Option shall accelerate and each Option shall become
exercisable in full (including with respect to Shares as to which an Option
would not otherwise be vested and exercisable) prior to consummation of the
transaction at such time and on such conditions as the Administrator shall
determine. To the extent an Option is not exercised prior to consummation of a
Change of Control in which the vesting of Options is being accelerated, such
Option shall terminate upon such consummation and the Administrator shall notify
the Optionee of such fact at least five (5) days prior to the date on which the
Option terminates.
For purposes of this Section 13(c), an Option shall be considered
assumed, without limitation, if, at the time of issuance of the stock or other
consideration upon a Corporate Transaction or a Change of Control, as the case
may be, each Optionee would be entitled to receive upon exercise of the Option
the same number and kind of shares of stock or the same amount of property, cash
or securities as such holder would have been entitled to receive upon the
occurrence of the transaction if the holder had been, immediately prior to such
transaction, the holder of the number of Shares of Common Stock covered by the
Option at such time (after
11
giving effect to any adjustments in the number of Shares covered by the Option
as provided for in this Section 13); provided however that if the consideration
received in the transaction is not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be received upon
exercise of the Option to be solely common stock of the successor corporation or
its Parent equal to the Fair Market Value of the per Share consideration
received by holders of Common Stock in the transaction.
(d) Certain Distributions. In the event of any distribution to the
---------------------
Company's shareholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per Share of Common Stock covered by each
outstanding Option to reflect the effect of such distribution.
14. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option or such other date as is determined by the Administrator;
provided however that in the case of an Incentive Stock Option, the grant date
shall be the later of the date on which the Administrator makes the
determination granting such Incentive Stock Option or the date of commencement
of the Optionee's employment relationship with the Company. Notice of the
determination shall be given to each Employee or Consultant to whom an Option is
so granted within a reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend, discontinue or terminate the Plan, but no amendment, alteration,
suspension, discontinuance or termination (other than an adjustment made
pursuant to Section 13(a) above) shall be made that would materially and
adversely affect the rights of any Optionee under any outstanding grant, without
his or her consent. In addition, to the extent necessary and desirable to
comply with the Applicable Laws, the Company shall obtain shareholder approval
of any Plan amendment in such a manner and to such as degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Administrator, which agreement must be in writing and signed by the Optionee
and the Company.
16. Conditions Upon Issuance of Shares. Notwithstanding any other
----------------------------------
provision of the Plan or any agreement entered into by the Company pursuant to
the Plan, the Company shall not be obligated, and shall have no liability for
failure, to issue or deliver any Shares under the Plan unless such issuance or
delivery would comply with the Applicable Laws, with such compliance determined
by the Company in consultation with its legal counsel.
12
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by law.
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. Option Agreement. Options shall be evidenced by Option Agreements in
----------------
such form as the Administrator shall from time to time approve.
19. Shareholder Approval. If required by the Applicable Laws, continuance
--------------------
of the Plan shall be subject to approval by the shareholders of the Company
within twelve (12) months before or after the date the Plan is adopted. To the
extent shareholder approval is required by the Applicable Laws and is not
obtained, all Options issued under the Plan that are subject to such approval
shall become void. In addition, the Company shall obtain shareholder approval
prior to reducing the exercise price of any Option to the then current Fair
Market Value. Such shareholder approval shall be obtained in the manner and to
the degree required under the Applicable Laws.
13
APPENDIX C
FY2001 Aspect Incentive Plan
Summary
The Aspect Incentive Plan (AIP) is a formula-driven, performance-based incentive
plan the performance goals of which for a particular fiscal year are reviewed
and approved by the Compensation Committee prior to the start of each fiscal
year. Aspect established the AIP beginning in January 2000 for all eligible
employees to create one company-wide plan to:
. Provide a common framework for managing and rewarding performance across
the organization,
. Clearly establish and communicate the goals and objectives for the Company
and each participating employee,
. Motivate and reward performance supporting Aspect's critical business
goals,
. Link rewards with individual performance, and
. Provide upside opportunity along with downside risk
The funding for the AIP is determined by the Company's performance against a set
of performance goals and measurements as determined by the Compensation
Committee. In FY 2001, these goals and measurements include revenue growth and
pro forma earnings. The Compensation Committee may also include other metrics as
deemed appropriate, including, but not limited to, total shareholder return,
stock price, value-added measures, asset turnover, return on investment,
earnings per share, customer satisfaction, internal operational criteria and
management objectives.
Achievement of the goals is substantially uncertain at the time the goals are
established and the Compensation Committee certifies the attainment of the goals
before any payment is made. The formula specifies the maximum annual payout for
any one employee and precludes the Compensation Committee from increasing any
amount once determined by the performance against the Company and personal
performance.
Eligibility
All employees are eligible to participate in the AIP, up through and including
all 16b elected officers. Excluded from the plan are direct sales, pre-sales and
non-executive sales management employees. Customer Service employees are AIP
eligible under a special carve-out plan formula in 2001.
Performance Period
Goals are set annually but they are calibrated, measured and paid quarterly,
subject to Compensation Committee certification that the applicable goals have
been met.
Levels/Types of Goals
Two types or levels of measures are used: Corporate and Individual. The annual
corporate goals are used to establish the individual goals. Results of goals are
measured and incentive payments are paid quarterly based on these results.
Corporate: In fy2001, the Compensation Committee has determined Revenue and
Pro-forma Earnings to be the appropriate measures. The Compensation Committee
will review and approve the Corporate Goals set at the beginning of the
measurement period. Company performance against these goals will be determined
at the end of the measurement period and can range from 0% to 200% against these
pre-established goals.
Individuals: Company managers will evaluate individuals on how they performed
at the end of the measurement period compared to the goals that were established
with their respective management at the beginning of the measurement period.
Individual's performance against these pre-established goals can range from 0%
to 150%.
AIP Payment Amounts
The AIP payment amounts for all eligible employees for Fiscal Year 2001 will be
calculated by using the following formula : E x T x CP x IP = BA
E = Quarterly earnings of the employee
T = Target AIP% which is based on grade level
CP = Company Performance
IP = Individual Performance percentage
BA = Bonus Amount
Note: While this formula will generally be followed, Aspect's Compensation
Committee reserves the right to reduce, but not increase actual payout based on
their subjective, but not arbitrary, determination of an employee's contribution
during the quarter.
Example of AIP Payment
E = $20,000
T = 8%
CP = 110%
IP = 100%
BA = $1,760
($20,000) x (8%) x (110%) x (100%) = $1,760
AIP Payment Maximum and Minimum
The maximum AIP payment an individual can receive is 300% of his or her target.
For example, if an employee's target is 8% of their quarterly earnings, then the
maximum (s)he could receive is 24% of quarterly earnings. The annual maximum
payout for any one employee is $5,000,000. The minimum payout can be zero.
Terms and Conditions
1. An Individual must be employed at the time the award is paid to receive
it.
2. Generally, the AIP payment will be paid within 45 to 60 days from the
quarter's end.
3. All required payroll withholdings would be deducted from the gross bonus
amount.
4. Employees on a performance improvement plan are not eligible to receive an
AIP payment until their performance is satisfactory or better.
5. Aspect management can recommend to the Compensation Committee that the
plan be changed or cancelled at any time or for any reason at their sole
discretion.
6. Eligibility in the plan does not constitute a contract of employment with
Aspect; employees are still employed `at will.'
7. The President & CEO and the Sr. VP of Human Resources will decide any
issues with the administration of the plan, exclusive of pool funding
decisions; and their decisions will be final and binding.
Executive Compensation
The Board of Directors revised the Aspect Incentive Plan in January 2001. The
AIP was also designed to meet the exclusion requirements of Section 162(m) of
the Code as described below.
The 1993 Omnibus Budget Reconciliation Act (OBRA) established a $1,000,000
ceiling for deductions for compensation paid to any of the five most highly
compensated executive officers identified in the Company's proxy statement
(although performance related compensation as defined by COBRA in excess of
$1,000,000 will remain deductible). Because none of the cash compensation
figures for the five most highly compensated executive officers identified in
the Company's proxy statement exceeded the limitation in 2000, there has been no
requirement on the part of the Company to use any of the available exemptions
from the deduction limit.
However, cash compensation levels for the highest paid executives are beginning
to approach the threshold of this limitation. The Compensation Committee took
steps to ensure that performance-related compensation continues to be deductible
by the Company.
CORPORATE INFORMATION
Board of Directors
Beatriz V. Infante: Chairman, President, and Chief Executive Officer
Donald P. Casey: President and Chief Operating Officer, Exodus Communications,
Inc.
Debra J. Engel: Investor and Advisor; former SVP, Corporate Services, 3Com
Corporation
Norman A. Fogelsong: General Partner, Institutional Venture Partners
Christopher B. Paisley: Dean's Executive Professor, Leavey School of Business,
Santa Clara University
John W. Peth: President and Chief Executive Officer, Business Resource Group
David B. Wright: President and Chief Executive Officer, Legato Systems, Inc.
Officers
Beatriz V. Infante: Chairman, President, and Chief Executive Officer
Gary L. Smith: Chief Operating Officer
Betsy Rafael: Executive Vice President, Finance, Chief Financial Officer, and
Secretary
Gary E. Barnett: Executive Vice President, eCRM Applications, and Chief
Technical Officer
Rod Butters: Executive Vice President, Product Strategy and Portal Platform,
and Chief Strategy Officer
Frederick H. Harder: Senior Vice President, Operations
David B. Puglia: Senior Vice President, Global Marketing
Chris T. Purpura: Senior Vice President, Strategic Marketing and Business
Planning
John R. Viera: Senior Vice President, Human Resources
Independent Auditors: Deloitte & Touche LLP, San Jose, California
Legal Counsel: Morrison & Foerster LLP, Palo Alto, California
Transfer Agent: EquiServe, L.P., Canton, Massachusetts
Investor Relations: Additional copies of this annual report and other financial
information are available without charge upon request to: Investor Relations,
Aspect Communications, 1310 Ridder Park Drive, San Jose, California 95131-2313
Tel: (408) 325-2629; E-mail: invest@aspect.com
Stock Listing: Aspect Communications Corporation's common stock is traded on
the Nasdaq Stock Market under the symbol "ASPT." As of December 31, 2000, there
were approximately 968 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.
Annual Meeting: The annual meeting of shareholders will be held at 4:00 p.m. on
May 16, 2001, at Aspect headquarters.
Aspect Corporate Headquarters: Aspect Communications, 1310 Ridder Park Drive,
San Jose, California 95131-2313
Tel: (408) 325-2200 or (877) 621-3692; Fax: (408) 325-2260; www.aspect.com
Primary Locations:
North America
Atlanta, Georgia / Chelmsford, Massachusetts / Chicago, Illinois /
Dallas, Texas / Denver, Colorado / Greenbelt, Maryland / Irvine,
California / Mexico City, Mexico / Nashville, Tennessee / San Jose,
California / Seattle, Washington / Toronto, Ontario, Canada / White
Plains, New York
Europe
Amsterdam, The Netherlands / Brussels, Belgium / Copenhagen, Denmark /
Dublin, Ireland / Dusseldorf, Germany / Frankfurt, Germany / London,
England / Manchester, England / Munich, Germany / Paris, France /
Zurich, Switzerland
Asia-Pacific
Hong Kong, China / Singapore / Sydney, Australia / Tokyo, Japan
((C))2001 Aspect Communications Corporation. Aspect, the Aspect logo, Aspect
eBusiness Architect, and eBusinessIP are trademarks and/or service marks of
Aspect Communications Corporation in the United States and/or other countries.
All other product or service names mentioned in this document may be trademarks
of the companies with which they are associated. Design: Cahan & Associates,
San Francisco
1042-PS-01
1042-PS-01
DETACH HERE
[LOGO OF ASPECT]
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
ASPECT COMMUNICATIONS CORPORATION
2001 ANNUAL MEETING OF SHAREHOLDERS
The undersigned shareholder of Aspect Communications Corporation, a
California corporation, hereby acknowledges receipt of the Notice of Annual
Meeting of Shareholders and the Proxy Statement, each dated April 6, 2001, and
hereby appoints Beatriz V. Infante and Betsy Rafael, or any of them, proxies and
attorneys-in-fact, with full power to each substitution, on behalf and in the
name of the undersigned, to represent the undersigned at the 2001 Annual Meeting
of Shareholders of Aspect Communications Corporation to be held on May 16, 2001,
at 4:00 p.m. at the Company's facilities located at 1310 Ridder Park Drive, San
Jose, California, and at any adjournment(s) thereof, and to vote all shares of
Common Stock that the undersigned would be entitled to vote if then and there
personally present, on the matters set forth on the reverse side.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR THE ELECTION OF ALL LISTED DIRECTORS, FOR THE
AMENDMENT TO THE 1999 EQUITY INCENTIVE PLAN, FOR THE AMENDMENT TO THE ASPECT
INCENTIVE PLAN, FOR THE RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP
AS INDEPENDENT AUDITORS, AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER
MATTERS AS MAY COME BEFORE MEETING.
- ------------- -------------
SEE REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE SIDE
- ------------- -------------
ZASP1A DETACH HERE
[X] Please mark
votes as in
this example.
1. Election of Directors. 2. Approval of an FOR AGAINST ABSTAIN
amendment to the [_] [_] [_]
Nominees: (01) Donald P. Casey; 1999 Equity
(02) Debra J. Engel; (03) Norman Incentive Plan
A. Fogelsong; (04) Beatriz V. to increase the
Infante; (05) Christopher B. number of shares
Paisley; (06) John W. Peth; of common stock
(07) David B. Wright. reserved for
issuance thereunder
FOR [_] [_] WITHHELD by 2,450,000 shares.
ALL FROM ALL
NOMINEES NOMINEES 3. Approval of an [_] [_] [_]
amendment to the
[_] ____________________________ Aspect Incentive Plan.
For all nominee(s) except as
noted above. 4. Ratification of [_] [_] [_]
Deloitte & Touche
LLP as independent
auditors of the
Company for the fiscal
year ending
December 31, 2001.
and, in their discretion, upon such other
matter or matters which may properly come
before the meeting and any adjournment(s)
thereof.
MARK HERE FOR ADDRESS CHANGE [_]
AND NOTE AT LEFT
MARK HERE IF YOU PLAN TO ATTEND [_]
THE MEETING
(This Proxy should be marked, dated,
signed by the shareholder(s) exactly as
his or her name appears hereon, and
returned promptly in the enclosed
envelope. Persons signing in a fiduciary
capacity should so indicate. If shares
are held by joint tenants or as community
property, both should sign.)
Signature:______________ Date: ________ Signature:______________ Date: ________