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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 3, 1998
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ASPECT DEVELOPMENT, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 7372 25-162285
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Number) Identification No.)
</TABLE>
1300 CHARLESTON ROAD
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 428-2700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
DAVID S. DURY
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
ASPECT DEVELOPMENT, INC.
1300 CHARLESTON ROAD
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 428-2700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
JAMES M. KOSHLAND, ESQ.
PAUL A. BLUMENSTEIN, ESQ.
GRAY CARY WARE & FREIDENRICH LLP
400 HAMILTON AVENUE
PALO ALTO, CALIFORNIA 94301-1825
(650) 328-6561
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
---------------
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock ($0.001 par value) 1,296,459 shares $51.75 $67,091,753.25 $19,792.07
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</TABLE>
(1) Estimated solely for the purposes of determining the registration fee in
accordance with Rule 457(c) of the Securities Act and based on the average
of the high and low prices of the Common Stock of Aspect Development, Inc.
as reported on the Nasdaq National Market on March 27, 1998.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 3, 1998
1,296,459 SHARES
ASPECT DEVELOPMENT, INC.
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
The 1,296,459 shares of Common Stock, par value $0.001 ("Common Stock"), of
Aspect Development, Inc., a Delaware corporation ("Aspect" or the "Company"),
offered by this Prospectus (the "Shares") were issued in connection with the
merger (the "CADIS Merger") of CADIS, Inc., a Delaware corporation ("CADIS"),
with Hawaii Acquisition Corporation, a Delaware corporation and wholly-owned
subsidiary of Aspect ("Sub"), which was consummated on November 25, 1997. The
Shares may be sold from time to time by or on behalf of certain former
stockholders of CADIS (the "Selling Stockholders") who are described in this
Prospectus under "Selling Stockholders." As part of the CADIS Merger, the
Company has agreed to register the Shares under the Securities Act of 1933, as
amended (the "Securities Act"). The Company has also agreed to use its best
efforts to cause the registration statement covering the Shares to remain
effective until November 25, 1998. The Company will not receive any of the
proceeds from the sale of the Shares by the Selling Shareholders.
The Company has been advised by the Selling Stockholders that they intend
to sell all or a portion of the Shares from time to time in The Nasdaq National
Market, in negotiated transactions or otherwise, and on terms and at prices then
obtainable. The Selling Stockholders and any broker-dealers, agents or
underwriters that participate with the Selling Stockholders in the distribution
of any of the Shares may be deemed to be "underwriters" within the meaning of
the Securities Act, and any commission received by them and any profit on the
resale of the Shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The Company has agreed to
indemnify in certain circumstances the Selling Stockholders against certain
liabilities, including liabilities under the Securities Act. The Selling
Stockholders have agreed to indemnify in certain circumstances the Company
against certain liabilities, including liabilities under the Securities Act.
See "Plan of Distribution."
The Company's Common Stock is quoted on The Nasdaq National Market under
the symbol "ASDV." On March 31, 1998, the last sale price of the Company's
Common Stock as reported on The Nasdaq National Market was $54.88.
Except as described in this Prospectus under "Plan of Distribution," the
Company will pay all expenses incident to the offering and sale of the Shares to
the public. See "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OFFERED HEREBY.
______________________________
THE SHARES HAVE NOT BEEN REGISTERED FOR SALE UNDER THE SECURITIES LAWS OF ANY
STATE OR JURISDICTION AS OF THE DATE OF THIS PROSPECTUS. BROKERS OR DEALERS
EFFECTING TRANSACTIONS IN THE SHARES SHOULD CONFIRM THE REGISTRATION OF THE
SHARES UNDER THE SECURITIES LAWS OF THE STATES IN WHICH SUCH TRANSACTIONS OCCUR,
OR THE EXISTENCE OF ANY EXEMPTIONS FROM SUCH REGISTRATION.
______________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS _____, 1998.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the Commission's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as at the Regional Offices of the Commission
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can be obtained by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the fees prescribed by the Commission. The Commission
maintains a website that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The Commission's website can be accessed at http://www.sec.gov.
The Common Stock is traded on the Nasdaq National Market. Reports and other
information concerning the Company can also be inspected at the offices of the
National Association of Securities Dealers, Inc., Market Listing Section, at
1735 K Street, N.W., Washington D.C. 20006-1500.
The Company has also filed with the Commission a Registration Statement on
Form S-1 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is made to the Registration Statement, copies of
which may be obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed
by the Commission.
THE COMPANY
Aspect develops, markets and supports enterprise client/server software and
content products that enable manufacturers to improve product development and
business processes through component and supplier management ("CSM"). Aspect's
CSM solution can reduce the costs of production and non-production parts and
accelerate manufacturing time-to-market by enabling users to effectively manage
the components and commodities they buy, as well as the suppliers of those
commodities across the enterprise. Aspect's products enable rapid search,
comparison and selection of the optimal components and suppliers, promote the
reuse of design and manufacturing knowledge, support the consolidation of the
supply chain and facilitate automation of the related design and procurement
processes. Aspect's CSM solution plays the role of "in-bound supply chain
management," providing the information bridge between design and procurement,
complementing the role of enterprise resource planning ("ERP") systems in
planning, manufacturing and order entry and the role of product data management
("PDM") systems in design release and configuration management. The Aspect CSM
solution provides several key business advantages, including a unified
repository of all CSM data, powerful decision support, desktop access to
industry-wide component content, rapid deployment and workflow/process
automation. Aspect's CSM solution is licensed to global enterprises in many
industry verticals including electronics and high technology, aerospace and
defense, automotive, industrial process and consumer package goods.
The Aspect CSM solution incorporates four interrelated elements: the
Explore family of enterprise client/server software products, the VIP family of
component and supplier content databases, Professional Services for legacy data
conversion and business process consulting and the Krakatoa Web Catalog
Publisher.
. Aspect's Explore software, based on patent-pending, third generation
object-relational technology, enables the creation and management of a
unified enterprise repository of knowledge regarding components,
suppliers and designs, facilitates the organization and cross-
referencing of such knowledge for rapid search and reuse, and supports
workflow/process automation.
. The VIP family includes three major content databases: standard parts,
known as VIP; commodity suppliers, known as VIS; and operational/
Maintenance Repair Operations (MRO) products, known as VIP-OPS. VIP, or
very important parts, contains frequently updated industry-wide
information regarding approximately 3 million standard electronic,
electromechanical, and mechanical devices from more than
800 suppliers worldwide. VIS, or very important suppliers, is a
consolidated database of major suppliers of commodities, including
company, financial, qualification, and rating information. VIP-OPS, or
very important parts-operational is a comprehensive catalog of
operational and maintenance items, including information from more than
5,000 suppliers of equipment, tools, supplies and similar products.
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. CSM Professional Services include Data Services for migration,
cleansing, normalization of existing customer component and supplier
data, electronic catalog creation, and Business Process Services to
implement CSM best practices for preferred parts management, supply
chain consolidation, design reuse and similar uses.
. Krakatoa supplies the technology to give manufacturers instant access to
their specialized online databases. This software is currently being
used by suppliers and the data aggregators who seek to publish content
in an easily accessible manner on the Web (the "Web").
Aspect's CSM solution operates in an open client/server environment
allowing customers to use various UNIX servers from Sun Microsystems, Inc.
("Sun"), International Business Machines Corporation ("IBM"), Hewlett Packard
Company ("HP") and Digital Equipment Corporation ("Digital"), as well as servers
based on Microsoft NT. Customers can provide access to CSM data from all major
client platforms, including traditional Windows and UNIX native clients as well
as Web browser access. The Aspect CSM solution also includes standard interfaces
and tools that facilitate CSM integration with ECAD, MCAD, ERP, PDM and other
enterprise systems, including legacy systems. Aspect's products are designed to
provide an out-of-the-box solution for rapid enterprise-wide deployment and are
scalable from a divisional solution to an enterprise deployment of hundreds or
thousands of users in a heterogeneous information technology environment. In
order to provide a complete solution, Aspect offers consulting services to
accelerate CSM data migration and implementation.
The principal executive offices of Aspect are located at 1300 Charleston
Road, Mountain View, California 94043, and its telephone number at that location
is (650) 428-2700. The Aspect logo and Explore, Explore-Enterprise, Explore-
CIS, VIP, Soft Model, Cascade Search, CIS, CADIS and Krakatoa are trademarks of
the Company. All other brand names or trademarks appearing in this Prospectus
are the property of their respective holders.
3
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RISK FACTORS
The following risk factors should be considered in conjunction with the
other information included in this Prospectus before purchasing or otherwise
acquiring the Common Stock offered hereby. This Prospectus contains forward-
looking statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. Actual results could differ materially from
those projected in these forward-looking statements as a result of a variety of
factors, including those set forth below and elsewhere in this Prospectus.
FLUCTUATIONS IN OPERATING RESULTS
The Company's revenues and results of operations have varied on a quarterly
and an annual basis in the past and are expected to vary significantly in the
future. The Company's revenues and results of operations are difficult to
forecast and could be materially adversely affected by many factors, some of
which are outside the control of the Company, including, among others, the
relatively long sales and implementation cycles for the Company's products; the
size and the timing of individual license transactions; seasonality of revenues;
changes in the Company's operating expenses; changes in the mix of products and
services sold; timing of introduction or enhancement of products by the Company
or its competitors; market acceptance of new products; technological changes in
software or database technology; personnel changes and difficulties in
attracting and retaining qualified sales, marketing, technical and consulting
personnel; changes in customers' budgeting cycles; foreign currency exchange
rates; quality control of products sold; and economic conditions generally and
in specific industry segments.
The Company's business has experienced and is expected to continue to
experience seasonality, in part due to customer buying patterns and the
Company's expense patterns. In recent years, the Company has generally had
stronger demand for its products during the quarter ending December 31, and has
incurred higher personnel costs in the quarter ending March 31. The Company
believes that these patterns will continue for the foreseeable future.
Licenses of the Company's client/server software and reference content
products have historically accounted for a substantial majority of the Company's
revenues, and the Company anticipates that this trend will continue for the
foreseeable future. The Company generally ships its products within a short
period of time after execution of a license. As a result, the Company typically
does not have a material backlog of unfilled license orders, and revenues in any
quarter are substantially dependent on license contracts signed in that quarter.
The Company's expense levels are based, in part, on its expectations as to
future revenues and to a large extent are fixed in the short term. Accordingly,
the Company may be unable to adjust spending in a timely manner to compensate
for any unexpected shortfall in revenues, and any significant shortfall of
demand in relation to the Company's expectations or any material delay of
customer orders would have an almost immediate material adverse effect on the
Company's business, financial condition and results of operations.
As a result, it is likely that in some future period the Company's results
of operations could fail to meet the expectations of public market analysts or
investors. In such event, or in the event that adverse conditions prevail or
are perceived to prevail generally or with respect to the Company's business,
the price of the Company's Common Stock would likely drop significantly.
LENGTHY SALES AND IMPLEMENTATION CYCLES
The licensing of the Company's client/server software and reference content
products generally requires the Company to engage in a sales cycle lasting six
to twelve months or longer, during which the Company typically provides a
significant level of education to prospective customers regarding the use and
benefits of the Company's products. In addition, the implementation of the
Company's standard products typically involves a significant commitment of
resources by its customers over an extended period of time and is commonly
associated with reengineering of product development and business processes.
For these reasons, sales and customer implementation cycles are susceptible to a
number of significant delays over which the Company may have little or no
control. Any delay in the sale or customer implementation of a larger license
or a number of smaller licenses would have a material adverse effect on the
Company's business, financial condition or results of operations and cause the
Company's operating results to vary significantly from quarter to quarter.
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RELIANCE ON ACCEPTANCE OF CSM SOLUTION
Substantially all of the Company's revenues are derived from fees for
licensed products and for services which enable CSM by manufacturers. The
Company's future financial performance will depend to a large extent on the
growth in the number of organizations adopting client/server software and
reference content solutions for CSM and engaging outside vendors to provide and
maintain such solutions. The Company's future growth, if any, will also depend
upon the extent to which such organizations choose to implement CSM solutions
across their enterprises and on their continued reliance on the Company's
subscription, maintenance and support offerings. Because the CSM market is
relatively new and evolving, it is difficult to assess or predict with any
assurance its size or growth rate. There can be no assurance that the market
for CSM products and services will continue to develop, or that the Company's
CSM products or services will continue to achieve market acceptance. If the CSM
market develops more slowly than expected or fails to attract new competitors,
or if the Company's products do not continue to achieve broader market
acceptance, the Company's business, financial condition and results of
operations would be materially adversely affected.
DEPENDENCE ON FEW PRODUCTS
The Company currently derives substantially all of its revenues from the
licensing of its Explore client/server software and VIP family of reference
databases and fees from related services. These products and services are
expected to continue to account for substantially all of the Company's revenues
for the foreseeable future. The Company first made its Explore client/server
software and VIP reference databases generally commercially available in the
second quarter of 1995, and has issued regular updates since then. While the
Company believes that to date its customers have not experienced significant
problems with such products, if the Company's customers were to do so in the
future or if they were dissatisfied with product functionality or performance,
the Company's business, financial condition and results of operations would be
materially adversely affected.
There can be no assurance that the Company's products will continue to
achieve broader market acceptance or that the Company will be successful in
marketing its products or product enhancements. In the event that the Company's
current or future competitors release new products that have more advanced
features, offer better performance or are more price competitive than the
Company's products, demand for the Company's products would decline. A decline
in demand for the Explore client/server software or the VIP family of reference
databases as result of competition, technological change, evolution of the
Internet or other factors would have a material adverse effect on the Company's
business, financial condition and results of operations.
MANAGEMENT OF EXPANDING OPERATIONS; KEY PERSONNEL
The Company's business has grown rapidly in recent years, and the Company
has experienced significant growth in the number of its employees, the scope of
its operating and financial systems and the geographic area of its operations,
which has placed a significant strain on the Company's management. The
Company's future results of operations will depend in part on the ability of its
officers and other key employees to continue to implement and expand its
operational, customer support and financial control systems and to grow, train
and manage its employee base. Should the Company's business continue to expand,
there can be no assurance that the Company will be able to manage this expansion
successfully, and any inability to do so would have a material adverse effect on
the Company's business, financial condition or results of operations. In
addition, the Company believes that its future success will also depend to a
significant extent upon its ability to attract, train and retain highly skilled
technical, management, sales, marketing and consulting personnel. Competition
for such personnel is intense, and the Company expects that such competition
will continue for the foreseeable future. The Company has from time to time
experienced difficulty in locating candidates with appropriate qualifications.
There can be no assurance that the Company will be successful in attracting or
retaining such personnel, and the failure to attract or retain such personnel
could have a material adverse effect on the Company's business, financial
condition and results of operation.
5
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RISKS RELATED TO ACQUISITIONS
The Company acquired CADIS in November 1997. See Note 2 of Notes to the
Consolidated Financial Statements. The successful integration of CADIS will
require substantial additional attention from management. The majority of the
costs associated with the acquisition have already been incurred, but the
anticipated benefits of the acquisition will not be achieved unless the CADIS
operations are successfully combined with the Company's. The diversion of the
attention of management from the day-to-day operations of the Company, or
difficulties encountered in the transition and integration process, could have a
material adverse effect on the business, financial condition and results of
operations of the Company.
In connection with the acquisition of CADIS, the Company terminated current
or potential contractual relationships between CADIS and certain customers of
CADIS. Although the Company believes that this action was not in breach of
contractual obligations of CADIS or any rights of other parties that may have
existed at the time, there can be no assurance that any of these customers will
not bring an action against CADIS or the Company claiming contract or tort
damages arising out of the Company's termination of these relationships, or
that, in the event any such action is brought, the Company will be successful in
defending it.
To implement its business plans, the Company may make further acquisitions
in the future, which will require significant financial and management resources
both at the time of the transaction and during the process of integrating the
newly-acquired business into the Company's operations. The Company's operating
results could be adversely affected if it is unable to successfully integrate
such new companies into its operations. There can be no assurance that any
acquired products, technologies or businesses will contribute at anticipated
levels to the Company's sales or earnings, or that sales and earnings from
combined businesses will not be adversely affected by the integration process.
Certain acquisitions or strategic transactions may be subject to approval by the
other party's board or stockholders, domestic or foreign governmental agencies
or other third parties. Accordingly, there is a risk that important
acquisitions or transactions could fail to be concluded as planned. Future
acquisitions by the Company could also result in issuances of equity securities
or the rights associated with the equity securities, which could potentially
dilute earnings per share. In addition, future acquisitions could result in the
incurrence of additional debt, taxes, contingent liabilities, amortization
expenses related to goodwill and other intangible assets and expenses incurred
to align the accounting policies and practices of the acquired companies with
those of the Company. These factors could adversely affect the Company's future
operating results, financial position and cash flows. As some of the Company's
competitors have pursued a strategy of growth through acquisition, there is a
risk that future acquisitions could be more expensive due to competition among
bidders for target companies.
CUSTOMER CONCENTRATION
Historically, a relatively small number of customers has accounted for a
significant percentage of the Company's total revenues, and the Company expects
that it will continue to experience significant customer concentration for the
foreseeable future. In the year ended December 31, 1997 SAP AG ("SAP") accounted
for 11% of revenues. No other customer in any of the three years ended December
31, 1997 accounted for more than 10% of revenues. There can be no assurance
that such customers or any other customers will in the future continue to
license or purchase products or services from the Company at levels that equal
or exceed those prior periods, or at all.
COMPETITION
The market for the Company's products is competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. The Company's products are targeted at the
emerging market for open, client/server software solutions, and the Company's
competitors offer a variety of products and services to address this market.
Among the Company's principal competitors is the Information Handling Systems
division of IHS Group, Inc. ("IHS"), a privately held software and data
publishing company. The Company had licensed a reference data product, CAPS,
from IHS from 1992 until the license expired in October 1997. Prior to October
1997, the Company offered CAPS on a limited basis to certain current and
potential customers who typically use it in addition to the Company's VIP
reference databases. There can be no assurance that the Company will be able to
retain all of these customers following the expiration of the Company's license
to CAPS. Further, the Company
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currently faces indirect competition from third-party professional service
organizations and internal management information systems and computer-aided
design departments of potential customers that develop custom internal software.
In the future, in light of relatively low barriers to entry in the software
industry, the Company could experience additional competition from other
established or emerging companies as the client/server application software
market continues to develop and expand. In particular, Relational Database
Management Systems ("RDBMS") vendors, enterprise resource planning ("ERP")
firms, PDM vendors, supply chain management companies, computer aided design
("CAD") distributors or professional service providers may in the future enter
the Company's market with competitive products. To the extent that the Company
expands into Internet-based or other forms of delivery of data, the Company may
encounter additional competition from its existing competitors and other
established or emerging companies. Many of these potential competitors have
well-established relationships with the Company's current and potential
customers, have extensive knowledge of the client/server industry, better name
recognition and significantly greater financial, technical, sales, marketing and
other resources and are capable of offering single vendor solutions that span
multiple industries. It is also possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. The
Company also expects that competition will increase as a result of software
industry consolidations. The Company's competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development, promotion and sale of their
products.
DISTRIBUTION RISKS
An integral part of the Company's strategy is to expand its direct sales
force and to establish marketing, selling and consulting relationships both
domestically and internationally. In addition, the Company intends to leverage
its relationships with hardware and software vendors and systems integrators to
encourage these parties to recommend or distribute the Company's products. The
Company has invested resources and may invest additional resources to develop
these channels. The ability of the Company to achieve revenue growth in the
future will depend on its success in adding a substantial number of direct sales
employees and establishing marketing, selling and consulting relationships
during 1998 and future periods. There can be no assurance that the Company will
be able to attract sufficient direct sales personnel, software vendors, systems
integrators or other marketing or selling partners to market the Company's
products effectively. There can be no assurance that the cost of the Company's
investment in direct and indirect sales channels will not exceed the revenues
generated from such investment, if any, or that the Company's sales and
marketing organization will successfully compete against the sales and marketing
organizations of the Company's competitors.
INTERNATIONAL SALES
In fiscal 1995, 1996 and 1997, international sales accounted for
approximately 18.9%, 20.3%, and 17.0% of the Company's revenues, respectively.
In addition, although the Company records revenues based on the billing
location, certain domestic billings include licenses that may be deployed by
customers or resold through indirect channels into international locations. The
Company expects that international sales will continue to account for a
significant percentage of the Company's revenues for the foreseeable future.
However, there can be no assurance that the Company will achieve any significant
degree of penetration in any international market.
There are a number of risks inherent in the Company's international
business activities, including unexpected changes in regulatory requirements,
tariffs and other trade barriers, costs and risks of localizing products for
foreign countries, longer accounts receivable payment cycles, potentially
adverse tax consequences, repatriation of earnings and the burdens of complying
with a wide variety of foreign laws. International sales are denominated and
collected in both U.S. and foreign currency. Accordingly, a portion of the
Company's international revenues are subject to currency fluctuation risks. In
those jurisdictions in which the Company's sales are denominated in foreign
currency, fluctuations in such currencies could adversely affect the
profitability of sales made in such jurisdictions and therefore adversely affect
the Company's business, financial condition or results of operations. Further,
an increase in the value of the U.S. dollar relative to foreign currencies could
make the Company's products more expensive and, therefore, potentially less
competitive in those markets where the Company's sales are denominated in U.S.
dollars. The Company to date has
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engaged in foreign currency hedging denominated in U.S. dollars only to a
limited extent. In addition, the Company's revenues earned in various countries
in which the Company does business may be subject to taxation by more than one
jurisdiction, thereby adversely affecting the Company's earnings. There can be
no assurance that any of the foregoing factors will not have a material adverse
effect on the revenues from the Company's future international sales and,
consequently, the Company's financial condition and results of operations.
Significant fluctuations in currency exchange rates against the U.S.
dollar, such as the recent significant fluctuations in Asian currencies, may
cause deferrals, delays and cancellation of orders. The financial systems in
Japan, South Korea, Taiwan, Singapore, and other Asian nations have experienced
significant turmoil. Recently announced financial failures by leading Asian
financial institutions have increased concerns over Asian economic stability.
Such turmoil in the financial markets has caused manufacturers in these
countries to delay or defer capital expenditures. Diminished economic growth in
Asia could reduce consumer demand for the Company's products and related
services.
NEED TO DEVELOP, MAINTAIN AND IMPROVE REFERENCE CONTENT PRODUCTS
The Company's VIP component reference databases are comprised of a large
amount of information supplied by component suppliers that requires frequent
updating and expansion. As a result, the Company must continue to invest
substantial resources in its reference content products. The information
regarding components and suppliers contained in the Company's VIP component
reference databases is derived from supplier databooks and is not proprietary to
the Company. Therefore, other parties may independently create similar
reference data products. Furthermore, the Company currently plans to develop,
license or acquire reference content products for additional global vertical
markets, which will impose significant additional burdens on its content product
development efforts. As the information contained in the Company's reference
content products expands or if the Company's customer base demands more frequent
updates, unforeseen problems with entering, updating, managing or delivering the
data could arise. Because the Company's customers rely on the information
contained in the Company's VIP family of component reference databases to design
and procure components for their products, the accuracy, completeness and
currency of the information in those content products is critical. To the
extent that the Company is unable to keep its reference content products
accurate, complete or current, its customers may become dissatisfied with these
products and discontinue their purchase of the Company's products and services.
In the event that the Company's VIP family of component reference databases is
or is perceived to be inaccurate, incomplete or out-of-date, the Company's
business, financial condition and results of operations could be materially
adversely affected.
RISK OF PRODUCT DEFECTS
Software and reference content products as complex as those offered by the
Company frequently contain undetected errors or failures when first introduced
or when new versions are released. The Company has in the past discovered
software bugs and data errors in certain of its products and enhancements, both
before and after initial shipment. There can be no assurance that, despite
testing by the Company and its customers, errors will not occur in products,
data or releases after commencement of commercial shipments, resulting in loss
of or delay in market acceptance, which could have a material adverse effect
upon the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH EMERGING INTERNET MARKET
A portion of the Company's strategy is to leverage the Web to provide
access to its VIP reference databases, as well as to additional value-added
content. The Company may devote substantial resources to developing products
designed for use with the Web, and there can be no assurance that the revenues
generated, if any, from the use of the Web will be greater than the costs of
developing and modifying products for such use. Further, the Company's
solutions may be rendered obsolete by, or less valuable in comparison to,
competitive solutions made possible by future development of the Web. If this
were to occur, the Company's business, financial condition and results of
operations would be materially adversely affected.
8
<PAGE>
DEPENDENCE ON PROPRIETARY AND LICENSED TECHNOLOGY
The Company's success is heavily dependent upon proprietary technology.
The Company relies primarily on a combination of copyright, trademarks, trade
secrets, confidentiality procedures and contractual provisions with its
employees, consultants and business partners and in its license agreements to
protect its proprietary rights. The Company seeks to protect its software,
published data, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary.
The Company has submitted a patent application for various technology
innovations in its Explore client/server software. In addition, certain patent
applications have been filed by CADIS, but patents have not yet been issued.
There can be no assurance that any such patents will be issued or that any
patent, if issued, will provide sufficiently broad protection or will prove
enforceable in actions against alleged infringements.
While the Company is not aware that any of its products infringes the
proprietary rights of third parties, there can be no assurance that third
parties will not claim infringement by the Company with respect to current or
future products. The Company expects that it may increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time-
consuming, result in costly litigation, cause product shipment delays or require
the Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
Company or at all, which could have a material adverse effect upon the Company's
business, financial condition or results of operations.
In addition, the Company relies on certain software and data that it
licenses from third parties, including software and data that are used in the
Company's products to perform certain functions. There can be no assurance that
such firms will remain in business, that they will continue to support their
products or that their products will otherwise continue to be available to the
Company on commercially reasonable terms. The Company believes that
substantially all of the software it licenses is available from vendors other
than the Company's current vendors and could be replaced with equivalent
software in a timely manner. However, it is possible that the loss of or
inability to maintain any of these software licenses could result in delays or
cancellations in products shipments until equivalent software can be identified
and licensed or developed and integrated with the Company's products. Any such
delay or cancellation could materially adversely affect the Company's business,
financial condition and results of operations.
RISKS RELATED TO CERTAIN ANTI-TAKEOVER PROVISIONS
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law (the "Delaware Law"). In general, Section 203
of the Delaware Law prevents an "interested stockholder" (defined generally as a
person owning 15% or more of a corporation's outstanding voting stock) from
engaging in a "business combination" (as defined in the Delaware Law) with a
Delaware corporation for three years following the date such person became an
interested stockholder, subject to certain exceptions such as the approval of
the board of directors and of the holders of at least two-thirds of the
outstanding shares of voting stock not owned by the interested stockholder. The
existence of this provision would be expected to have an anti-takeover effect,
including attempts that might result in a premium over the market price for the
shares of Common Stock held by stockholders.
The Company's By-Laws provide that only the Company's Chief Executive
Officer, a majority of the members of the Company's Board of Directors or
holders of capital stock constituting at least 10% of the outstanding voting
power may call a special meeting of stockholders. This provision of the By-Laws
could discourage potential acquisition proposals and could delay or prevent a
change in control of the Company. This provision also may have the effect of
preventing changes in the management of the Company.
9
<PAGE>
YEAR 2000 COMPLIANCE
Although the Company believes that all of its products will record, store,
process, calculate and present calendar dates falling on or after (and if
applicable, spans of time including) January 1, 2000, and will calculate any
information dependent on or relating to such dates in the same manner, and with
the same functionality, data integrity and performance, as such products record,
store, process, calculate and present calendar dates on or before December 31,
1999, or calculate any information dependent on or relating to such dates
(collectively, "Year 2000 Compliant"), Year 2000 Compliant issues may arise with
respect to customers' internal management systems or third party suppliers that
may result in unforeseen costs or delays to the Company and therefore may have a
material adverse effect on the Company.
CONCENTRATION OF STOCK OWNERSHIP
The present directors, executive officers and 5% stockholders of the
Company and their affiliates beneficially own approximately 44.3% of the
outstanding Common Stock. As a result, these stockholders may be able to
exercise significant influence over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. Such concentration of ownership may have the effect of delaying
or preventing a change in control of the Company.
BLANK CHECK PREFERRED STOCK
The Board of Directors has authority to issue up to 2,000,000 shares of
Preferred Stock, and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares without any vote or
action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company, thereby delaying, deferring or preventing a change in
control of the Company. Furthermore, such Preferred Stock may have other
rights, including economic rights, senior to the Common Stock, and as a result,
the issuance of such Preferred Stock could have a material adverse effect on the
market value of the Common Stock. The Company has no present plan to issue
shares of Preferred Stock.
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997. This information should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
-------
(IN THOUSANDS)
<S> <C>
Capital Lease Obligations $ 11
Stockholders' equity:
Preferred stock, $0.001 par value
Authorized: 2,000 shares
Issued and outstanding: 0 shares --
Common stock; $0.001 par value
Authorized: 20,000 shares
Issued and outstanding: 14,433 shares (1) 81,627
Notes receivable from Stockholders (320)
Deferred Compensation (376)
Accumulated translation adjustment (302)
Accumulated deficit (22,055)
--------
Total Stockholders' equity 58,574
--------
Total Capitalization $ 58,585
========
</TABLE>
(1) Excludes 3,021,000 common shares issuable upon the exercise of stock
options outstanding as of December 31, 1997 at a weighted average exercise price
of $18.35 per share and 603,000 additional common shares reserved as such date
of grant of future options or direct issuance under the company's option plans.
See Note 4 of Notes to Consolidated Financial Statements.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock has been trading publicly in the over-the-counter market
and on the Nasdaq National Market under the symbol "ASDV" since May 24, 1996,
the first trading date of the Common Stock in the Company's initial public
offering. The following table sets forth, for the periods indicated, the range
of quarterly high and low closing sales prices for the Common Stock on the
Nasdaq National Market.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 HIGH LOW
---------------------------- ------ ------
<S> <C> <C>
Second quarter (May 24 to June 30) $36.50 $19.50
Third quarter 33.25 18.00
Fourth quarter 41.00 20.25
YEAR ENDED DECEMBER 31, 1997
----------------------------
<S> <C> <C>
First quarter $34.00 $18.88
Second quarter 30.00 16.75
Third quarter 44.00 24.25
Fourth quarter 53.13 36.75
</TABLE>
HOLDERS OF COMPANY STOCK
As of December 31, 1997, the Company had approximately 177 stockholders of
record.
DIVIDENDS
The Company has not paid cash dividends on its Common Stock and does not
plan to pay cash dividends to its stockholders in the near future. The Company
currently intends to retain its earnings to finance further growth of its
business.
12
<PAGE>
SELECTED CONSOLIDATED AND OTHER FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to and should be read in conjunction with the consolidated financial
statements and related notes thereto and the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information included elsewhere in this Prospectus.
The information in the tables below, representing Consolidated
Statements of Operations Data and Consolidated Balance Sheet Data has been
restated to include the financial position of CADIS at the respective year end
dates and results of its operations for each of the five years in the period
ended December 31, 1997.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses $ 2,521 $ 3,998 $ 8,123 $ 16,043 $ 26,892
Subscription and maintenance 715 2,974 5,141 9,392 13,594
Service and other 762 2,327 2,299 5,023 9,443
--------------------------------------------------------------------
Total revenues 3,998 9,299 15,563 30,458 49,929
--------------------------------------------------------------------
Cost of revenues:
Cost of license revenues 106 197 298 612 346
Cost of subscription and maintenance
revenues 261 735 1,142 1,206 2,676
Cost of service and other revenues 353 1,634 1,291 2,689 5,027
--------------------------------------------------------------------
Total cost of revenues 720 2,566 2,731 4,507 8,049
--------------------------------------------------------------------
Gross profit 3,278 6,733 12,832 25,951 41,880
--------------------------------------------------------------------
Operating expenses:
Research and development 3,481 4,012 6,031 8,762 11,213
Sales and marketing 2,295 3,982 7,128 13,540 26,730
General and administrative 926 1,629 2,253 4,030 5,304
Costs incurred in merger - - - - 4,312
--------------------------------------------------------------------
Total operating expenses 6,702 9,623 15,412 26,332 47,559
--------------------------------------------------------------------
Net loss before interest and taxes (3,424) (2,890) (2,580) (381) (5,679)
Interest and other income 104 112 268 1,805 3,066
Interest and other expense (70) (46) (83) (209) (665)
--------------------------------------------------------------------
Net income (loss) before taxes (3,390) (2,824) (2,395) 1,215 (3,278)
Taxes - 144 150 330 1,593
--------------------------------------------------------------------
Net income $ (3,390) $ (2,968) $ (2,545) $ 885 $ (4,871)
====================================================================
Net income (loss) per share basic (1) (2) $ (0.28) $ 0.07 $ (0.35)
=========================================
Net income (loss) per share diluted (1) (2) $ (0.28) $ 0.06 $ (0.35)
=========================================
Number of shares used in computing
per share amounts basic (1) 9,025 12,005 13,817
Number of shares used in computing
per share amounts diluted (1) 9,025 13,755 13,817
(1) Earnings per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
per Share" (SFAS 128) and Staff Accounting Bulletin No. 98 (SAB 98). See
Note 1 of Notes to Consolidated Financial Statements.
(2) Net income (loss) per share for 1995 and 1996 are pro forma computations.
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA
(IN THOUSANDS)
AS OF DECEMBER 31,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Cash and short-term investments $ 4,258 $ 3,999 $ 6,095 $ 57,831 $ 55,056
========================================================================
Working capital $ 3,413 $ 2,344 $ 3,927 $ 56,440 $ 48,521
========================================================================
Total assets $ 6,499 $ 7,696 $ 14,159 $ 73,273 $ 81,720
========================================================================
Long-term obligations, less
current portion $ 2,259 $ 2,297 $ 2,620 $ 2,365 $ 11
========================================================================
Stockholders' equity $ 1,953 $ 1,331 $ 3,855 $ 58,746 $ 58,574
========================================================================
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
ASPECT DEVELOPMENT, INC.
STATEMENT OF OPERATIONS DATA
(EXCLUDING THE OPERATING RESULTS OF CADIS)
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C> <C>
Licenses $ 2,476 $ 3,478 $ 7,143 $ 12,263 $ 24,238
Subscription and maintenance 715 2,962 4,964 8,943 12,596
Service and other 762 2,044 1,586 3,029 7,532
---------------------------------------------------------------
Total revenues 3,953 8,484 13,693 24,235 44,366
---------------------------------------------------------------
Cost of revenues:
Cost of license revenues 106 197 298 612 346
Cost of subscription and maintenance
revenues 261 735 938 1,116 2,503
Cost of service and other revenues 353 1,333 612 1,679 3,055
---------------------------------------------------------------
Total cost of revenues 720 2,265 1,848 3,407 5,904
---------------------------------------------------------------
Gross profit 3,233 6,219 11,845 20,828 38,462
---------------------------------------------------------------
Operating expenses:
Research and development 2,388 3,096 4,859 7,052 8,697
Sales and marketing 1,728 3,047 4,490 8,819 18,922
General and administrative 517 1,084 1,660 2,975 4,379
Costs incurred in merger - - - - 1,712
---------------------------------------------------------------
Total operating expenses 4,633 7,227 11,009 18,846 33,710
--------------------------------------------------------------
Net income (loss) before interest and taxes (1,400) (1,008) 836 1,982 4,752
Interest and other income 37 78 78 1,566 2,740
Interest and other expense (70) (46) (83) (209) (665)
--------------------------------------------------------------
Net income (loss) before taxes (1,433) (976) 831 3,339 6,827
Taxes - 144 150 330 1,593
---------------------------------------------------------------
Net income (loss) $(1,433) $ (1,120) $ 681 $ 3,009 $ 5,234
==============================================================
<CAPTION>
ASPECT DEVELOPMENT, INC
BALANCE SHEET DATA
(EXCLUDING THE ASSETS AND LIABILITIES OF CADIS)
(IN THOUSANDS)
AS OF DECEMBER 31,
------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Cash and short-term investments $ 2,955 $ 2,437 $ 3,159 $ 47,818 $ 52,675
==============================================================================
Working capital $ 2,163 $ 854 $ 1,024 $ 45,485 $ 47,872
==============================================================================
Total assets $ 4,990 $ 5,439 $ 9,979 $ 59,000 $ 75,456
==============================================================================
Long-term obligations, less
current portion $ 273 $ 311 $ 634 $ 379 $ 11
==============================================================================
Stockholders' equity $ 2,490 $ 1,374 $ 2,134 $ 48,754 $ 56,861
==============================================================================
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
CADIS, INC.
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses $ 45 $ 520 $ 980 $ 3,780 $ 2,654
Subscription and maintenance - 12 177 449 998
Service and other - 283 713 1,994 1,911
-------------------------------------------------------------------
Total revenues 45 815 1,870 6,223 5,563
-------------------------------------------------------------------
Cost of revenues:
Cost of license revenues - - - - -
Cost of subscription and maintenance
revenues - - 204 90 173
Cost of service and other revenues - 301 679 1,010 1,972
-------------------------------------------------------------------
Total cost of revenues - 301 883 1,100 2,145
-------------------------------------------------------------------
Gross profit 45 514 987 5,123 3,418
-------------------------------------------------------------------
Operating expenses:
Research and development 1,093 916 1,172 1,710 2,516
Sales and marketing 567 935 2,638 4,711 7,808
General and administrative 409 545 593 1,055 925
Costs incurred in merger - - - - 2,600
-------------------------------------------------------------------
Total operating expenses 2,069 2,396 4,403 7,486 13,849
-------------------------------------------------------------------
Net loss before interest and taxes (2,024) (1,882) (3,416) (2,363) (10,431)
Interest and other income 67 34 190 239 326
-------------------------------------------------------------------
Net loss $ (1,957) $ (1,848) $ (3,226) $ (2,124) $ (10,105)
===================================================================
<CAPTION>
CADIS, INC.
BALANCE SHEET DATA
(IN THOUSANDS)
AS OF DECEMBER 31,
-----------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Cash and short-term investments $ 1,303 $ 1,562 $ 2,936 $ 10,013 $ 2,381
=================================================================
Working capital $ 1,250 $ 1,490 $ 2,903 $ 10,955 $ 649
=================================================================
Total assets $ 1,509 $ 2,257 $ 4,180 $ 14,273 $ 6,264
=================================================================
Long-term obligations, less
current portion $ 1,986 $ 1,986 $ 1,986 $ 1,986 $ -
==================================================================
Stockholders' equity (deficit) $ (537) $ (43) $ 1,721 $ 9,992 $ 1,893
==================================================================
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion set forth below contains, in addition to historical
information, certain trend analyses and forward-looking statements which reflect
the Company's current views with respect to future events and financial
performance. These trend analyses and forward-looking statements are subject to
certain risks and uncertainties, including those discussed below, under "Risk
Factors" and elsewhere in the Prospectus. The Company's actual results could
differ significantly from the results discussed in the trend analyses and
forward-looking statements. In this report and elsewhere in the Prospectus, the
words "anticipates," "believes," "expects," "intends," "may," "future" and
similar expressions identify trend analyses and forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The following discussion
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto.
OVERVIEW
The Company develops, markets and supports enterprise client/server
software and reference content products that enable manufacturers to improve
product development and business processes through component and supplier
management. The Company was incorporated in 1990 and was in the development
stage, engaging primarily in research and development, until 1992. In 1992, the
Company commenced shipment of its first generation component and supplier
management software product, CIS 1.0. The Company's second generation CSM
software product, Explore, first became generally commercially available in the
second quarter of 1995. In 1993, the Company began development of component
reference content products, and its first internally developed reference content
products, VIP, became generally commercially available in the second quarter of
1995.
In November 1997, the Company acquired CADIS, a developer of CSM solutions.
In the acquisition, the Company issued approximately 1.4 million shares of its
Common Stock in exchange for all of the outstanding Common Stock and options of
CADIS. The acquisition was accounted for as a pooling of interests, and, except
where specified, the financial statements of the Company and the information
herein have been restated to include the results of CADIS for all periods. The
acquisition of CADIS augmented the Company's portfolio of CSM products with the
addition of Krakatoa, a Web based catalog publishing software product.
Excluding the effects of the acquisition of CADIS, the Company's revenues
have increased from $4.0 million in 1993 to $44.4 million in 1997 as a result of
greater market acceptance of the Company's CIS products and the introduction of
the Explore and VIP products. Taking the CADIS acquisition into account, the
Company's revenues have grown to $49.9 million over the same period. Excluding
the effects of the CADIS acquisition, the Company realized operating losses in
1993 and 1994 but achieved limited profitability in 1995 and increased
profitability in 1996 and 1997. The losses in 1993 and 1994 and the limited
profitability in 1995 primarily reflect the Company's substantial investment in
research and development to build its software and reference content products
and in sales and marketing to expand its marketing presence, while the increased
profitability in 1996 and 1997 reflected increased market acceptance of the
Company's products, which caused revenues to increase at a greater rate than
operating expenses. Taking the CADIS acquisition into account, the Company
recorded a smaller profit in 1996 and losses in 1995 and 1997. The differences
between these results on a consolidated basis and Aspect's results on a stand-
alone basis primarily reflect the fact that, during this period, CADIS was an
early-stage company whose primary focus was on developing its initial commercial
products and entering the CSM market, and therefore incurred substantial
software development and marketing expenses that were only partially offset by
licensing revenues. The consolidated loss incurred in 1997 also reflected costs
and expenses associated with the Company's acquisition of CADIS. See Note 2 of
Notes to Consolidated Financial Statements.
Licenses of the Company's software and reference content products have
historically accounted for the substantial majority of the Company's revenues,
and the Company anticipates that this will continue for the foreseeable future.
Accordingly, any decline in the demand for or market acceptance of the Company's
software or reference
16
<PAGE>
content products would have a material adverse effect on the Company's business,
financial condition and results of operations. Although the Company has
experienced significant revenue growth in recent periods, there can be no
assurance that the Company will sustain such growth in revenues or that the
Company will return to profitability in the future on a quarterly or an annual
basis. A significant portion of the Company's revenues has historically been
derived from relatively large sales to a limited number of customers, and the
Company expects that this trend will continue for the foreseeable future. The
license of the Company's software and data products generally requires the
Company to engage in a sales cycle of six to twelve month or longer and to
provide a significant level of education to prospective customers regarding the
use and benefits of the Company's products. For these reasons, sales cycles are
subject to a number of significant delays over which the Company has little or
no control. Accordingly, any delay in the sale of a larger license or a number
of smaller licenses would have a material adverse effect on the Company's
business, financial condition and results of operations and would cause the
Company's operating results to vary significantly from quarter to quarter.
The Company's revenues consist of: license revenues, subscription and
maintenance revenues and service and other revenues. License revenues are
comprised principally of perpetual license fees for the Company's client/server
software and reference content products. Subscription and maintenance revenues
are comprised principally of annual subscription and maintenance fees for the
Company's products, including its Explore client/server software, its VIP family
of component reference databases and the CAPS reference content product. CAPS
was licensed from Information Handling Systems, Inc. ("IHS") pursuant to a
license that expired in October 1997, after which the Company discontinued
offering it for sale. Service and other revenues are comprised principally of
fees for consulting, development and training services performed by the Company.
The Company recognizes revenues in accordance with the American Institute of
Certified Public Accountants (the "AICPA") Statement of Position ("SOP") 91-1 on
Software Revenue Recognition. License revenues are recognized after execution of
a license agreement, or receipt of a definitive purchase order, and shipment of
the product if no significant vendor obligations remain and collection of the
resulting receivables is deemed probable. Product returns and sales allowances
(which were not significant through December 31, 1997) are estimated and
provided for at the time of sale. When delivery involves significant
installation obligations at multiple sites, revenues are recognized on a per-
site basis upon completion of installation. Revenues from subscription and
maintenance agreements are deferred and recognized on a straight-line basis over
the life of the related agreement, which is typically twelve months. Service
revenues from training and consulting are recognized upon completion of the work
to be performed. Development revenues are recognized in accordance with the
terms of the agreements, generally when related costs have been incurred.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements and is required to be adopted by the Company beginning in
fiscal 1998. Additionally, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way that public business enterprises report information in annual
statements and interim financial reports regarding operating segments, products
and services, geographic areas and major customers. SFAS No. 131 will be
effective for the Company for fiscal 1998 and will apply to both annual and
interim financial reporting. The Company is evaluating the potential impact of
these accounting pronouncements on required disclosures, but believes that SFAS
No. 130 and SFAS No. 131 will not have a material impact on the financial
condition or results of operations of the Company.
In October 1997, the Accounting Standards Executive Committee of the AICPA
issued SOP 97-2, "Software Revenue Recognition," which is effective for all
transactions entered into after December 31, 1997. The statement provides
guidance on applying GAAP in recognizing revenue on software transactions.
Based upon the Company's review and interpretation of SOP 97-2, the Company does
not believe that the implementation of the statement will have a material
adverse effect on the results of operations. However, detailed procedures for
executing the guidelines have not been released. Once issued, such procedures
could lead to unanticipated changes in the Company's reported revenues and
earnings. In the event implementation guidance is contrary to the Company's
current revenue accounting practices, the Company believes it can change its
accounting practices to comply with the guidance and avoid any material adverse
effect on revenues and earnings. However, there can be no assurance this will
be the case.
17
<PAGE>
Management is currently engaged in reviewing the Company's present
licensing, subscription and service contracts for compliance with the revenue
recognition guidelines of the statement.
Effective December 31, 1997, the Company adopted the provisions of SFAS No.
128, "Earnings per Share" ("EPS"). As required by SFAS No. 128, all prior
periods presented have been restated. Under the new requirements for
calculating EPS, the dilutive effect of stock options and convertible securities
is excluded from a new EPS measure, basic EPS. Except as noted below, diluted
EPS is computed using the weighted average number of common shares outstanding
after the issuance of common stock upon exercise of stock options (using the
treasury stock method) and the issuance of common stock upon the conversion of
convertible preferred stock (using the as-if-converted method) when their
effect is dilutive.
Basic and diluted EPS for all years prior to 1997 have been retroactively
restated to apply the requirements of Staff Accounting Bulletin No. 98 issued by
the SEC in February 1998 (SAB 98). Under SAB 98, certain shares of common stock
and options and warrants to purchase shares of common stock issued at prices
substantially below the per share price of shares sold in the Company's initial
public offering previously included in the computation of shares outstanding
pursuant to the SABs Nos. 55, 64 and 83 are now excluded from the computation.
SIGNIFICANT SEGMENT INFORMATION
The Company derived approximately 14.1%, 19.5% and 14.9% of its revenues
from its European operations in 1995, 1996 and 1997, respectively. The Company
generated income before interest and taxes of 83.3%, 80.5% and 47.2% on those
revenues in each of the years listed, while incurring losses on substantially
larger revenue from its North American operations (See Note 8 of Notes to
Consolidated Financial Statements). This apparent disparity is due to the fact
that in those years most of the Company's research and development, sales and
marketing and general and administrative costs were allocated to the Company's
operations in North America. In addition, the 1997 North American results
include expenses of approximately $4.3 million associated with the acquisition
of CADIS. Management expects this concentration of research and development
costs and other infrastructure expenses in North America to become less
significant in the future as more operational functions are organized and
developed in the countries in which the Company sells its products and as the
Company continues to expand its sales efforts in foreign markets.
RESULTS OF OPERATIONS
The following tables set forth certain operating data, expressed as a
percentage of net revenue, for each of the years ended December 31, 1995, 1996
and 1997 for the Company on a consolidated basis, for the Company excluding the
operating results of CADIS and for CADIS on a stand-alone basis.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS 1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Licenses 52.2% 52.7% 53.9%
Subscription and maintenance 33.0 30.8 27.2
Service and other 14.8 16.5 18.9
----- ----- -----
Total revenues 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Cost of license revenues 1.9 2.0 0.7
Cost of subscription and maintenance
revenues 7.3 4.0 5.3
Cost of service and other revenues 8.3 8.8 10.1
----- ----- -----
Total cost of revenues 17.5 14.8 16.1
----- ----- -----
Gross margin 82.5 85.2 83.9
----- ----- -----
Operating expenses:
Research and development 38.8 28.8 22.5
Sales and marketing 45.8 44.5 53.6
General and administrative 14.5 13.2 10.6
Merger costs - - 8.6
----- ----- -----
Total operating expenses 99.1 86.5 95.3
----- ----- -----
Operating loss (16.6) (1.3) (11.4)
Interest and other income 1.7 5.9 6.1
Interest and other expense (0.5) (0.6) (1.3)
----- ----- -----
Income (loss) before income taxes (15.4) 4.0 (6.6)
Provision for income taxes 1.0 1.1 3.2
----- ----- -----
Net income (loss) (16.4)% 2.9% (9.8)%
====== ===== =====
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
ASPECT STATEMENTS OF OPERATIONS 1995 1996 1997
(EXCLUDING CADIS) ---- ---- ----
<S> <C> <C> <C>
Revenues:
Licenses 52.2% 50.6% 54.6%
Subscription and maintenance 36.2 36.9 28.4
Service and other 11.6 12.5 17.0
----- ----- -----
Total revenues 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Cost of license revenues 2.2 2.5 0.8
Cost of subscription and maintenance
revenues 6.8 4.6 5.6
Cost of service and other revenues 4.5 6.9 6.9
----- ----- -----
Total cost of revenues 13.5 14.0 13.3
----- ----- -----
Gross margin 86.5 86.0 86.7
----- ----- -----
Operating expenses:
Research and development 35.5 29.1 19.6
Sales and marketing 32.8 36.4 42.6
General and administrative 12.1 12.3 9.9
Merger costs - - 3.9
----- ----- -----
Total operating expenses 80.4 77.8 76.0
----- ----- -----
Operating income 6.1 8.2 10.7
Interest and other income 0.6 6.5 6.2
Interest and other expense (0.6) (0.9) (1.5)
----- ----- -----
Income before income taxes 6.1 13.8 15.4
Provision for income taxes 1.1 1.4 3.6
----- ----- -----
Net income 5.0% 12.4% 11.8%
===== ===== =====
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
CADIS STATEMENTS OF OPERATIONS 1995 1996 1997
(STAND-ALONE BASIS) ---- ----- ----
Revenues:
<S> <C> <C> <C>
Licenses 52.4% 60.7% 47.7%
Subscription and maintenance 9.5 7.2 17.9
Service and other 38.1 32.1 34.4
------- ------ -------
Total revenues 100.0 100.0 100.0
------- ------ -------
Cost of revenues:
Cost of license revenues - - -
Cost of subscription and maintenance
revenues 10.9 1.5 3.1
Cost of service and other revenues 36.3 16.2 35.5
------- ------ -------
Total cost of revenues 47.2 17.7 38.6
------- ------ -------
Gross margin 52.8 82.3 61.4
------- ------ -------
Operating expenses:
Research and development 62.7 27.5 45.2
Sales and marketing 141.1 75.8 140.4
General and administrative 31.7 17.0 16.6
Merger costs - - 46.7
------- ------ -------
Total operating expenses 235.5 120.3 248.9
------- ------ -------
Operating loss (182.7) (38.0) (187.5)
Interest and other income 10.2 3.9 5.9
------- ------ -------
Net loss (172.5)% (34.1)% (181.6)%
======= ====== =======
</TABLE>
REVENUES
Licenses. Revenues from licenses increased from approximately $8.1 million
in 1995 to approximately $16.0 million in 1996, due primarily to general
commercial introduction of the Company's Explore client/server software and VIP
component reference databases in 1995. License revenues increased from $16.0
million in 1996 to $26.9 million in 1997. This increase was due primarily to
the growing market acceptance of the Company's products and an increased
emphasis on marketing the Company's products. The Explore client/server
software and VIP component reference databases generally have higher average
selling prices than the CIS products.
Subscription and maintenance. Subscription and maintenance revenues were
$5.1 million, $9.4 million, and $13.6 million in 1995, 1996 and 1997,
respectively. The increase in subscription and maintenance fee revenues from
1995 to 1996 was principally the result of the general commercial introduction
of the Company's VIP component reference databases in 1995 and the increased
base of customers entering into maintenance contracts. The increase between
1996 and 1997 was primarily due to the expansion of the Company's customer base.
20
<PAGE>
Service and other. Service and other revenues increased from $2.3 million
in 1995 to $5.0 million in 1996 due primarily to the increased number and size
of consulting contracts in 1996 offset by a decrease in development revenues
caused by the conclusion of a significant development contract in 1995. Service
and other revenues increased $4.4 million to $9.4 million in 1997 due to
management's continuing recognition of the need to offer superior service
support to the Company's customers in order to enhance the market's acceptance
of the Company's products.
International sales were $2.9 million, $6.2 million and $8.5 million in
1995, 1996 and 1997, respectively, representing 18.9%, 20.3% and 17.0% of total
revenues, respectively, in each year. The increased volume of international
sales from 1995 to 1997 in absolute dollars is primarily attributable to an
increase in the Company's international marketing efforts. The Company intends
to continue to expand its international operations and to enter additional
international markets. The Company currently maintains sales offices in the
United Kingdom, France, Germany, Japan, Canada, India and Italy and has sales
representative agreements with Advanced Technology of Engineering Systems Co.,
Ltd. ("ATE") in South Korea and Onyx Technologies, Ltd. ("Onyx") in Israel, a
joint marketing/systems integrator agreement with Mentor Graphics Corporation
("Mentor Graphics") and Digital Equipment Corporation ("Digital Japan") in Japan
and worldwide strategic reselling agreements with SAP and Baan Company N.V.
("Baan"). In addition, although the Company records revenues based on the
billing location, certain domestic billings include licenses that may be
deployed by customers or resold by indirect channel partners into international
locations. International sales are denominated and collected in both U.S. and
foreign currency. Accordingly, a portion of the Company's international
revenues are subject to foreign currency fluctuation risks. In those
jurisdictions in which the Company's sales are denominated in foreign currency,
fluctuations in such currencies could adversely affect the profitability of
sales made in such jurisdictions and, therefore, materially adversely affect the
Company's business, financial condition and results of operations. Further, an
increase in the value of the U.S. dollar relative to foreign currencies could
make the Company's products more expensive and, therefore, potentially less
competitive in those markets in which the Company's sales are denominated in
U.S. dollars. To a limited extent, the Company has engaged in some
insignificant foreign currency hedging activities to offset the potential risks
mentioned above. This hedging activity has not had a material effect on the
financial statements and no hedging contracts remained open at December 31,
1997. If considered appropriate, the Company will enter into hedging contracts
in the future.
COST OF REVENUES
Cost of license revenues. Cost of licenses consists primarily of license
fees and royalties paid to third-party vendors, primarily Oracle, and shipping
expenses. Cost of licenses was $298,000, $612,000 and $346,000 in 1995, 1996
and 1997, respectively, representing 3.7%, 3.8% and 1.3%, respectively, of the
related license revenues for each of those years. The increase in the dollar
amount of cost of licenses between 1995 and 1996 reflects the higher volumes of
licenses entered into in 1996. The dollar decrease between 1996 and 1997 is
primarily due to the fact that more customers already owned Oracle or other
relational database software and the Company was not obligated to obtain the
product for them. The increase as a percentage of revenues from 1995 to 1996
was primarily due to the addition of an additional third-party vendor's product
licensed in conjunction with Aspect's products. The percentage decrease between
1996 and 1997 was primarily due to new customers providing their own database
software, eliminating that cost from the Company's operations. Because all
development costs incurred in the research and development of products and
enhancements to existing software products have been expensed as incurred, cost
of licenses includes no amortization of capitalized software development costs.
See Note 1 of Notes to Consolidated Financial Statements.
Cost of subscription and maintenance revenues. Cost of subscription and
maintenance revenues consists primarily of license fees and royalties paid to
third-party vendors, primarily IHS for the CAPS reference data product, and
personnel-related costs incurred in providing centralized telephone support and
related technical support to customers. Cost of subscription and maintenance
revenues was $1.1 million, $1.2 million and $2.7 million, in 1995, 1996 and
1997, representing 22.2%, 12.8% and 19.7%, respectively, of related subscription
and maintenance revenues for each year. The decrease in cost of subscription
and maintenance revenues as a percentage of related revenues between 1995 and
1996 is primarily the result of allocating related costs over a larger customer
base and an increased proportion of sales of the VIP reference databases over
the CAPS reference data product. The increase between 1996 and 1997 is
primarily due to the Company's high level of interest in continued customer
support and the resulting increase in facilities and employees assigned to that
effort.
21
<PAGE>
Cost of service and other revenues. Cost of service and other revenues
consist primarily of personnel-related costs incurred in providing consulting
services, development services and training to customers. Cost of service and
other revenues was $1.3 million, $2.7 million and $5.0 million, respectively, in
1995, 1996 and 1997, representing 56.2%, 53.5% and 53.2%, respectively, of
related revenue for each year. The increase in absolute dollars in each of the
years presented is due to an increase in the number and size of consulting
contracts. The overall decrease in terms of percentages is due to the
increasing profit margin associated with each individual contract due to
management's continuing effort to more efficiently manage them and an increasing
percentage of the fulfillment of these contracts from this lower cost of labor
in India.
GROSS PROFIT
Gross profit was $12.8 million, $26.0 million and $41.9 million in 1995,
1996 and 1997, respectively, representing 82.5%, 85.2% and 83.9%, respectively,
of total revenues for each year. The increase in absolute dollars and as a
percentage of total revenues from 1995 to 1996 was primarily the result of an
increased level of revenues and the allocation of costs over a larger customer
base. The decrease in terms of percentages between 1996 and 1997 is due to the
larger percentage growth in service and other revenue as compared to the
Company's other revenue sources. The Company currently expects that gross
profits may decrease as a percentage of total revenues in the future as services
and other revenues, which generally have lower gross margins than the Company's
other revenues, increase as a percentage of total revenues.
OPERATING EXPENSES
Research and development. Research and development expenses consist
primarily of engineering personnel costs. Research and development expenses for
1995, 1996 and 1997 were approximately $6.0 million, $8.8 million and $11.2
million, respectively. These expenses as a percentage of total revenues were
38.8%, 28.8% and 22.5%, respectively, during the three years. The increases in
research and development expenses in absolute dollars since 1995 were primarily
attributable to increased staffing and associated support for technical staff
and the use of consultants and outside service providers required to develop and
enhance the Company's products. The reduction as a percentage of revenue is due
to revenues increasing at a higher rate than research and development expenses.
The Company believes that a significant level of research and development
expenses will be required to be competitive in the future. Accordingly, the
Company expects that the absolute dollar amounts of research and development
expenses may increase in the future, but may decline as a percentage of total
revenues in the event that revenues increase.
Sales and marketing. Sales and marketing expenses include salaries,
commissions, advertising, travel, trade show, public relations and other selling
and marketing related expenses. Sales and marketing expenses for 1995, 1996 and
1997 were approximately $7.1 million, $13.5 million and $26.7 million,
respectively, representing 45.8%, 44.5%, and 53.5% of total revenues,
respectively. The increases in sales and marketing expenses in absolute dollars
were primarily due to the addition of sales and marketing personnel and
increased marketing activities, including trade shows and promotional expenses
and substantial growth in international sales and marketing channels. The
Company believes that such expenses will increase in dollar amounts and may
increase as a percentage of total revenues in the future as the Company expands
its sales and marketing staff and enters new markets, worldwide.
General and administrative. General and administrative expenses include
personnel costs for administration, finance, human resources and general
management, along with legal and accounting expenses and other professional
services. General and administrative expenses increased from $2.3 million in
1995 to $4.0 million in 1996 and $5.3 million in 1997. These expenses
represented 14.5%, 13.2% and 10.6% of total revenues, respectively during those
three years. The increases in dollar amounts were primarily the result of
increased staffing and associated expenses necessary to manage and support the
Company's growth. The Company believes that its general and administrative
expenses will increase in dollar amounts in the future as the Company expands
its staffing and as the Company experiences higher costs associated with being a
public company, but may decrease as a percentage of total revenues in the event
that revenues increase.
Merger costs. The costs associated with the acquisition of CADIS were
approximately $4.3 million, including $0.9 million in consulting fees to
financial advisors, $0.7 million for legal and other professional fees, $0.7
million for
22
<PAGE>
personnel severance and outplacement expenses and $0.6 million for facilities
consolidation expense. Of the merger expenses, a total of approximately $2.9
million was accrued at December 31, 1997. The Company may incur similar expenses
should management determine that further acquisitions are strategically
important to the Company's future growth.
INTEREST AND OTHER INCOME
The Company's net interest and other income for 1995, 1996 and 1997 was
$268,000, $1.8 million and $3.1 million, respectively. Interest income consists
primarily of interest accrued on the Company's cash generated from financing and
operating activities. The increase in interest income in 1996 was primarily due
to higher cash and investment balances resulting from the infusion of cash from
the initial public offering. The increase in 1997 was primarily due to improved
cash flows from operations and the resulting investment in short-term securities
of the funds generated.
INTEREST AND OTHER EXPENSE
Interest and other expense was $83,000, $209,000 and $665,000 in 1995, 1996
and 1997 respectively. The increase between 1995 and 1996 was primarily due to
a $90,000 expense related to the settlement of a dispute, while the increase in
1997 was due to a $612,000 charge to record the Company's proportionate share of
the loss in a joint venture.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes was $150,000 in 1995, $330,000 in
1996 and $1.6 million in 1997. The 1995 provision amount was primarily due to
foreign withholding taxes in connection with product license sales to Korea. The
increase in the provision in 1997 is primarily due to increased income generated
by the Company (excluding the acquisition of CADIS) and the Company's inability
to use CADIS's net operating loss carryforwards or its losses generated in
1997. As of December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $37 million. The Company also had federal
research and development tax credit carryforwards of approximately $1.7 million.
The federal net operating loss and credit carryforwards will expire in 2007
through 2012, if not utilized sooner. Utilization of the net operating losses
and credits will be subject to a substantial annual limitation for losses
previously incurred by CADIS and obtained by the Company in the acquisition and
merger (as described in Note 2 to the Consolidated Financial Statements) due to
the ownership change limitations provided by the Internal Revenue Code of 1986
and similar state provisions. Net operating losses and credits related to Aspect
may also be subject to a substantial limitation due to ownership change
limitations provided by the Internal Revenue Code of 1986 and similar state
provisions. Based upon current values, however, the annual limitations are not
expected to result in the expiration of net operating losses and credits before
utilization. See Note 6 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
In May 1996, the Company completed its initial public offering, and its
common stock began trading on the Nasdaq National Market under the symbol ASDV.
Through the offering, the Company sold 2,322,500 new shares of its common stock
which generated approximately $42.3 million of cash, net of underwriting
discounts, commissions and other offering costs.
In 1995 and 1996, the Company's investing activities consisted primarily of
purchases of property and equipment. In 1995 and 1996, the Company used
approximately $800,000 and $3.5 million, respectively, of cash to purchase
property and equipment, primarily for personal computers and for furniture and
other office equipment. During 1997 the Company continued to invest heavily in
property and equipment and also acquired CADIS (as discussed in Note 2 to the
Consolidated Financial Statements). The Company expects that the rate of
purchases of property and equipment will increase as the Company's employee base
grows. As of December 31, 1997, the Company's principal commitments consisted
primarily of capital lease obligations for equipment and operating leases for
office facilities. See Notes 3 and 9 of Notes to Consolidated Financial
Statements.
23
<PAGE>
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk. The
Company expects that, in the future, cash in excess of current requirements will
be invested in investment grade, interest-bearing securities.
At December 31, 1997, the Company had $14.6 million in cash and cash
equivalents, $40.5 million in short-term investments and $48.5 million of
working capital.
The Company believes that its current cash balances and short term
investments are sufficient to support the Company's operations and planned
growth over the next year. Although operating activities may provide cash in
certain periods, to the extent that the Company experiences growth in the
future, the Company anticipates that its operating and investing activities may
use cash. Consequently, any such growth may require the Company to obtain
additional equity or debt financing. In addition, although there are no present
understandings, commitments or agreements with respect to any acquisition of
other businesses, products or technologies, the Company from time to time
evaluates potential acquisitions of businesses, products and technologies and
may in the future require additional equity or debt financings to consummate
such potential acquisitions.
The Company will continue to invest in its sales and marketing
infrastructure. In addition, the Company will commit substantial cash resources
to research and development activities.
24
<PAGE>
BUSINESS
Aspect develops, markets and supports enterprise client/server software and
content products that enable manufacturers to improve product development and
business processes through component and supplier management ("CSM"). Aspect's
CSM solution can reduce the costs of production and non-production parts and
accelerate manufacturing time-to-market by enabling users to effectively manage
the components and commodities they buy, as well as the suppliers of those
commodities across the enterprise. Aspect's products enable rapid search,
comparison and selection of the optimal components and suppliers, promote the
reuse of design and manufacturing knowledge, support the consolidation of the
supply chain and facilitate automation of the related design and procurement
processes. Aspect's CSM solution plays the role of "in-bound supply chain
management," providing the information bridge between design and procurement,
complementing the role of enterprise resource planning ("ERP") systems in
planning, manufacturing and order entry and the role of product data management
("PDM") systems in design release and configuration management. The Aspect CSM
solution provides several key business advantages, including a unified
repository of all CSM data, powerful decision support, desktop access to
industry-wide component content, rapid deployment and workflow/process
automation. Aspect's CSM solution is licensed to global enterprises in many
industry verticals including electronics and high technology, aerospace and
defense, automotive, industrial process and consumer package goods.
The Aspect CSM solution incorporates four interrelated elements: the
Explore family of enterprise client/server software products, the VIP family of
component and supplier content databases, Professional Services for legacy data
conversion and business process consulting and the Krakatoa Web Catalog
Publisher.
. Aspect's Explore software, based on patent-pending, third generation
object-relational technology, enables the creation and management of a
unified enterprise repository of knowledge regarding components,
suppliers and designs, facilitates the organization and cross-
referencing of such knowledge for rapid search and reuse, and supports
workflow/process automation.
. The VIP family includes three major content databases: standard parts,
known as VIP; commodity suppliers, known as VIS; and operational/
Maintenance Repair Operations ("MRO") products, known as VIP-OPS. VIP,
or very important parts, contains frequently updated industry-wide
information regarding approximately 3 million standard electronic,
electromechanical, and mechanical devices from more than 800 suppliers
worldwide. VIS, or very important suppliers, is a consolidated database
of major suppliers of commodities, including company, financial,
qualification, and rating information. VIP-OPS, or very important parts-
operational is a comprehensive catalog of operational and maintenance
items, including information from more than 5,000 suppliers of
equipment, tools, supplies and similar products.
. CSM Professional Services include Data Services for migration,
cleansing, normalization of existing customer component and supplier
data, electronic catalog creation, and Business Process Services to
implement CSM best practices for preferred parts management, supply
chain consolidation, design reuse and similar uses.
. Krakatoa supplies the technology to give manufacturers instant access to
their specialized online databases. This software is currently being
used by suppliers and the data aggregators who seek to publish content
in an easily accessible manner on the Web.
Aspect's CSM solution operates in an open client/server environment
allowing customers to use various UNIX servers from Sun, IBM, HP and Digital, as
well as servers based on Microsoft NT. Customers can provide access to CSM data
from all major client platforms, including traditional Windows and UNIX native
clients as well as from Web browsers. The Aspect CSM solution also includes
standard interfaces and tools that facilitate CSM integration with ECAD, MCAD,
ERP, PDM and other enterprise systems, including legacy systems. Aspect's
products are designed to provide an out-of-the-box solution for rapid
enterprise-wide deployment and are scalable from a divisional solution to an
enterprise deployment of hundreds or thousands of users in a heterogeneous
information technology
25
<PAGE>
environment. In order to provide a complete solution, Aspect offers consulting
services to accelerate CSM data migration and implementation.
The Aspect CSM solution delivers the following key business advantages:
Rapid Return-on-Investment through Strategic Sourcing. One of the leading
business benefits from a CSM system is the ability to consolidate and
standardize component and commodity data across the enterprise, enabling
customers to instantly leverage consolidated procurement with strategic
suppliers. In addition, the CSM solution enables procurement to encourage
selection of preferred components from preferred suppliers. In contrast to
most enterprise systems, these savings are measurable, in actual dollars, in
the form of reduced cost of goods.
Improved Product Cost, Quality and Time-to-Market. The Aspect CSM solution
enables the management, cross-referencing, integration and sharing of relevant
technical and business information regarding components, commodities, suppliers
and designs, even when some or all of the source data is physically resident in
other systems or databases. In addition, users may add internal component and
supplier information such as specifications, CAD drawings, cost and
availability to the electronics catalogs in Aspect's VIP component content
databases. Designers and procurement professionals are therefore able to
access both the business and technical information necessary for them to make
better and faster decisions, which can reduce costs and shorten time-to-market,
all from a single unified repository of CSM content.
Low-Risk Implementation. CSM delivers a variety of process benefits, without
requiring substantial changes to existing procedures or enterprise systems.
Its implementation offers extremely high rewards in return-on-investment,
without the inherent deployment time risks of a mission-critical transaction
system. The form of the deployment of a CSM system can significantly
accelerate the transaction system deployment by providing the basis for clean
item masters and bills-of-materials for existing and new designs.
Powerful Decision Support. The Aspect CSM solution supports advanced search
techniques that enable users to rapidly search and select the optimal
components, suppliers and reusable designs from a multitude of possible
choices. This solution allows users to access this information much more
rapidly and reliably than using paper catalogs or accessing documents, if
available, on suppliers' World Wide Web servers. Advanced analytical
capabilities also enable spreadsheet style comparison of technical and business
features.
Desktop Access to Industry-Wide Reference Data. The VIP component reference
databases provide search and select parameters and electronic catalogs for a
wide range of standard components and commodities, classified and organized for
consistency and ease of search. These reference data products include
approximately 3 million components from approximately 800 suppliers worldwide
and are updated frequently. These content databases are designed to provide
desktop access for a wide variety of choices and are organized under a standard
classification scheme ("SCS") to enable rapid and consistent search, comparison
and selection of standard components and suppliers.
Rapid Deployment. The deployment of a CSM system is targeted to be available
to users within 200 days. Explore provides powerful Soft Model technology that
enables companies to model their business processes rapidly and to keep this
data model up-to-date as these processes evolve. A full suite of application
programming interfaces ("APIs") and batch data loading tools are available to
speed legacy data migration and accelerate integration with other enterprise
systems.
Workflow/Process Automation. Explore automates the management of ongoing
changes in component and supplier information from qualification through
obsolescence, enabling companies to manage their information in the context of
best business practices and to improve design and procurement productivity.
CUSTOMERS
Aspect's customers include more than 125 of the world's largest
manufacturers. Aspect has traditionally been strong in the electronics and high
technology manufacturing sector. The acquisition of CADIS, Inc. in November
1997
26
<PAGE>
has given the Company an additional customer base primarily in the
industrial/mechanical sector. Recent expansion of the product line to include
solutions for operations/MRO has allowed the company to sell its CSM solution
into the process manufacturing sector as well. The Company's revenues in any
period are substantially dependent upon a relatively small number of large
sales. The Company expects that this trend will continue for the foreseeable
future.
For the year ended December 31, 1997, sales to SAP AG ("SAP") accounted for
11% of revenues. No other customer in any of the three years ended December 31,
1997 accounted for more than 10% of revenues. See "Risk Factors-Customer
Concentration."
PRODUCTS
Aspect offers a comprehensive CSM solution that enables companies to
address component and supplier management demands in today's competitive global
marketplace. The Aspect CSM solution includes the Explore family of
client/server software products, the VIP, VIS and VIP-OPS family of content
databases and CSM business process and data consulting services and Web products
and services.
EXPLORE SOFTWARE PRODUCTS
The Company's Explore client/server software products are available in
three primary application configurations: Explore-CIS, Explore-Enterprise and
Strategic Sourcing Management ("SSM"). Explore-CIS is a system that enables
design and procurement teams to rapidly classify and search components from
legacy data or from VIP content databases licensed by the customer. Explore-
Enterprise is an enterprise-wide solution that enables, in addition to component
classification and search, preferred component and supplier management, design
reuse, design and procurement process automation and integration with other
enterprise systems. SSM expands Explore-Enterprise with the addition of a
consolidated repository, navigation, and analysis solution for commodity and
supplier information from customers' ERP systems, the CSM system and outside
suppliers to enable procurement to identify strategic sourcing opportunities.
Each of these three configurations is based on the Explore Server and the
Explore Client software, although Explore-CIS is licensed for only a subset of
the available functionality. In addition, the Company offers a range of
software options, including CAD/PDM/ERP Interfaces, Enterprise Integration APIs,
and a Rapid Development Server.
EXPLORE SERVER. The Explore Server provides a variety of features for
component and supplier management, including a parametric search engine, a
cascade search engine, a forms editor for workflow/process automation and a
class and object editor. The Explore Server enables the storage and management
of parametric data, metadata, text, images, graphics and CAD files. Objects
such as components, suppliers or reusable design elements can be organized into
one or more classes, which can be organized into one or more hierarchies for
ease of classification and search. Objects can also be characterized by their
form, fit, function and technical parameters, their business or other
parameters, and by their catalogs, specifications or CAD drawings/models.
Relationships and cross-references between classes or objects can also be
defined via Soft Models. The Explore Server is a portable object-oriented
application written in C++ that is supported on various UNIX server platforms
(Sun, IBM and HP) and on Microsoft NT Servers, and operates in conjunction with
the embedded Oracle RDBMS.
. Parametric Search Engine. The parametric search engine enables the
browsing of class hierarchies and searching for components, items or
other objects by specifying simple or complex parametric criteria,
such as speed, temperature, material, packaging, technology, cost or
availability. Results of these parametric searches can be displayed in
a spreadsheet-like comparison window and compared side-by-side, and
differences can be highlighted to accelerate selection. Datasheets,
notes, CAD files or other information related to the selected objects
can be immediately retrieved and viewed.
. Cascade Search Engine. The cascade search engine enables simultaneous
ad-hoc parametric searching across a combination of component,
supplier, design reuse or other class hierarchies. Relationships
between a class of components, such as memory devices, and its
manufacturers, distributors, CAD design libraries and preferred parts
and suppliers lists can be viewed graphically to assist in the rapid
setup of the search criteria. This functionality is particularly
important for analytical searches which involve complex
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combinations of technical and business parameters. For example, a user
may search for certain memory devices with an access time of 50
nanoseconds, lead time of less than two weeks, and cost of less than
two dollars from preferred suppliers that are ISO 9000 certified and
for which reusable CAD libraries are already available. This type of
complex search across multiple classes is significantly more difficult
to manage without the cascade search capability.
. Forms Editor for Workflow/Process Automation. The Explore Server
provides the ability to automate manual, paper-based processes with an
automated forms generation and management capability. For example, new
part requests and approvals can be created and managed in the system
as objects, just like component or supplier information. Customer-
defined routings, signoffs and approvals can be accomplished
electronically.
. Class and Object Editor. This editor enables the easy addition and
modification of classes, objects and parameters, as well as the
relationships between them, using the graphical user interface
("GUI"). It also enables the use of a spreadsheet-like edit window to
make simultaneous changes to a large number of objects.
EXPLORE CLIENT. Explore Client software is supported on a variety of PC
and UNIX platforms, as well as commercially available Web browsers. The client
software presents the services and features of the Explore Server software
through such familiar GUI features as folders, icons and toolbars and supports
Windows and other graphical environments. Class hierarchies and relationships
can be viewed in a graphical browser. Using point-and-click methods, users can
rapidly locate the desired class of information for subsequent searching,
initiate parametric or cascade searches, compare results using spreadsheet
windows, organize component information into user-specified lists, and view
related data or documents. The Explore client software GUI configures itself
directly from the data model stored in the Explore Server. Therefore, if the
model changes, the GUI reconfigures itself automatically without any custom
programming.
. Dashboard. In order to make searching easier for novices and to
automate repetitive searches, Aspect introduced Explore Dashboard.
With the push of a button, users can call up a list of preferred parts
for the corporation, for a division, even for a project, view a list
of functionally equivalent parts, or upgrades or downgrades according
to a wide range of specifications. Procurement professionals can
generate graphs showing commitment levels to suppliers, reports
monitoring supplier performance according to agreed-upon delivery
logistics and timeframes, quality, and other performance metrics. In
performing these CSM operations, Dashboard draws on the full power of
the classification browser, parametric search engine, results display,
search configurations and patterns, permissions, and report generation
capabilities of Explore.
. Explore List Manager. Explore List Manager allows users to collect and
analyze a group of components. For example, users can analyze a group
of components by cost, availability, and other business criteria.
Designers can easily construct a preliminary bill of materials
("BOMs"). Explore List Manager also facilitates the ability to import
parts information (such as product structure and BOMs) from external
sources to enrich that information with VIP and VIS information, to
view the combined information as a group, and to analyze the
collective grouping for usage within designs.
. ACE. Explore's Alternate Component Expert ("ACE") opens new
opportunities for consolidation, volume buying, component obsolescence
management, and cost cutting through elimination of redundant part
numbers. ACE quickly and easily searches both legacy data and VIP
reference databases. Searches for equivalent parts with ACE, based on
dozens of parameters, are more accurate and efficient than searches
based on part numbers only. If an exactly equivalent component cannot
be found, users can then turn to performance upgrades where a part may
actually cost less due to volume discounts of consolidated purchases
or downgrades where, for example, defense contractors retool products
for commercial markets, whose performance requirements are less
stringent, creating the opportunity to lower product cost. ACE is a
complete software and data solution, and includes the underlying rules
for equivalents, upgrades and downgrades, based on best practices.
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EXPLORE OPTIONS. In addition to the basic functionality available with the
Explore-CIS, the Explore-Enterprise, or SSM applications, customers can choose
to enhance their CSM solution with the following options:
. Replication. The Explore Replication Server is designed for
corporations seeking to integrate their global enterprise with
preferred component and supplier information. Aspect's robust database
replication solution links remote, network-optimized divisions to allow
different divisions to maintain control of certain information yet
effectively share it. This ability to ensure that corporate preferences
for components and suppliers are visible enterprise-wide significantly
aids in the development of strategic component and supplier programs.
Replications to multiple servers can be made that include Explore
database objects, attachments and notes.
. SAP and Baan Integration. All of Aspect's applications integrate
directly into SAP's environment and that of Baan. Aspect is a SAP and
Baan certified partner, which guarantees that Aspect software will
maintain integration integrity with each partner's products throughout
release cycles, and that customers will be supported by each partner's
support organization.
. Explore Interfaces. The Explore interfaces integrate the Explore
software with tools from leading electronic and mechanical design
automation vendors, allowing designers to work in the environment in
which they are most comfortable while at the same time providing access
to the Explore Server to select components, obtain information about
components used in the current design, find alternatives, or reuse CAD
libraries. The Explore interfaces also integrate the Explore software
with leading PDM vendors, allowing users to select components, find
alternatives, and obtain information about components and where they
are used in various versions of products and configurations stored in
the PDM system. To date, the Company has released interfaces to
electronic design automation tools of Mentor Graphics Corporation
("Mentor Graphics"), Cadence Design Systems, Inc. ("Cadence") and
Parametric Technology Corporation ("Parametric Technology").
. Explore Integration Toolkit. A range of enterprise integration tools is
provided to enable integration with existing enterprise systems. An API
is available to allow real-time, programmatic interfaces between
Explore and other systems. Batch data import-export utilities are also
available to enable the uploading and downloading of data and data
models to and from Explore. This toolkit can be used for developing or
extending data models or integrating them with other systems. Certain
of these tools can be used to create new data models for new
applications, add special functions, create or modify class hierarchies
and create one-to-one, one-to-many or many-to-many relationships using
high-level object-oriented methods.
. Explore Rapid Application Development ("RAD"). RAD is a software
toolkit targeted at the application development programmer rather than
the Explore client end user. RAD is used to develop Softmodels
(datamodel) to customize Explore, integrations to legacy systems, or
unique applications, such as a bill of materials analysis, layered on
Explore.
THE ASPECT FAMILY OF COMPONENT, COMMODITY AND SUPPLIER REFERENCE DATABASES
The Company's family of reference databases provides regularly-updated
information in the area of parts and components, commodity suppliers and
operational maintenance goods.
VIP REFERENCE DATABASES. Aspect's VIP database contains almost 3 million
standard electronic, electro-mechanical and mechanical components. The content
of the VIP component reference databases includes, for most components, an index
of search and select parameters that enables rapid component search, comparison
and selection based on form, fit and function and other technical
characteristics, as well as electronic versions of databooks and datasheets.
VIP component reference databases provide broad, industry-wide coverage of
component manufacturers, enabling users to rapidly access component information
at their desktops instead of searching manually through many different and often
inconsistent paper databooks or receiving information from one manufacturer at a
time. The VIP component reference databases are organized by major device
groups, including ICs and discrete semiconductors, passive components,
electromechanical components and mechanical components, and contain
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infromation on approximately 3 million standard components available from over
800 suppliers. The Company updates its VIP component reference databases
regularly and delivers these updates to its customers on computer tape. VIP
component reference databases are integrated with the Company's Explore
client/server software to enable a comprehensive CSM solution for enterprise
data management.
VIP reference databases utilize the Company's Standard Classification
Scheme and VIP data dictionary, which defines the classification structure in
which the part classes reside and the standard definitions of the search
parameters, including names, descriptions, units of measure, allowable values
and other criteria.
The VIP family of component reference databases includes the following
individual databases:
. VIP IC and Discrete Semiconductors Reference Database, which includes
memory, programmable logic, digital logic, microprocessor, analog and
interface devices and discrete device types including transistor, diode,
transformer, crystal, trigger, optoelectronic and sensor devices.
. VIP Passives Reference Database, which includes capacitor, resistor,
inductor and transformer components.
. VIP Electro-Mechanical Reference Database, which includes connectors,
relays, and switches.
. VIP IC Military Specifications Database, which includes military
specifications for military-rated IC and semiconductor components.
. VIP Package Standards Database, which provides package dimensions and
outline drawings to international specifications for certain IC
components.
. VIP Fasteners Standards Database, which includes international
specifications for nuts, bolts, screws, washers, clips, and other
standard fasteners.
VIS DATABASES. The Company also resells and sublicenses reference data on
thousands of suppliers from Dun & Bradstreet Corporation ("Dun & Bradstreet"),
providing such information as headquarters and distributor locations, contact
information, supplier credit rating and UN-SPSC codes for products and services
they provide.
VIP-OPS DATABASE. The Company expects to launch version 1.0 of its VIP-OPS
database, containing information on products from over 5,000 suppliers of
operational management items, including pipes, valves, fittings, solvents,
cleansers, repair items and hardware, in the second quarter of 1998. The
Company is sourcing data for VIP-OPS from a variety of suppliers and publishers,
including Howard W. Sams & Co. ("Sams") and Cahners Publishing Company.
PRODUCTS AND SERVICES FOR THE WORLD WIDE WEB
The Company has developed a product and service designed to expand its
business utilizing Web technology, including a Web client for the Explore
Server, based on a combination of the Java programming language and HTML. This
technology will enable authorized users in an intranet or Internet environment
to use parametric search and other search techniques to access information in
any specific Web-enabled Explore Server, utilizing standard Web browsers. For
intranet applications the Company offers the intranet client as an additional
option to its UNIX or PC/Windows client software. For Internet applications,
the Company offers a Web-based product called Aspect Online, through which
authorized subscribers can access the VIP-Reference Databases via the Web.
Aspect Online is sold through authorized value added resellers to small and
medium sized companies whose primary requirement is access to reference data
with minimal setup costs. As a result of the acquisition of CADIS in November
1997, the Company has expanded its Web product line to include Krakatoa. As a
Web catalog technology designed to be embedded in e-commerce solutions for re-
sale, Krakatoa allows customers to quickly create and easily maintain large
catalogs with parametric searching. There can be no assurance, however, that
the revenues generated from such Web-based products will exceed the cost of
developing, modifying and supporting products and services for such use.
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PRODUCT PRICING
The Company's Explore software is priced based on a number of factors,
including the base application configuration (Explore-CIS, Explore-Enterprise or
SSM), the modules licensed and the number of licensed users. The list price for
perpetual licenses of the Explore software may range from approximately $250,000
to more than $5 million depending on the configuration and number of users. The
list price for software maintenance is typically based on a percentage of the
associated software list price. The Company's content databases are offered
under a perpetual license or an annual subscription license, with list prices
typically ranging from approximately $50,000 to approximately $800,000 depending
on the specific content databases licensed, the number of licensed users and
other factors. The Company may offer discounts to customers based on the scope
of the customer's commitment and other commercial considerations. Additionally,
the Company may in the future offer new or different configurations at
significantly lower prices.
Customer Service and Support
The Company's customer service and support organization provides customers
with technical support, training, consulting and implementation services. All
of the Company's current customers have software maintenance agreements with the
Company that provide for one or more of the following services:
Professional Services. The Company's consultants work closely with
customers to deliver legacy data conversion and business process consulting
services. Legacy data conversion services include legacy data migration,
standardization, enrichment, and integration of legacy data with the Company's
content databases. Business process services include process engineering, data
modeling, best practice development, and enterprise architecture definition and
integration to deliver global preferred part management, global preferred supply
chain consolidation, and design reuse programs. Fees for legacy data conversion
services are charged in addition to and separate from the license fees charged
for the Company's application software and content products and are charged on a
per part and per database, or a per diem basis. Fees for business process
services are typically charged in addition to and separate from the Company's
software and content products on a per diem or fixed price based on deliverables
basis. The professional services provided by the Company may be obtained from a
third party. The Company also provides customers with Rapid Deployment support,
including installation and technical support, the fees for which are charged in
addition to and separate from the Company's software and content products,
typically on a per diem basis.
Customer Education and Training. The Company offers training courses
designed to meet the needs of end users, data modeling, knowledge, and
integration experts and system administrators. The Company also trains customer
personnel who in turn train end users in large global enterprise deployments.
Training classes are provided at the Company's offices in Mountain View,
California; Boston, Massachusetts; London, England; Tokyo, Japan; and Bangalore,
India. The Company provides on-site training services upon request by customers
at a higher cost. Fees for education and training services are in addition to
and separate from the fees for software and content products and are typically
charged either per student and per class, or on a per diem basis.
Software Maintenance and Support. The Company offers telephone, e-mail and
facsimile customer support through its central technical support staff at the
Company's headquarters and regional support centers in North America, Europe,
and Asia. The Company also provides customers with product documentation,
release notes, and on-line help that describe features in new products, known
problems and workarounds, and application notes. Software product license fees
do not cover maintenance. Each customer is entitled to receive certain software
updates, maintenance releases and technical support for an annual fee based on a
percentage of the price of the products under license to such customers. The
annual subscription service fee for the Company's content products covers all
data updates and maintenance on an ongoing basis for the term of the
subscription.
SALES AND MARKETING
The Company markets and sells its products and services primarily through a
direct sales force based in Mountain View, California and field sales offices in
North American metropolitan areas of Atlanta, Boston, Cincinnati, Cleveland,
Chicago, Dallas, Denver, Los Angeles, New York and Toronto, and abroad in
London, Milan, Paris, Munich,
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Tokyo and Bangalore. As of December 31, 1997 the Company's sales and marketing
organization consisted of 114 employees. To support its sales force, the Company
conducts a number of marketing programs, which includes public relations,
telemarketing, seminars, direct mail, trade shows and customer advisory board
meetings. The Company's sales team includes persons performing strategic account
manager, applications, and consulting and business development roles. The
Company also has worldwide strategic reselling agreements with SAP and Baan, a
joint marketing and systems integrator agreement with Digital Japan in Japan, a
sales representative agreement in South Korea with ATE and a sales
representative agreement in Israel with Onyx.
The Company's near-term strategy is to focus its sales and marketing
efforts to a highly targeted "Aspect 500" list of the top 500 worldwide discrete
manufacturers and top 500 manufacturers in the process, CPG and related
industries, as well as exploring additional sales opportunities among its
current customer base. The Company's field sales force conducts multiple
presentations and demonstrations of the Company's CSM solution to management and
users at the customer site as a part of the direct sales effort. Sales cycles
generally range from six to twelve months or longer. The direct sales force is
responsible for joint sales efforts and management of multiple channels.
International sales accounted for 18.9%, 20.3% and 17.0% of the Company's
total revenues in 1995, 1996 and 1997, respectively. In addition, although the
Company records revenues based on the billing location, certain domestic
billings include licenses that may be deployed by customers or resold through
indirect channels into international locations. The Company believes that in
order to increase sales opportunities and profitability, it will be required to
expand its international sales. The Company intends to continue to expand its
direct and indirect sales and marketing activities worldwide, which will require
significant management attention and financial resources.
The Company has committed and continues to commit significant time and
financial resources to developing international sales and support channels.
There are a number of risks inherent in the Company's international business
activities, including unexpected changes in regulatory requirements, tariffs and
other trade barriers, costs and risks of localizing products for foreign
countries, longer accounts receivable payment cycles, potentially adverse tax
consequences, currency fluctuations, repatriation of earnings and the burdens of
complying with a wide variety of foreign laws. In addition, revenues of the
Company earned in various countries where the Company does business may be
subject to taxation by more than one jurisdiction, thereby adversely affecting
the Company's earnings. There can be no assurance that such factors will not
have an adverse effect on the revenues from the Company's future international
sales and, consequently, the Company's business, financial condition or results
of operations. See "Risk Factors--International Sales."
The Company generally ships its products within a short period of time
after execution of a license. As a result, the Company typically does not have
a material backlog of unfilled license orders at any given time, and the Company
does not consider backlog to be a meaningful indicator of future performance.
STRATEGIC ALLIANCE PARTNERS
The Company believes that in order to provide comprehensive CSM solutions,
it will be necessary to develop, maintain and enhance close alliances with
vendors of hardware, software, database, data and professional services. In
addition to the strategic reselling agreements with SAP and Baan, the Company
has established marketing and strategic alliances with a number of major
vendors, including Cadence, Electronic Data Systems Corp., HP, IBM, Mentor
Graphics, SDRC/Metaphase Technology, Inc., Oracle, Origin Technology Corp.,
Parametric Technology, Sherpa Corporation, Siemens Business Systems, Sun,
Viewlogic and a relationship with the consulting group of a Big 6 accounting
firm. The Company's alliances with hardware vendors have enabled it to
integrate its solution with several industry standard hardware platforms. The
Company has formed an Enterprise Partners Program with vendors of complementary
products and meets regularly with its Enterprise Partners to enhance integration
between their complementary products and the Company's products. The Company
believes these alliances can enhance the Company's ability to deliver a CSM
solution that supports customers' existing enterprise data management
architecture and that is tailored to the specific requirements of their
industry. Although the Company seeks to maintain close alliances with these
companies, if the Company is unable to develop and retain effective, long-term
alliances with these third parties, the Company's competitive position could be
materially adversely affected. See "Risk Factors--Dependence on Relationship
with Complementary Vendors."
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RESEARCH AND DEVELOPMENT
The Company has committed, and expects to continue to commit in the future,
substantial resources to product development. Research and development efforts
are directed at increasing product functionality and solution modules, improving
product performance and expanding the capabilities of the products to
interoperate with third party software. The Company originally introduced its
CIS software in 1992 and introduced commercial availability of the next
generation Explore client/server software and its VIP content databases in 1995.
The Company has regularly released new products and enhancements to existing
products. The latest software release, Explore Version 4.0, and the latest
content release, VIP version 98.1, are each expected to ship as of the second
quarter of 1998. Although the Company expects that certain of its new products
will be developed internally, the Company may, based on timing and cost
considerations, acquire technology and products from third parties.
The Company supplements its product development efforts by reviewing
customer feedback on existing products and working with customers and potential
customers to anticipate future functionality requirements. To assist this
effort, the Company hosts a customer advisory board made up of representatives
from many of its key customers, which meets periodically to provide feedback to
the Company's current and future product plans.
The Company's future success will depend in part upon its ability to
enhance its current products and to develop and introduce new products on a
timely basis that keep pace with technological developments, emerging industry
standards and the increasingly sophisticated needs of its customers. There can
be no assurance that the Company will be successful in developing or marketing
product enhancements or new products that respond to technological change or
evolving industry standards, that the Company will not experience difficulties
that could delay or prevent the successful development, introduction and
marketing of these products or that its new products or product enhancements
will adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce new products or enhancements, the Company's business,
financial condition and results of operations could be materially adversely
affected. See "Risk Factors--Need to Develop New Software Products and
Enhancements and "--Need to Develop, Maintain and Improve Database Products."
In addition, applications software and content products as complex as those
offered by the Company frequently contain undetected errors or failures when
first introduced or when new versions are released. The Company has in the past
discovered software and data errors in certain of its products and enhancements,
both before and after initial shipments, and has experienced delays or lost
revenues during the period required to correct these errors. There can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not occur in products, data or releases after
commencement of commercial shipments, resulting in loss of or delay in market
acceptance, which could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Risk Factors--
Risk of Product Defects."
As of December 31, 1997, the Company's research and development
organization consisted of 242 full time employees, 152 of whom are employed by
the Company's operations in Bangalore, India. During 1995, 1996 and 1997,
research and development expenses were approximately $6.0 million, $8.8 million
and $11.2 million, respectively.
COMPETITION
The market for the Company's products is competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. The Company's products are targeted at the
emerging market for open, client/server software, content databases and services
solutions, and many of the Company's competitors offer software or content to
address this market. Among the Company's principal competitors is IHS. The
Company may face future competition from International Computex Inc., a
consulting company which has announced its intention to sell low-end CSM
systems. Further, the Company currently faces indirect competition from third-
party professional service organizations and internal information systems and
computer-aided design departments of potential customers that develop custom
internal software.
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In the future, because there are relatively low barriers to entry in the
software industry, the Company could experience additional competition from
other established or emerging companies as the client/server application
software market continues to develop and expand. In particular, RDBMS vendors,
ERP vendors, PDM vendors, CAD vendors or professional service providers may
enter the Company's market with competitive products. As the Company expands
into Internet-based or other forms of product delivery, it may encounter
additional competition from its existing competitors and other established or
emerging companies. Many of these potential competitors have well-established
relationships with the Company's current and potential customers, have extensive
knowledge of client/server technology, better name recognition and significantly
greater financial, technical, sales, marketing and other resources and are
capable of offering single vendor solutions which span multiple industries. It
is also possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share. The Company also expects that
competition will increase as a result of software industry consolidations. The
Company's competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products.
Increased competition may result in price reductions, reduced gross margins
and loss of market share, any of which could materially adversely affect the
Company's business, financial condition or results of operations. There can be
no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures will not materially
adversely affect its business, financial condition or results of operations.
The Company believes that the principal competitive factors affecting its
market include features such as the ongoing development of comprehensive
software and integrated content products, openness, scalability, ability to
integrate with third party products, functionality, adaptability, ease of use,
product reputation, quality, performance, price, customer service and support,
effectiveness of sales and marketing efforts and company reputation. Although
the Company believes that it currently competes favorably with respect to such
factors, there can be no assurance that the Company can maintain its competitive
position against current and potential competitors, especially those with
greater financial, marketing, service, support, technical and other resources
than the Company. See "Risk Factors--Competition."
PROPRIETARY RIGHTS AND LICENSING
The Company's success is heavily dependent upon proprietary technology.
The Company relies primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions with its
employees, consultants and business partners and in its license agreements to
protect its proprietary rights. The Company currently has one patent
application pending for object technology use for parametric searching. The
Company seeks to protect its software, published data, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
product or to obtain and use information that the Company regards as
proprietary. While the Company is not aware that any of its products infringes
the proprietary rights of third parties, there can be no assurance that third
parties will not claim infringement by the Company with respect to current or
future products.
In addition, the Company relies on certain software and data that it
licenses from third parties, including software and data that are used in the
Company's products to perform certain functions. There can be no assurance that
such firms will remain in business, that they will continue to support their
products or that their products will otherwise continue to be available to the
Company on commercially reasonable terms. The Company believes that
substantially all of the software it licenses is available from vendors other
than the Company's current vendors and could be replaced with equivalent
software in a timely manner. However, it is possible that the loss of or
inability to maintain any of these software licenses could result in delays or
cancellations in product shipments until equivalent software can be identified
and licensed or developed and integrated with the Company's products. Any such
delay or cancellation could materially adversely affect the Company's business,
financial condition or results of operations. See "Risk Factors--Dependence on
Proprietary and Licensed Technology."
The Company's products are generally provided to customers in object code
format only. From time to time, in limited circumstances, the Company has
licensed source code format subject to customary protections such as use
restrictions and confidentiality agreements. In addition, certain customers
have entered into source code escrow arrangements with the Company, pursuant to
which the Company's source code could be released to the customer upon the
occurrence of certain events, such as certain material breaches of the
agreement. In the event of any such release of source code from escrow, the
customer's license is generally limited to use of the source code to maintain,
support and configure the Company's software products.
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EMPLOYEES
As of December 31, 1997, the Company employed 536 persons, of whom 264 were
based in the United States, and 272 were based in India and other foreign
countries. Of the total, 114 were engaged in sales and marketing, 250 were in
product development and technical support, 135 were engaged in consulting
services, and 37 were in finance and administration. None of the Company's
employees is represented by a labor union with respect to his or her employment
by the Company. The Company has experienced no organized work stoppages and
believes its relationships with its employees are good. The Company believes
that its future success will also depend to a significant extent upon its
ability to attract, train and retain highly skilled technical, management,
sales, marketing and consulting personnel. Competition for such personnel in
the computer software industry in both the United States and India is intense.
The Company has from time to time experienced difficulty in locating candidates
with appropriate qualifications. There can be no assurance that the Company
will be successful in attracting or retaining such personnel and the failure to
attract or retain such personnel could have a material adverse effect on the
Company's business or results of operations.
PROPERTIES
The Company's principal administrative, sales, marketing, support and
software research and development facility is located in approximately 28,000
square feet of space in Mountain View, California. This facility is leased to
the Company through May 1998. The Company also leases facilities of
approximately 14,000 square feet of space in Nashua, New Hampshire and
approximately 37,000 square feet of space in three locations in Bangalore,
India. The Nashua facility is leased to the Company through August 2002. The
Bangalore facilities are occupied under leases which expire in 1999 through
2004. In addition, the Company maintains sales and support offices in the
metropolitan areas of Atlanta, Boston, Boulder, Chicago, Cleveland, Dallas,
Denver, Detroit, Los Angeles, New York, London, Munich, Milan, Paris, and Tokyo.
The Company believes that its current facilities are adequate for its needs
through the end of 1998, and that, should it be needed, suitable additional or
alternative space will be available in the future on commercially reasonable
terms.
LEGAL PROCEEDINGS
In the ordinary course of business, the Company may be involved in legal
proceedings. As of the date hereof, to the Company's knowledge, there are no
material proceedings in which the Company is involved or litigation pending
against the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company who are elected by and
serve at the discretion of the Board of Directors, and their ages as of December
31, 1997, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------ ----------- -----------------------------------------------------
<S> <C> <C>
Dr. Romesh Wadhwani 50 Chairman of the Board and Chief Executive Officer
Joseph A. Prang 42 President, Chief Operating Officer and Director
David S. Dury 49 Vice President and Chief Financial Officer
James C. Althoff 44 Executive Vice President and Chief Technical Officer
Philip G. Nutburn 48 Vice President, European Operations
David Horne 45 Vice President, Marketing
Craig Palmer 37 Vice President, Strategic Sourcing Group
Kenneth B. Belanger 42 Vice President, Content Business Development
William Zierolf 39 Vice President and General Manager, Knowledge Services
Patrick Quirk 41 Vice President, Americas and Asia/Pacific Sales
Steven Goldby 57 Director
Dennis G. Sisco 51 Director
Mark A. Stevens 38 Director
</TABLE>
Dr. Wadhwani founded the Company in 1990 and has served as Chairman of the
Board of Directors and Chief Executive Officer of the Company since January
1991. From January 1982 to March 1989, Dr. Wadhwani served as Chief Executive
Officer of Cimflex Teknowledge, Corp. ("Cimflex"), a provider of factory
automation products and systems. Dr. Wadhwani continued to serve as Chairman of
the Board of Cimflex until July 1990. From 1973 to 1981, Dr. Wadhwani was Chief
Executive Officer of Compuguard Corporation, a provider of building automation
systems. Dr. Wadhwani received his M.S. and Ph.D. in Electrical Engineering
from Carnegie-Mellon University.
Mr. Prang joined the Company as President and Chief Operating Officer in
May 1994. Mr. Prang has also served as a Director of the Company since October
1995. Prior to joining the Company from January 1986 to May 1994, he served in
numerous capacities at Cadence Design Systems, Inc. ("Cadence"), an electronic
design automation software developer, including Vice President of Marketing,
Vice President and General Manager of System Design Division and President of
Systems Division. From June 1979 to January 1986, Mr. Prang served as Vice
President of GenRad, Inc. ("GenRad"), a company specializing in simulation and
test systems. Mr. Prang holds a B.S. in engineering technology and an M.S.M.
from Purdue University. Mr. Prang is also a director of EPIC Design Technology,
Inc., an electronic design automation software developer.
Mr. Dury joined the Company in April 1996 as Vice President and Chief
Financial Officer. Prior to joining the Company, Mr. Dury served as Chief
Financial Officer of NetFrame Systems, Inc., a network server manufacturer,
beginning in March 1992. From August 1991 to February 1992, he served as Senior
Vice President and Chief Financial Officer of Maxtor Corporation, a disk drive
manufacturer. From December 1989 to August 1991, he served as Executive Vice
President and Chief Financial Officer of Boole & Babbage, a software developer.
Previously, Mr. Dury
36
<PAGE>
was employed by Priam Corporation from February 1983 to February 1989, serving
first as Vice President and Chief Financial Officer, and then as President and
Chief Operating Officer. Mr. Dury had several financial and operating management
positions at Intel corporation from 1979 to 1983. Mr. Dury holds a B.A. in
psychology from Duke University and an M.B.A. from Cornell University.
Mr. Althoff joined the Company as Vice President, Software Operations in
December 1991 and was appointed Executive Vice President and Chief Technical
Officer in January 1997. Prior to joining the Company, from October 1981 to
December 1991, Mr. Althoff served as Vice President of Engineering and General
Manager of the Japan Business Unit of VLSI Technology/Compass Design &
Automation, as ASIC developer. Mr. Althoff holds a B.S. in mathematics from
Florida State University and an M.S. in computer science from California
Institute of Technology.
Mr. Nutburn joined the Company as Director of European Operations in
November 1992. In January 1997, he was appointed as Vice President, European
Operations. Prior to joining the Company, Mr. Nutburn worked as a consultant to
the Company beginning in July 1992. Prior to that time, he served as director
of worldwide sales for the electronics design automation division of GenRad from
June 1991 to June 1992. Prior to that time Mr. Nutburn held various management
positions at Silicon Valley Research, Inc. (formerly, Silvar-Lisco) and a
division of Schlumberger Technologies, Inc. Mr. Nutburn holds a B.S. in
electrical engineering from the University of Northumberland.
Mr. Horne joined the Company in September 1996 as Vice President of
Marketing. Before joining Aspect, Mr. Horne was Vice President of Marketing for
Concentra Corporation from July 1994 to September 1996. From September 1982 to
June 1994 he held a variety of sales and marketing management positions at
Computervision Corporation, most recently Director of Worldwide Marketing
operations. Mr. Horne holds a B.S. from the University of Massachusetts and an
M.B.A. from Northeastern University.
Mr. Palmer joined the Company as Vice President of Marketing in September
1994. In September 1996 he became Vice President, Online Services. In January
1998 he became Vice President, Strategic Sourcing Group. From February 1989 to
September 1994, Mr. Palmer worked at Cadence, most recently as Director of
Marketing from January 1993 to August 1994. Mr. Palmer also worked at Hewlett-
Packard Company from February 1982 to February 1989, where he held several
marketing management positions. Mr. Palmer holds a B.S. in electrical
engineering from the University of Wisconsin.
Mr. Belanger joined the Company as Vice President, Data Operations in March
1992. Prior to joining the Company, Mr. Belanger served as Director of
Development at ExpertViews, Inc., a component information systems provider, from
September 1989 to October 1991. Mr. Belanger holds a B.S. in engineering
technology from the University of Massachusetts.
Mr. Zierolf joined the Company as Vice President and General Manager,
Knowledge Services in March, 1997. Prior to joining the Company, from October
1994 to March 1997 Mr. Zierolf served as President, Chief Executive Officer and
Director of Teltech Resource Network, Inc., an information services and software
provider. From February 1982 to October 1994 he was Vice President of Venture
Development for Dun and Bradstreet. Mr. Zierolf holds a B.S. in Business
Administration and Marketing and a B.S. in Communication Arts from Wittenberg
University in Springfield, Ohio.
Mr. Quirk joined the Company as Vice President, Americas and Asia/Pacific
Sales in May 1997. Prior to joining the Company from July 1995 to May 1997, he
served as Vice President-Worldwide Sales at Connect, Inc., an electronic
commerce software company. From June 1993 to July 1995, Mr. Quirk served as
Vice President-Americas at Avalon Software, Inc., an enterprise resource
planning software company. From April 1989 to May 1993, he served as Group
Sales Manager and National Account Manager at Oracle Corporation. From January
1983 to April 1989, Mr. Quirk held various sales management positions at Control
Data Corporation. Mr. Quirk holds a B.S. in industrial engineering from the
University of Wisconsin-Madison.
Mr. Goldby was appointed to the Company's Board of Directors in March 1993.
Mr. Goldby is the Chief Executive Officer of MDL Information Systems, Inc., an
enterprise software company, where he has been employed since January 1982.
37
<PAGE>
Mr. Sisco was appointed to the Company's Board of Directors in September
1994. Mr. Sisco has been a Partner in Behrman Capital, a private equity
investment firm, since January 1998. Mr. Sisco was an Executive Vice President
at Cognizant Corporation, an information services company, from February 1995
until February 1997. Prior to that time, beginning in July 1993, Mr. Sisco was a
Senior Vice President at the Dun & Bradstreet Corporation. Mr. Sisco was also
the President of Cognizant Enterprises, a venture capital firm and a Subsidiary
of Cognizant Corporation, a capacity in which he has served from December 1988
until February 1997. Mr. Sisco also serves as a director of TSI Software
International, Inc., a software products firm, Oasis Healthcare Systems, a
software firm specializing in clinical information systems, and Gartner Group,
Inc., a market research firm.
Mr. Stevens was appointed to the Company's Board of Directors in March
1993. Mr. Stevens has been a General Partner of Sequoia Capital, a venture
capital firm, since March 1993. Prior to that time, beginning in July 1989, Mr.
Stevens was an associate at Sequoia Capital. Mr. Stevens is a director of
several privately held companies. Mr. Stevens holds a B.S. in electrical
engineering, a B.A. in economics and an M.S. in computer engineering from the
University of Southern California and an M.B.A. from the Harvard Business
School.
38
<PAGE>
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information for the fiscal years ended
December 31, 1997, 1996 and 1995 concerning the compensation of the Chief
Executive Officer of the Company and the four other most highly compensated
executive officers of the Company as of December 31, 1997 whose total salary and
bonus for the year ended December 31, 1997 exceeded $100,000, for services in
all capacities to the Company and its subsidiaries:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
-----------------
Annual Compensation Securities
--------------------- Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation
- ------------------------------------- -------- ---------- --------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Romesh Wadhwani 1997 $200,000 $100,000 125,000 $4,337 (1)
Chairman of the Board 1996 $200,000 $ 90,000 125,000 $9,640 (1)
and Chief Executive Officer 1995 $200,000 $ 90,000 -- --
Joseph Prang 1997 $185,000 $ 85,000 35,000 --
President, Chief Operating 1996 $185,000 $ 76,500 50,000 --
Officer and Director 1995 $185,000 $ 76,500 -- --
James Althoff 1997 $159,597 $ 48,373 35,063 --
Executive Vice President 1996 $145,000 $ 45,000 25,000 --
and Chief Technical Officer 1995 $145,000 $ 45,000 -- --
David Dury (2) 1997 $169,209 $ 37,500 10,000 --
Vice President and 1996 $114,968 $ 10,000 100,000 --
Chief Financial Officer 1995 -- -- -- --
David James Horne (3) 1997 $138,692 $ 30,079 5,000 --
Vice President 1996 $ 35,308 -- 55,000 --
Marketing 1995 -- -- -- --
</TABLE>
(1) Represents $4,337 and $9,640 paid by the Company for executive life
insurance for which Mr. Wadhwani's estate is the beneficiary.
(2) Mr. Dury joined the Company in April 1996 as Vice President and Chief
Financial Officer.
(3) Mr. Horne joined the Company in September 1996 as Vice President of
Marketing.
39
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides the specified information concerning grants of
options to purchase the Common Stock made during the fiscal year ended December
31, 1997 to the persons named in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual
% of Total Rates of Stock Price
Number of Options Appreciation for Option Term (1)
Options Granted to Expiration --------------------------------
Name Granted (2) Employees Price (3) Date 5% ($) 10% ($)
- ------------------------ ------------- ---------- ---------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Romesh Wadhwani 125,000 5.96% $21.75 6/4/07 1,709,807 4,332,987
Joseph Prang 35,000 1.67% $21.75 6/4/07 478,746 1,213,236
James Althoff 35,063 1.67% $21.75 6/4/07 479,608 1,215,420
David Dury 10,000 0.48% $21.75 6/4/07 136,785 346,639
David James Horne 5,000 0.24% $21.75 6/4/07 68,392 173,319
</TABLE>
(1) Potential gains are net of exercise price, but before taxes associated with
exercise. These amounts represent certain assumed rates of appreciation
only, in accordance with the SEC's rules. Actual gains, if any, on stock
option exercises are dependent on the future performance of the Common
Stock, overall market conditions and the optionholders' continued
employment through the vesting period. The amounts reflected in this table
may not necessarily be achieved.
(2) All options granted in fiscal 1997 under the Company's 1992 Stock Option
Plan (the "1992 Option Plan") are immediately exercisable subject to the
Company's right to repurchase unvested shares at the original exercise
price upon termination of the optionee. Options and underlying shares
generally vest over a four year period at the rate of one-fourth on the
first anniversary of the date of grant and 1/48 per month thereafter for
each full month of the optionee's continuous employment with the Company.
Under the 1992 Option Plan, the Board retains discretion to modify the
terms, including the price, of outstanding options.
(3) All options listed were granted at market value on the date of grant, based
on the closing sales price on the date of grant.
40
<PAGE>
OPTION EXERCISES AND YEAR-END HOLDINGS
The following table provides the specified information concerning exercises
of options to purchase the Common Stock in the fiscal year ended December 31,
1997, and unexercised options held as of December 31, 1997, by the persons named
in the Summary Compensation Table:
AGGREGATED OPTION EXERCISES
AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options at 12/31/97 Options at 12/31/97(1)
Acquired Value --------------------------------- -------------------------------
Name on Exercise Realized Exercisable (2) Unexercisable Exercisable (2) Unexercisable
- ----------------- ---------------- ---------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Romesh Wadhwani - N/A 250,000 - $9,387,500 -
Josesph Prang - N/A 85,000 - $3,333,750 -
James Althoff 275,000 $8,589,258 190,063 - $8,932,156 -
David Dury 4,000 $ 109,122 116,000 - $5,072,500 -
David James Horne 5,000 $ 96,250 55,000 - $1,763,750 -
</TABLE>
(1) Based on a fair market value of $52.00, the closing price of the Common
Stock on December 31, 1997 as reported by the Nasdaq National Market.
(2) All options granted in fiscal 1997 under the Company's 1992 Stock Option
Plan (the "1992 Option Plan") are immediately exercisable subject to the
Company's right to repurchase unvested shares at the original exercise
price upon termination of the optionee. Options and underlying shares
generally vest over a four year period at the rate of one-fourth on the
first anniversary of the date of grant and 1/48 per month thereafter for
each full month of the optionee's continuous employment with the Company.
Under the 1992 Option Plan, the Board retains discretion to modify the
terms, including the price, of outstanding options.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash for services provided as a
director. The Company's 1996 Outside Directors Stock Option Plan (the
"Directors Plan") provides for the automatic grant of nonstatutory stock options
to directors of the Company who are not employees of the Company or any parent
or subsidiary corporation of the Company ("Outside Directors"). Under the
Directors Plan, each Outside Director who had not previously been granted an
option under any stock option plan of the Company was granted automatically on
the effective date of the Company's initial public offering (the "IPO") an
option to purchase 5,000 shares of Common Stock, which vests in full on the
third anniversary of the date of grant. Each new Outside Director elected after
the IPO is automatically granted on the date of his election an option to
purchase 15,000 shares of Common Stock, which vests in three equal installments
on the anniversary of the date of grant. In addition, each Outside Director
previously granted an option under the Directors Plan will be granted
automatically on the date of each annual meeting of stockholders an option to
purchase 5,000 shares of Common Stock, which vests in full on the third
anniversary of the date of grant. The exercise price of each option granted
under the Directors Plan will equal the fair market value of the Common Stock on
the date of grant, and the term of each option is ten years.
CHANGE OF CONTROL ARRANGEMENTS
The agreements for options granted under the 1992 Stock Option Plan (the
"1992 Option Plan") generally provide that the options may be immediately
exercised, but that shares acquired upon such exercise will be subject to a
repurchase right which lapses over a four-year period beginning on the date the
option was granted. The agreements with respect to options to purchase 250,000
and 79,312 shares granted to Messrs. Wadhwani and Prang, respectively, provide
that, in the event that the Company is acquired by another entity, the
repurchase option applicable to such shares will lapse immediately upon the
effective date of the transfer of control. The agreement with respect to an
option to purchase 106,000 shares granted to David Dury provides that, in the
event the Company is acquired by another entity within two years of his hire
date, the repurchase option applicable to such shares will lapse with respect to
25% of such
41
<PAGE>
shares upon termination of Mr. Dury's employment with the acquiror.
The agreement with respect to an option to purchase 55,000 shares granted to
David Horne provides that, in the event the Company is acquired by another
entity, the repurchase option applicable to such shares will lapse with respect
to 25% of such shares upon termination of Mr. Horne's employment with the
acquiror.
Pursuant to the terms of an employment offer letter dated April 29, 1994
from the Company to Mr. Prang, the Company sold 550,000 shares of its Common
Stock to Mr. Prang for an aggregate purchase price of $110,000, subject to a
repurchase option in favor of the Company which lapses over a four-year period.
In the event that the Company is acquired by another entity, the repurchase
option applicable to such shares will lapse immediately if the acquiror
terminates Mr. Prang's employment without cause prior to April 29, 1998.
42
<PAGE>
BENEFICIAL SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of Common Stock of
the company as of February 28, 1998 by (i) each stockholder known by the
Company to be a beneficial owner of more than five percent of its Common Stock;
(ii) each of the officers named in the Summary Compensation Table, (iii) each
of the Company's directors; and (iv) all directors and executive officers as a
group.
<TABLE>
<CAPTION>
Number of
Beneficial Owner Shares (1) Percent of Total
- ------------------------------------------------------------- --------------- ------------------
<S> <C> <C>
Romesh Wadhwani (2) 3,280,000 22.4%
1300Charleston Road
Mountain View, CA 94043
Putnam Investments, Inc. (3) 970,467 6.6%
One Post Office Square
Boston, MA 2109
AMVESCAP PLC (4) 747,900 5.1%
11 Devonshire Square
London EC2M 4YR
England
Pilgrim Baxter & Associates, Ltd. (5) 651,100 4.4%
825 Duportail Road
Wayne, PA 19087
Joseph Prang (6) 449,704 3.1%
James Althoff (7) 201,191 1.4%
David Dury (8) 110,463 *
David James Horne (9) 55,339 *
Dennis Sisco (10) 15,280 *
Mark A. Stevens (11) 1,250 *
Steven Goldby (12) 1,250 *
All directors and executive officers as a group (13 persons) (13) 4,452,336 30.4%
</TABLE>
- -----------------------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to
options or warrants held by that person that are currently exercisable, or
become exercisable within 60 days following February 28, 1998, are deemed
outstanding. However, such shares are not deemed outstanding for purposes
of computing the percentage ownership of any other person. All options
held by the individuals named in the table are immediately exercisable,
subject to a right of repurchase in favor of the Company for all exercised
unvested shares. Except as indicated in the footnotes to the table, the
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws. Unless otherwise indicated, the
individuals in the table may be contacted c/o Aspect Development, Inc.,
1300 Charleston Road, Mountain View, CA 94943.
43
<PAGE>
(2) Includes 250,000 shares subject to immediately exercisable options, 181,251
of these shares would not be vested within 60 days of February 28, 1998,
and thus would be subject to repurchase by the Company at a price equal to
the option exercise price, if the corresponding options were exercised
before those shares had vested.
(3) Based solely on an amendment to Schedule 13G filed with the Securities and
Exchange Commission on January 21, 1998. Includes 889,967 held by Putnam
Investment Management, Inc. (of which 716,467 are specifically held by
Putnam OTC & Emerging Growth Fund) and 80,500 shares held by The Putnam
Advisory Company, Inc.
(4) Based solely on an amendment to Schedule 13G filed with the Securities and
Exchange Commission on February 11, 1998, which states that each of
AMVESCAP PLC, AVZ, Inc., A I M Management Group Inc., AMVESCAP Group
Services, Inc., INVESCO, Inc., INVESCO North American Holdings, Inc.,
INVESCO Capital Management, Inc., INVESCO Funds Group, Inc., INVESCO
Management & Research, Inc. and INVESCO Realty Advisers, Inc. may be deemed
to beneficially own 747,900 shares of Common Stock of the Company and that
each entity may be deemed to have shared voting and dispositive power over
such shares.
(5) Based solely on an amendment to Schedule 13G filed with the Securities and
Exchange Commission on February 17, 1998, which states that each of Pilgrim
Baxter & Associates, Ltd. and PBHG Growth Fund may be deemed to
beneficially own 651,100 shares of Common Stock of the Company and that
each entity may be deemed to have sole voting and dispositive power over
such shares.
(6) Includes 79,312 shares subject to immediately exercisable options, 76,464
of these shares would not be vested within 60 days of February 28, 1998,
and thus would be subject to repurchase by the Company at a price equal to
the option exercise price, if the corresponding options were exercised
before those shares had vested.
(7) Includes 140,063 shares subject to immediately exercisable options, 51,721
of these shares would not be vested within 60 days of February 28, 1998,
and thus would be subject to repurchase by the Company at a price equal to
the option exercise price, if the corresponding options were exercised
before those shares had vested.
(8) Includes 106,000 shares subject to immediately exercisable options, 63,752
of these shares would not be vested within 60 days of February 28, 1998,
and thus would be subject to repurchase by the Company at a price equal to
the option exercise price, if the corresponding options were exercised
before those shares had vested.
(9) Includes 55,000 shares subject to immediately exercisable options, 37,606
of these shares would not be vested within 60 days of February 28, 1998,
and thus would be subject to repurchase by the Company at a price equal to
the option exercise price, if the corresponding options were exercised
before those shares had vested.
(10) Includes 2,395 shares subject to options which are exercisable within 60
days of February 28, 1998.
(11) Represents 1,250 shares subject to options which are exercisable within 60
days of February 28, 1998.
(12) Represents 1,250 shares subject to options which are exercisable within 60
days of February 28, 1998.
(13) Includes 1,007,508 shares subject to immediately exercisable options or
issuable upon exercise of outstanding options exercisable within 60 days of
February 28, 1998 beneficially owned by executive officers and directors.
653,683 of these shares would not be vested within 60 days of February 28,
1998, and thus would be subject to repurchase by the Company at a price
equal to the option exercise price, if the corresponding options were
exercised before those shares had vested.
44
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors and persons who beneficially own more than 10% of the Common
Stock to file reports of ownership and reports of changes in ownership with the
Commission. Such persons are required by Commission regulations to furnish the
Company with copies of all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the Company
and written representations from certain reporting persons, the Company believes
that all filing requirements applicable to the Company's executive officers,
directors and greater-than-10% stockholders were complied with and filed in a
timely manner.
45
<PAGE>
SELLING STOCKHOLDERS
The Selling Stockholders hold Shares that were issued by Aspect in
connection with the CADIS Merger. The following table sets forth certain
information known to the Company with respect to beneficial ownership of the
Company's Common Stock as of February 28, 1998 by each Selling Stockholder. In
addition, certain of the Selling Stockholders are venture capital funds,
corporations or trusts which may distribute their shares to their partners,
shareholders or trust beneficiaries, respectively, which distributees may
likewise distribute such shares to their partners, shareholders or trust
beneficiaries. Those shares may later be sold by those partners, shareholders or
trust beneficiaries, or any of their respective distributees. As of November 18,
1997, none of the Selling Stockholders owned more than one percent of the
Company's outstanding shares. Except as indicated, none of the Selling
Stockholders has held any position or office (other than a non-officer
employment relationship) or had any other material relationship with the Company
or any of its affiliates within the past three years other than as a result of
the ownership of the Company's Common Stock. The Company may amend or supplement
this Prospectus from time to time to update the disclosure set forth herein.
<TABLE>
<CAPTION>
Shares Beneficially Shares Offered Shares Beneficially
Owned Prior to the by this Owned After
Selling Stockholders Offering (1) Prospectus the Offering (1)
- ------------------------------------------------ ---------------------- ------------------- ----------------------
<S> <C> <C> <C>
Aperture Associates, L.P......................... 100,016 91,884 8,132
Christopher W. Beall............................. 10,242 9,410 832
Chancellor Venture Capital II, L.P. (2).......... 32,719 30,059 2,660
Sherrie L. Clapp................................. 250 230 20
Commonwealth Venture Partners II, L.P............ 16,718 15,359 1,359
Drake & Co. for the Account of Citiventure III... 131,565 120,868 10,697
Janet Eden-Harris................................ 1,731 (3) 561 1,170 (3)
Daniel J. Ellis.................................. 2,037 1,872 165
EOS Partners SBIC, L.P........................... 63,061 57,934 5,127
Frontenac VI LP (1).............................. 179,291 164,713 14,578
Linda Gartner.................................... 16 15 1
Edward A. Green.................................. 6,522 5,992 530
Caroline D. Himes................................ 597 549 48
J.H. Whitney & Co................................ 26,641 24,475 2,166
Bruce A. Jacquemard.............................. 2,547 2,340 207
Thomas S. Kavanagh............................... 81,538 74,908 6,630
KME Venture III, L.P. (2)........................ 6,882 6,323 559
James L. Mann.................................... 2,552 2,345 207
Marquette Venture Partners II, L.P............... 48,662 44,706 3.956
Venkat A. Mohan.................................. 23,781 21,848 1,933
John C. Morley................................... 10,710 (4) 9,656 1,054 (4)
John D. Motycka.................................. 815 749 66
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Shares Offered Shares Beneficially
Owned Prior to the by this Owned After
Selling Stockholders Offering (1) Prospectus the Offering (1)
- ------------------------------------------------ ---------------------- ------------------- ----------------------
<S> <C> <C> <C>
MVP II Affiliates Fund LP........................ 1,390 1,277 113
Norwest Equity Partners V........................ 108,106 99,316 8,790
Samuel S. Pendleton.............................. 243 224 19
Philadelphia Ventures II, L.P.................... 53,190 48,865 4,325
Philadelphia Ventures Japan II, L.P.............. 6,557 6,024 533
Robert E. King, Trustee for Heather Pines GS..... 1,667 1,532 135
Robert E. King, Trustee for M. Elizabeth
King GS........................................ 1,667 1,532 135
Robert E. King, Trustee for
Robert E. King, Jr. GS........................... 1,667 1,532 135
Thomas Smallwood................................. 168 155 13
Brooke E. Terpening.............................. 3,261 2,996 265
The Hill Partnership III......................... 196,694 180,701 15,993
Transition Three Limited Partnership............. 47,067 43,240 3,827
Whitney 1990 Equity Fund L.P..................... 106,566 97,901 8,665
Todd A. Wichers.................................. 188 173 15
Wind Point Partners II, L.P...................... 135,187 124,195 10,992
</TABLE>
_____________________
(1) The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 promulgated under the Exchange Act. Under such
rule, beneficial ownership includes any shares as to which the individual
has sole or shared voting or investment power and also any shares which the
individual has the right to acquire within 60 days of February 28, 1998
through the exercise of any stock option or other right. Unless otherwise
indicated in the footnotes, each person has sole voting and investment
power (or shares such powers with his or her spouse) with respect to the
shares shown as beneficially owned.
(2) Chancellor LGT Asset Management, Inc. ("Chancellor LGT") is the investment
is the investment manager for KME Venture III, L.P., Chancellor Venture
Capital II, L.P. and Drake & Co. for the Account of Citiventure III (the
"Chancellor Selling Shareholders") and other separately managed clients
(the "Chancellor LGT Separate Accounts"). On behalf of the Chancellor
Selling Stockholders and the Chancellor LGT Separate Accounts, Chancellor
LGT has full discretion as to the voting and dispositive power and
therefore may have "beneficial" ownership under securities laws over
281,766 shares of Common Stock. As of March 31, 1998, Chancellor LGT had
voting and dispositive powers over 171,166 shares of Common Stock purchased
in privately negotiated transactions for the account of the Chancellor
Selling Stockholders and 110,600 shares of Common Stock purchased in the
public market on behalf of the Chancellor LGT Separate Accounts of the
110,600 shares publicly purchased, Drake & Co. for the Account of
Citiventure III holds 4,100 of these shares.
(4) Includes 1,121 shares held by Ms. Eden-Harris.
(5) Includes 200 shares held by McDonald & Co. for the account of John C.
Morley.
47
<PAGE>
PLAN OF DISTRIBUTION
Any or all of the Shares may be sold from time to time to purchasers
directly by any of the Selling Stockholders. Alternatively, the Selling
Stockholders may from time to time offer the Shares through underwriters,
dealers or agents who may receive compensation in the form of underwriting
discounts, concessions or commissions from the Selling Stockholders and/or the
purchasers of Shares for whom they may act as agents. The Selling Stockholders
and any such underwriters, dealers or agents that participate in the
distribution of Shares may be deemed to be "underwriters," and any profit on the
sale of the Shares by them and any discounts, commissions or concessions
received by them may be deemed to be underwriting discounts and commissions
under the Securities Act. The Shares may be sold from time to time in one or
more transactions at a fixed offering price, which may be changed, or at varying
prices determined at the time of sale or at negotiated prices.
The Shares offered hereby may be sold from time to time in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
any varying prices determined at the time of sale or at negotiated prices. The
sale of the Shares may be effected in transactions (which may involve crosses or
block transactions) (i) on any national securities exchange or quotation service
on which the Shares may be listed or quoted at the time of sale, (ii) in the
over-the-counter market or (iii) in transactions otherwise than on such
exchanges or in the over-the-counter market. There is no assurance that any of
the Selling Stockholders will sell any or all of the Shares offered by them. In
addition, certain of the Selling Stockholders are venture capital funds,
corporations or trusts which may distribute their shares to their partners,
shareholders or trust beneficiaries, respectively, which distributees may
likewise distribute such shares to their partners, shareholders or trust
beneficiaries. Those shares may later be sold by those partners, shareholders
or trust beneficiaries, or any of their respective distributees. At the time a
particular offer of Shares is made a supplement to this Prospectus, if required,
will be distributed that will identify and set forth the aggregate amount of
Shares being offered and the terms of the offering, including the name or names
of any underwriters, dealers or agents, the purchase price paid by any
underwriter for Shares purchased from the Selling Stockholders, any discounts,
commissions and other items constituting compensation from the Selling
Stockholders and/or the Company, and any discounts, commissions or concessions
allowed or reallowed or paid to dealers, including the proposed selling price to
the public. The Company will not receive any of the proceeds from the sale by
the Selling Stockholders of the Shares offered hereby.
The Selling Stockholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of any of the Shares by the Selling
Stockholders. The foregoing may affect the marketability of the Shares.
The Company has agreed to indemnify in certain circumstances the Selling
Stockholders against certain liabilities, including liabilities under the
Securities Act. The Selling Stockholders have agreed to indemnify in certain
circumstances the Company against certain liabilities, including liabilities
under the Securities Act.
The Company has agreed to use its best efforts to keep the Registration
Statement, of which this Prospectus constitutes a part, effective until November
25, 1998.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock and 2,000,000 shares of preferred stock, par value $0.001 per
share ("Preferred Stock"). The following summary of certain provisions of the
Common Stock and the Preferred Stock of the Company does not purport to be
complete and is subject to, and qualified in its entirety by, the Restated
Certificate of Incorporation and By-Laws of the Company and by the provisions of
applicable Delaware law.
COMMON STOCK
As of February 28, 1998, there were approximately 14,660,292 shares of
Common Stock outstanding held of record by approximately 177 stockholders. The
holders of Common Stock are entitled to one vote for each share held of record
on all matters submitted to a vote of the holders of Common Stock. Subject to
preferences applicable to any outstanding Preferred Stock, holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any Preferred Stock. Holders of
Common Stock have no preemptive or subscription rights, and there are no
redemption or conversion rights with respect to such shares. All outstanding
shares of Common Stock are fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to designate and issue Preferred Stock in one or more series and
to designate the dividend rate, voting rights and other rights, preferences and
restrictions of each series any or all of which may be greater than the rights
of the Common Stock. The effect of the issuance of any shares of Preferred
Stock upon the rights of holders of the Common Stock may not be determined until
the Board of Directors specifies the rights of the holders of such Preferred
Stock. Such effects might include, among other things, restricting dividends on
the Common Stock, diluting the voting power of the Common Stock, impairment of
the liquidation rights of the Common Stock and delaying or preventing a change
in control of the Company without further action by the stockholders. The
Company has no present plans to issue any shares of Preferred Stock.
OPTIONS TO PURCHASE COMMON STOCK
In addition, at February 28, 1998, the Company had outstanding options to
purchase 2,863,170 shares of Common Stock under its Stock Plans. The Company
also has an aggregate of 585,518 shares of Common Stock reserved for future
grant under its stock plans.
REGISTRATION RIGHTS
In February 1997, pursuant to an Agreement and Plan of Reorganization (the
"ZSoft Agreement") by and between the Company and ZSoft, Inc. ("ZSoft"), the
Company issued 13,673 shares (the "Zhang Shares") of Common Stock, subject to
certain escrow provisions provided therein, to Yong Zhang, the sole shareholder
of ZSoft. Pursuant to the terms of the ZSoft Agreement, the Company agreed to
register the Zhang Shares on a Form S-3 Registration Statement any time after
January 15, 1998 at the demand of Mr. Zhang.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware Law. In general, Section 203 of the Delaware Law prevents an
"interested stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in the Delaware Law) with a Delaware corporation for
three years following the date such person became an interested stockholder,
subject to certain exceptions such as the approval of the board of directors and
of the holders of
49
<PAGE>
at least two-thirds of the outstanding shares of voting stock not owned by the
interested stockholder. The existence of this provision would be expected to
have an anti-takeover effect, including attempts that might result in a premium
over the market price for the shares of Common Stock held by stockholders.
The Company's By-Laws provide that only the Company's Chief Executive
Officer, a majority of the members of the Company's Board of Directors or
holders of capital stock constituting at least 10% of the outstanding voting
power may call a special meeting of stockholders. This provision of the By-Laws
could discourage potential acquisition proposals and could delay or prevent a
change in control of the Company. This provision also may have the effect of
preventing changes in the management of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock
Transfer Corporation, and its telephone number is (818) 502-1404.
LEGAL MATTERS
The legality of the Shares is being passed upon by Gray Cary Ware &
Freidenrich LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements of Aspect Development, Inc. at
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein which, as to all years presented, are
based in part on the reports of Arthur Andersen LLP, independent public
accountants. The financial statements referred to above are included in reliance
upon such reports given upon the authority of such firms as experts in
accounting and auditing.
The consolidated financial statements of CADIS, Inc. as of December 31,
1996 and 1997, and for each of the three years in the period ended December 31,
1997, which are not presented separately in this prospectus and registration
statement, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report dated January 20, 1998 with respect
thereto, and are referred to herein in reliance upon the authority of said firm
as experts in giving said reports.
50
<PAGE>
<TABLE>
<CAPTION>
ASPECT DEVELOPMENT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Financial Statements are filed as part of this Report.
Page No.
<S> <C>
Report of Ernst & Young LLP, Independent
Auditors............................................................................... F-2
Report of Arthur Andersen LLP, Independent Public Accountants........................... F-3
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................................................... F-4
Consolidated Statements of Operations for each of the three fiscal years
in the period ended December 31, 1997................................................... F-5
Consolidated Statements of Stockholders' Equity for each of the three fiscal
years in the period ended December 31, 1997............................................. F-6
Consolidated Statements of Cash Flows for each of the three fiscal years
in the period ended December 31, 1997................................................... F-7
Notes to the Consolidated Financial Statements.......................................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Aspect Development, Inc.
We have audited the consolidated balance sheets of Aspect Development, Inc. as
of December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the management of the Company. Our responsibility is to
express an opinion on these financial statements based on our audits. In
November, 1997, the Company merged with CADIS, Inc. in a transaction that was
accounted for as a pooling of interests. We did not audit the financial
statements of CADIS, Inc., which statements reflected total assets of $6.3
million and $14.3 million as of December 31, 1997 and 1996, respectively, and
net losses of $10.8 million, $2.1 million and $3.2 million, for the years ended
December 31, 1997, 1996 and 1995, respectively. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to data included for CADIS, Inc., is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in 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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Aspect Development, Inc. at December 31,
1997 and 1996, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, after giving
retroactive effect to the business combination with CADIS, Inc., as described in
the notes to the consolidated financial statements, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
January 26, 1998
F-2
<PAGE>
REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
To CADIS, Inc.
We have audited the consolidated balance sheets of CADIS, Inc. (a Delaware
corporation) and subsidiary as of December 31, 1997 and 1996 and the related
consolidated statements of operations, mandatorily redeemable convertible
preferred stock, junior mandatorily redeemable preferred stock and stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1997, not presented separately herein. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, not presented
separately herein, present fairly, in all material respects, the consolidated
financial position of CADIS, Inc. and subsidiary as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
January 20, 1998
F-3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE PER SHARE AMOUNTS)
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,550 $ 16,683
Short-term investments 40,506 41,148
Accounts receivable, net of allowance for doubtful
accounts of $295 and $250 in 1997 and 1996, respectively 13,366 9,493
Employee receivables 151 65
Prepaid expenses and other current assets 3,083 1,213
- ------------------------------------------------------------------------------------------------------
Total current assets 71,656 68,602
Property and equipment, net 8,771 4,301
Other assets, net 1,293 370
- ------------------------------------------------------------------------------------------------------
$ 81,720 $ 73,273
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,009 $ 951
Accrued bonuses and commissions 2,077 910
Accrued merger costs 2,883 -
Income taxes payable 1,608 45
Other accrued liabilities 2,488 2,146
Deferred revenue 11,136 6,656
Capital lease obligations - current portion 346 482
Third-party royalties and fees 588 972
- ------------------------------------------------------------------------------------------------------
Total current liabilities 23,135 12,162
Capital lease obligations 11 379
Junior mandatorily redeemable preferred stock - 1,986
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value per share, 2,000 authorized,
none issued or outstanding - -
Common stock, $0.001 par value per share; 20,000 shares
authorized, 14,433 and 13,497 issued and outstanding in
1997 and 1996, respectively 81,627 76,729
Notes receivable from stockholders (320) (320)
Deferred compensation (376) (544)
Accumulated translation adjustment (302) 65
Accumulated deficit (22,055) (17,184)
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 58,574 58,746
- ------------------------------------------------------------------------------------------------------
$ 81,720 $ 73,273
- ------------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
(in thousands, except per share amounts)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues
Licenses $ 26,892 $ 16,043 $ 8,123
Subscription and maintenance 13,594 9,392 5,141
Service and other 9,443 5,023 2,299
-------- -------- --------
Total revenues 49,929 30,458 15,563
Cost of revenues
Cost of license revenues 346 612 298
Cost of subscription and maintenance 2,676 1,206 1,142
revenues
Cost ofservice and other revenues 5,027 2,689 1,291
-------- -------- --------
Total cost of revenues 8,049 4,507 2,731
-------- -------- --------
Gross profit 41,880 25,951 12,832
-------- -------- --------
Operating expenses:
Research and development 11,213 8,762 6,031
Sales and marketing 26,730 13,540 7,128
General and administrative 5,304 4,030 2,253
Merger costs 4,312 - -
-------- -------- --------
Total operating expenses 47,559 26,332 15,412
-------- -------- --------
Operating loss (5,679) (381) (2,580)
Interest and other income 3,066 1,805 268
Interest and other expense (665) (209) (83)
-------- -------- --------
Income (loss) before income taxes (3,278) 1,215 (2,395)
Provision for income taxes 1,593 330 150
-------- -------- --------
Net income (loss) $ (4,871) $ 885 $ (2,545)
-------- -------- --------
Net income (loss) per share-basic (1) $ (0.35) $ 0.07 $ (0.28)
-------- -------- --------
Net income (loss) per share-diluted (1) $ (0.35) $ 0.06 $ (0.28)
======== ======== ========
Number of shares used in computing
per share amounts-basic (1) 13,817 12,005 9,025
Number of shares used in computing
per share amounts-diluted (1) 13,817 13,755 9,025
(1) Net income (loss) per share for 1995 and 1996 are proforma computations.
See accompanying notes.
</TABLE>
F-5
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE ACCUMULATED TOTAL
--------------- --------------- FROM DEFERRED TRANSLATION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION ADJUSTMENT DEFICIT EQUITY
------ ------- ------ ------ ------------ ------------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 3,687 $ 4,916 5,314 $12,049 $(110) $ - $ - $(15,524) $ 1,331
Issuance of common stock for
cash net of issue costs of $20 - - 250 4,980 - - - - 4,980
Issuance of common stock
upon exercise of options - - 413 79 - - - - 79
Issuance of common stock
for note receivable - - 300 210 (210) - - - -
Deferred compensation related
to grant of stock options - - - 255 - (255) - - -
Foreign currency translation
adjustments - - - - - - (4) - (4)
Amortization of deferred
compensation - - - - - 14 - - 14
Net loss - - - - - - - (2,545) (2,545)
----- ------- ------- ------- ----- ----- ----- -------- -------
Balance at December 31,1995 3,687 4,916 6,277 17,573 (320) (241) (4) (18,069) 3,855
Conversion of preferred stock (3,687) (4,916) 3,687 4,916 - - - - -
Issuance of common stock
upon exercise of options - - 641 263 - - - - 263
Deferred compensation
related to grant of stock
options - - - 441 - (441) - - -
Amortization of deferred
compensation - - - - - 138 - - 138
Tax benefit from stock options - - - 250 - - - - 250
Issuance of common stock
Initial Public Offering net of
issuance costs of $938 - - 2,323 42,261 - - - - 42,261
Issuance of common stock for
cash, net of issuance costs of - - 399 10,298 - - - - 10,298
$663
Issuance of common stock
upon exercise of warrants - - 95 30 - - - - 30
Option granted for dispute
settlement - - - 90 - - - - 90
Issuance of common stock
upon exercise of options from
settlement (see note 4) - - 75 607 - - - - 607
Foreign currency translation
adjustments - - - - - - 69 - 69
Net income - - - - - - - 885 885
----- ------- ------- ------- ----- ----- ----- -------- -------
Balance at December 31, 1996 - - 13,497 76,729 (320) (544) 65 (17,184) 58,746
Issuance of common stock
upon exercise of options - - 673 1,027 - - - - 1,027
Issuance of common stock
under Employee Purchase Plan - - 182 1,307 - - - - 1,307
Foreign currency translation
adjustments - - - - - - (367) - (367)
Amortization of deferred
compensation - - - - - 168 - - 168
Issuance of common stock for
Redeemable Preferred Stock - - 42 1,986 - - - - 1,986
Issuance of common stock for
software - - 14 375 - - - - 375
Issuance of common stock upon
exercise of options from
settlement (see Note 4) - - 25 203 - - - - 203
Net loss (4,871) (4,871)
----- ------- ------- ------- ----- ----- ----- -------- -------
Balance at December 31, 1997 - $ - 14,433 $81,627 $(320) $(376) $(302) $(22,055) $58,574
===== ======= ======= ======= ===== ===== ===== ======== =======
</TABLE>
See accompanying notes
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
---------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,871) $ 885 $(2,545)
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization 3,096 1,792 717
(Gain) loss on disposals of assets 61 (9) 1
Compensation related to options granted in settlement
of dispute - 90 -
Changes in items affecting operations:
Accounts receivable (3,873) (4,801) (2,912)
Prepaid expenses and other current assets (1,870) (526) (24)
Accounts payable 1,058 599 976
Other accrued liabilities 342 956 52
Accrued merger costs 2,883 - -
Income taxes payable 1,563 45 -
Accrued bonuses and commissions 1,167 910 -
Deferred revenue 4,480 2,106 2,370
Third-party royalties and fees (384) 155 -
-------- -------- -------
Net Cash provided by (used in) operating activities 3,652 2,202 (1,365)
-------- -------- -------
Cash flows from investing activities
Purchases of property and equipment (7,429) (3,453) (808)
Proceeds from sales of property and equipment 15 25 1
Acquisition of Aspect-India - - (90)
Proceeds from sales of short-term investments 56,662 30,949 5,085
Purchases of short-term investments (56,020) (70,289) (6,307)
Decrease (increase) in employee note receivable (86) 157 (170)
Increase in other assets (548) 61 (115)
-------- -------- -------
Net cash used in investing activities (7,406) (42,550) (2,404)
-------- -------- -------
Cash flows from financing activities
Principal payments on capital lease obligations (553) (705) (413)
Proceeds from initial public offering, net of offering costs - 42,261 -
Proceeds from additional issuance of common stock,
net of offering costs 2,548 11,197 5,059
-------- -------- -------
Net cash provided by financing activities 1,995 52,753 4,646
-------- -------- -------
Net increase (decrease) in cash and cash equivalents (1,759) 12,405 877
Effect of exchange rates on cash (374) (9) (3)
Cash and cash equivalents at the beginning of the period 16,683 4,287 3,413
-------- -------- -------
Cash and cash equivalents at the end of the period $ 14,550 $ 16,683 $ 4,287
======== ======== =======
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 44 $ 116 $ 83
======== ======== =======
Income taxes paid $ 143 $ 67 $ 51
======== ======== =======
Supplemental schedule of noncash financing activities
Equipment acquired under capital lease obligations $ 49 $ 401 $ 953
======== ======== =======
Conversion of preferred stock to common stock $ 1,986 $ 4,916 $ -
======== ======== =======
Issuance of common stock for note receivable $ - $ - $ 210
======== ======== =======
Issuance of common stock for software $ 375 $ - $ -
======== ======== =======
Tax benefits from stock options $ - $ 250 $ -
======== ======== =======
</TABLE>
See accompanying notes.
F-7
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Principles of Consolidation
Aspect Development, Inc. (the "Company") develops, markets and supports
enterprise client/server software and reference data products that enable
manufacturers to improve product development and business processes through
component and supplier management. The Company sells licensed software and
reference data products to customers and provides software and data services for
customers both within and outside the United States.
The consolidated financial statements comprise the accounts of the Company and
its wholly-owned subsidiaries after elimination of all significant intercompany
balances and transactions. On November 25, 1997, the Company acquired CADIS,
Inc. in a merger transaction accounted for as a pooling of interests (see Note
2).
Foreign Exchange
Assets and liabilities of the Company and its wholly-owned foreign subsidiaries
are translated from the local currency to the United States dollar at year-end
exchange rates. Income and expense items are translated on a quarterly basis at
the average rates of exchange prevailing during the quarter. The adjustment
resulting from translating the financial statements of the Company and its
foreign subsidiaries is reflected as an accumulated translation adjustment in
stockholders' equity. Foreign currency transaction gains and losses are
included in results of operations and were immaterial for all periods presented.
The Company has not entered into any material hedging contracts in the three
years ended December 31, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results inevitably will differ from those
estimates, and such differences may be material to the financial statements.
Revenue Recognition
Licenses are comprised of perpetual license fees, which are recognized as
revenue after execution of a license agreement or receipt of a definitive
purchase order, and shipment of the product if no significant vendor obligations
remain and collection of the resulting receivables is deemed probable. Where
delivery involves significant installation obligations at multiple sites,
revenues are recognized on a per-site basis upon completion of installation.
Product returns and allowances (which were not significant through December 31,
1997) are estimated and provided for at the time of sale.
Revenue from subscription and maintenance agreements is deferred and recognized
on a straight-line basis over the life of the related agreement, which is
typically one year.
Service and other revenues are comprised of service, consulting and development
fees. Service revenues from training and consulting are recognized upon
completion of the work to be performed. Development fees are recognized as
revenue in accordance with the terms of the agreements, generally when related
costs have been incurred. Generally, the Company retains complete ownership of
technology developed under these agreements. The related costs are charged as
incurred. Under these development agreements, costs totaled approximately
$167,000 for fiscal year 1995 and none for fiscal years 1996 and 1997.
F-8
<PAGE>
Per Share Amounts
Effective December 31, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." As
required by SFAS No. 128, all prior periods presented have been restated.
Under the new requirements for calculating EPS, the dilutive effect of stock
options and convertible securities is excluded from a new EPS measure, basic
EPS. Except as noted below, diluted EPS is computed using the weighted average
number of common shares outstanding after the issuance of common stock upon
exercise of stock options (using the treasury stock method) and the issuance of
common stock upon the conversion of convertible preferred stock (using the as-
if-converted method) when their effect is dilutive.
Basic and diluted EPS for 1996 and 1995 have been retroactively restated to
apply the requirements of Staff Accounting Bulletin No. 98 issued by the SEC in
February 1998 ("SAB 98"). Under SAB 98, certain shares of common stock and
options and warrants to purchase shares of common stock issued at prices
substantially below the per share price of shares sold in the Company's initial
public offering that were previously included in the computation of shares
outstanding pursuant to the Staff Accounting Bulletins Nos. 55, 64, and 83 are
now excluded from the computation.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Basic:
Weighted average Common stock outstanding 13,817 10,530 5,338
Convertible preferred stock - 1,475 3,687
--------- ---------- -----------
Total weighted average common and common equivalent
shares outstanding 13,817 12,005 9,025
Net income (loss) $ (4,871) $ 885 $ (2,545)
Net income (loss) per share (1) $ (0.35) $ 0.07 $ (0.28)
Diluted:
Weighted average Common stock outstanding 13,817 10,530 5,338
Common stock equivalents (treasury stock method) - 1,750 -
Convertible preferred stock - 1,475 3,687
--------- ---------- -----------
Total weighted average common and common equivalent
shares outstanding 13,817 13,755 9,025
Net income (loss) $ (4,871) $ 885 $ (2,545)
Net income (loss) per share (1) $ (0.35) $ 0.06 $ (0.28)
</TABLE>
(1) Net income (loss) per share for 1995 and 1996 are proforma computations.
Concentration of Credit Risk and Significant Customers
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash investments and trade receivables. The
Company has a cash investment policy that limits investments to investment grade
securities. The Company's revenues consist primarily of license and
subscription fees for its applications software and reference data products from
large manufacturers in the United States, Europe and Asia. The Company has
historically sold primarily to large financially stable institutions and has not
obtained collateral. The Company has not incurred significant credit losses
during any of the periods presented. Increases in the Company's allowance for
bad debts (expense) in 1997, 1996 and 1995 were approximately $52,000, $281,000
and $70,000, respectively. Outstanding customer receivables written off and
deducted from the allowance account in each of those years were approximately
$7,000, $112,000 and $11,000, respectively.
F-9
<PAGE>
During the year ended December 31, 1997 one customer accounted for 11% of
revenues. No other customer in any of the three years ended December 31, 1997
accounted for more than 10% of revenues.
Product Concentration
The Company currently derives substantially all of its revenues from the
licensing of its Explore client/server software, the VIP family of reference
databases, the Krakatoa Web Catalog Publisher, and fees from related services.
These products and services are expected to continue to account for
substantially all of the Company's revenues for the foreseeable future. While
the Company believes that to date its customers have not experienced significant
problems with such products, if the Company's customers were to do so in the
future or if they were dissatisfied with product functionality or performance,
the Company's business, financial condition or results of operations could be
materially adversely affected.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with minimum yield risks and
maturities of less than 90 days at time of purchase to be cash equivalents.
The Company's investment policy is to protect the value of its investment
portfolio and to minimize principal risk by earning returns based on current
interest rates.
At December 31, 1997, all of the Company's cash equivalents and short term
investments were designated as "available-for-sale" and, in accordance with FAS
115, are presented at fair value in the financial statements. As of December
31, 1997, the carrying value of the Company's short-term investments
approximated the current fair value. Therefore no adjustment has been recorded
as a separate component of equity as of December 31, 1997. Realized gains and
losses to date have not been material. The cost of securities sold is based on
specific identification.
At December 31, 1997 and 1996, the Company's debt securities consisted of $8.4
million and $10.7 million of US Government Agency obligations and $36.2 million
and $32.9 million of domestic corporation debt issues, all of which mature
within one year. At December 31, 1997 and 1996, $4.1 million and $5.4 million,
respectively, of debt securities were included in cash equivalents.
At December 31, 1997, no debt securities held by the Company were classified as
"held-to-maturity". At December 31, 1996, $8.5 million of U.S. Government
Agency obligations were classified as "held-to-maturity" and presented at their
amortized cost. At December 31, 1996, $5.5 million of "held-to-maturity" debt
securities were included in cash equivalents. All of the Company's short-term
investments mature within twelve months.
Property and Equipment
Office and computer equipment are recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the respective assets
(generally two to five years). Equipment under capital lease obligations is
recorded at cost and amortized on a straight-line basis over the shorter of its
estimated life or the term of the lease (generally three years). Accumulated
depreciation of assets under capital leases was approximately, $1.8 million and
$1.3 million at December 31, 1997 and 1996, respectively. Property and
equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1997 1996
---- ----
<S> <C> <C>
Office and computer equipment $ 12,152 $ 5,140
Computer equipment under capital lease
obligations 2,295 2,295
--------- --------
14,447 7,435
Accumulated depreciation and amortization (5,676) (3,134)
--------- --------
Property and equipment, net $ 8,771 $ 4,301
========= ========
</TABLE>
On January 1, 1996 the Company adopted Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." SFAS 121 requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future undiscounted cash flows attributable to such
assets. The effect of adopting this statement was immaterial to the Company's
consolidated financial position or operating results.
F-10
<PAGE>
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred by the Company between completion of the
working model and the point at which the product is ready for general release
have been insignificant. Through December 31, 1997, all research and
development costs have been expensed.
Reclassification
The Company has reclassified certain prior year balances to conform with current
year's presentation.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", which establishes standards for reporting and
displaying comprehensive income and its components in a full set of general-
purpose financial statements and is required to be adopted by the Company
beginning in fiscal 1998. Additionally, the Fiancial Accounting Standards Board
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which establishes standards for the way that public business
enterprises report information in annual statements and interim financial
reports regarding operating segments, products and services, geographic areas
and major customers. SFAS No. 131 will be effective for the Company for fiscal
1998 and will apply to both annual and interim financial reporting. The Company
is evaluating the potential impact of these accounting pronouncements on
required disclosures, but believes that SFAS No. 130 and SFAS No. 131 will not
have a material impact on the financial condition or results of operations of
the Company.
In October 1997, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 97-2, "Software Revenue Recognition," which provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions and is effective for the Company's transactions
entered into subsequent to December 31, 1997. Based upon the Company's reading
and interpretation of SOP 97-2, the Company does not believe that the
implementation of the statement will have a material adverse effect on expected
revenues or earnings. However, detailed implementation guidelines for this
standard have not yet been issued. Once issued, such detailed guidance could
lead to unanticipated changes in the Company's reported revenues and earnings.
In the event implementation guidance is contrary to the Company's revenue
accounting practices, the Company believes it can change its current business
practices to comply with this guidance and avoid any material adverse effect on
reported revenues and earnings. However, there can be no assurance this will be
the case.
2. BUSINESS COMBINATION
On November 25, 1997, the Company acquired all of the outstanding shares of
CADIS, Inc. ("CADIS"), a privately held Delaware corporation which develops,
markets, and supports component and supplier management software, by issuing
approximately 1,411,000 shares of the Company's common stock. The acquisition
was accounted for as a pooling-of-interests and the accompanying consolidated
financial statements of Aspect for prior periods have been restated to
F-11
<PAGE>
include the operating results of CADIS. In connection with the transaction, the
Company incurred approximately $4.3 million in merger related expenses,
including $0.9 million in consulting fees to financial advisors, $0.7 million
for legal and other professional fees, $0.7 million for personnel severance and
outplacement expenses and $0.6 million for facilities consolidation expense. Of
the merger expenses, a total of approximately $2.9 million was accrued at
December 31, 1997.
There were no materially significant intercompany transactions between the the
Company and CADIS prior to the merger and there were no significant accounting
reclassifications required to conform the financial reporting of the two
companies.
The following information shows revenue and net income of the separate companies
during the periods preceding the combination (in thousands):
<TABLE>
<CAPTION>
Ten Months
----------
Ended
-----
October 31, December 31, December 31,
----------- ------------ -------------
1997 1996 1995
--------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Aspect $36,170 $24,235 $13,693
CADIS 4,564 6,223 1,870
--------------------------------------------------------------------------
$40,734 $30,458 $15,563
==========================================================================
Net income (loss):
Aspect $ 6,614 $ 3,009 $ 681
CADIS (6,725) (2,124) (3,226)
--------------------------------------------------------------------------
$ (111) $ 885 $(2,545)
==========================================================================
</TABLE>
3. LEASE OBLIGATIONS
The Company leases eight office facilities under noncancelable operating leases
which expire at various dates through September 2004. The Company also rents
certain property and equipment under operating leases. Rental expense for all
operating leases was $2,377,942, $933,193 and $727,499 for 1997, 1996 and 1995,
respectively. See Note 10.
Future minimum lease payments under operating and capital lease obligations
which have initial or remaining noncancelable lease terms in excess of one year
as of December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
<S> <C> <C>
Year ending December 31,
1998 $ 1,859 $ 361
1999 1,565 11
2000 1,519 -
2001 1,288 -
2002 948 -
Thereafter 3,496 -
----------- ----------
Total minimum lease payments $ 10,675 372
=========== ----------
Less amount representing interest 15
----------
Present value of net minimum lease
payments 357
Less current portion 346
----------
Non-current portion $ 11
==========
</TABLE>
F-12
<PAGE>
4. STOCKHOLDERS' EQUITY
CADIS was authorized to issue a total of 1,985,705 shares of Junior Mandatorily
Redeemable Preferred stock ("Junior Preferred"), all of which had been issued as
of December 31, 1996. The holders of Junior Preferred were entitled to
liquidation preferences of $1.00 per share and were not entitled to dividends.
The Junior Preferred was mandatorily redeemable at $1.00 per share on each of
July 31, 2000, 2001, and 2002. All of the outstanding Junior Preferred was
converted to common stock of the Company at the time of the acquisition of
CADIS.
CONVERTIBLE PREFERRED STOCK
Each aggregate share of Series A, B and C preferred stock outstanding was
automatically converted into one share of common stock upon the initial public
offering of the Company's common stock on May 24, 1996 (a total of 3,687,117
shares). In 1996, the Company's Certificate of Incorporation was amended to
authorize the issuance of 2,000,000 shares of undesignated preferred stock and
20,000,000 shares of common stock. The Board did not authorize any additional
shares in 1997.
COMMON STOCK SUBJECT TO REPURCHASE
The Company has previously issued shares of common stock which are subject to
the Company's right to repurchase at the original issuance price upon the
occurrence of certain events, as defined in the agreement relating to the sales
of such stock. At December 31, 1996 and December 31, 1997, approximately
351,042 and 138,542 shares, respectively, were subject to repurchase. In the
event that a stockholder negotiates to sell all or part of the stock to a third
party, the Company has a right of first refusal to repurchase that stock at the
negotiated price.
STOCK OPTIONS
Amended and Restated 1992 Stock Option Plan. In 1996, the Company adopted its
Amended and Restated 1992 Stock Option Plan (the "Plan"), which authorizes the
board of directors to grant incentive stock options or nonqualified stock
options to purchase up to 3,930,000 shares of common stock to employees,
officers, directors and consultants of the Company. The Plan allows for the
grant of incentive stock options to employees and the grant of nonstatutory
stock options to eligible participants.
The option price shall be at least 100% and 85% of the fair value on the date of
the grant for incentive stock options and nonqualified stock options,
respectively, except for options granted to a person owning greater than 10% of
the total voting power of the Company, for which the exercise price of the
options must not be less than 110% of the fair market value at the time of
grant. Options generally become exercisable upon grant subject to repurchase
rights in favor of the Company until vested. At December 31, 1996 and December
31, 1997, a total of 47,872 and 11,470 shares of common stock, respectively,
previously exercised under the plan were subject to repurchase. Shares
generally vest over a period of four years, with 1/8 of the shares subject to
option vesting at the end of the six months after commencement of employment,
and the remainder vesting ratably over the next 42 months. Options may be
granted with different vesting terms. Options are exercisable for a term of ten
years after the date of grant except those options granted to a person owning
greater than 10% of the total vesting power of stock of the Company, which are
exercisable for a term of five years after the date of grant. The options are
not transferrable.
In the event of a sale or merger of the Company, the board may arrange with the
acquiring corporation for such corporation either to assume the Company's rights
and obligations under the outstanding options or to substitute new options for
the acquiring corporation's stock for such outstanding options. Options that
are neither assumed nor substituted by the acquiring corporation, nor exercised
as of the date of the sale or merger, terminate and cease to be outstanding as
of the date of the transaction.
F-13
<PAGE>
On November 25, 1997, in connection with the merger of the Company and CADIS
described in Note 2, the Company substituted options covering 117,842 shares of
common stock for options granted under the CADIS option plan and assumed the
rights and obligations of CADIS with respect to the outstanding options. The
options are generally exercisable only when vested, and have similar vesting
terms as options granted under the Aspect Plan.
1996 Outside Directors Stock Option Plan. In 1996 the Company adopted its 1996
Outside Directors Stock Option Plan (the "Directors Plan") and reserved for
issuance a total of 100,000 shares of common stock. The Directors Plan provides
for the automatic grant of nonstatutory stock options to directors of the
Company who are not employees of the Company or any parent or subsidiary
corporation of the Company ("Outside Directors"). Under the Directors Plan,
each Outside director who had not previously been granted an option under a
stock option plan of the Company was granted automatically on the effective date
of the IPO an option to purchase 5,000 shares of common stock. Each new Outside
Director elected after the date of the IPO is granted automatically on the date
of election an option to purchase 15,000 shares of common stock. Such options
will become vested in three annual installments on the anniversary of the date
of grant. In addition, each Outside Director previously granted an option under
the Directors Plan is granted automatically on the date of each annual meeting
of the stockholders after 1996 an option to purchase 5,000 shares of common
stock. Each such subsequent option will become vested in full on the third
anniversary of the date of grant. The exercise price of each option granted
under the Directors Plan is equal to the fair market value of the common stock
on the date of grant, and the term of each option is ten years. Options granted
under the Directors plan are nontransferable.
1997 Nonstatutory Stock Option Plan. In 1997, the Company adopted its 1997
Nonstatutory Stock Option Plan (the "1997 Plan"), which authorizes the board of
directors to grant nonqualified stock options to purchase up to 1,200,000 shares
common stock to eligible participants. The option exercise price shall be at
least 85% of the fair market value of the Company's common stock on the date of
grant of the option. The options are not transferable. The shares issued under
the 1997 Plan are subject to the Company's right to repurchase all shares not
vested to the employee under the 1997 Plan at the participant's original cost.
Shares vest ratably over a 48-month period.
Information with respect to activity under the plans is as follows (in thousands
except per share and exercise price amounts):
<TABLE>
<CAPTION>
Options
Available Outstanding Options Weighted Average
for Grant Number of Shares Price Per Share Exercise Price
---------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 555 1,913 $ 0.05-$3.68 $ 0.25
Options Granted (584) 584 $ 0.70-$3.68 $ 0.86
Exercised - (412) $ 0.05-$1.84 $ 0.19
Canceled 178 (178) $ 0.05-$1.84 $ 0.27
------------- ---------- ----------------- -------
Balance at December 31, 1995 149 1,907 $ 0.05-$3.68 $ 0.45
Additional Shares Authorized 1,700 - - -
Options Granted (1,055) 1,055 $ 0.70-$26.75 $ 10.57
Exercised - (639) $ 0.05-$8.10 $ 0.41
Canceled 108 (108) $ 0.20-$8.10 $ 1.48
------------- ---------- ------------------ -------
Balance at December 31, 1996 902 2,215 $ 0.05-$26.75 $ 5.23
Additional Shares Authorized 1,200
- - -
Options Granted (1,671) 1,671 $ 3.00-$44.82 $ 28.77
Exercised - (693) $ 0.05-$33.75 $ 1.75
Canceled 172 (172) $ 0.20-$43.34 $ 19.07
------------- ------------ ------------------ --------
Balance at December 31, 1997 603 3,021 $ 0.05-$44.82 $ 18.35
============= ============ ================== ========
</TABLE>
At December 31, 1997, options to purchase 2,966,728 shares were exercisable
(2,172,218 shares at December 31, 1996).
F-14
<PAGE>
The Company has recorded for financial statement purposes, deferred compensation
expense of $0.7 million for the difference between the exercise price and the
deemed fair value of the common stock with respect to certain options granted in
1995 and 1996. This amount is being amortized over the vesting period of the
individual options, generally four years. Compensation expense recognized in
fiscal 1997, 1996 and 1995 total approximately $168,000, $138,000 and $14,000,
respectively. At December 31, 1997, deferred compensation totaled $376,000.
1996 Employee Stock Purchase Plan. In 1996, the Company adopted its 1996
Employee Stock Purchase Plan (the "Purchase Plan"). A total of 600,000 shares
of common stock have been reserved for issuance under the Purchase Plan and
181,448 have been issued as of December 31, 1997. The Purchase Plan permits
eligible employees to purchase common stock at a discount, but only through
payroll deductions, during concurrent 24-month offering periods. Each offering
period is divided into four consecutive six-month purchase periods. The price
at which stock is sold under the Purchase Plan is equal to 85% of the fair
market value of the common stock on the first day of the offering period or the
last day of the purchase period, whichever is lower. The initial offering
period commenced approximately two weeks prior to the effective date of the IPO.
STOCK WARRANTS
In 1992, warrants to purchase 55,970 shares of Series A Preferred Stock at an
exercise price of $0.67, were issued in connection with equipment lease
arrangements. In 1993, warrants to purchase an additional 8,333 shares of
Series A Preferred Stock at an exercise price of $1.50 and 29,412 shares of
Series C Preferred Stock at an exercise price of $1.85, were issued in
connection with an extension of the equipment lease arrangements. During 1995,
warrants to purchase an additional 14,286 shares of Series C preferred stock at
an exercise price of $3.50 per share were issued in connection with the further
extension of the lease line. All outstanding warrants were exercised in May
1996 in connection with the Company's IPO. As of December 31, 1997, there were
no outstanding warrants.
OPTION ISSUED AS SETTLEMENT
During 1996, the board of directors approved the issuance of an option to a
third party to purchase up to 100,000 shares of common stock at a price of $8.10
per share to obtain the release of all claims arising from a dispute with such
party. The Company recorded an expense of $90,000 in connection with this
grant. A total of 75,000 of these options were exercised in 1996 for proceeds
of $607,000 and the remaining 25,000 options were exercised in January 1997 for
proceeds of $203,000.
STOCK COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" (FAS 123) requires use of option
valuation models that were not developed for use in valuing employee
F-15
<PAGE>
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
FAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of FAS 123. The fair value for
these options was estimated at the date of grant using the Black-Scholes option
pricing model for 1996 and 1997, with the following weighted-average assumptions
for 1996 and 1997, respectively: risk-free interest rates of 5.64% and 6.00%; a
dividend yield of 0.0%; volatility factors of the expected market price of the
Company's common stock of .75 and .70; and a weighted-average expected life of
the option of 2.0 and 2.5 years beyond each respective vesting period. The
weighted average fair value of options granted during 1996 and 1997 was $4.56
and $13.97, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Pro forma net income (loss) $(13,157) $ 222 $(2,588)
Pro forma earnings
(loss) per share-basic $ (0.95) $0.02 $ (0.29)
</TABLE>
Because FAS 123 is applicable only to options granted subsequent to December 31,
1994, its pro forma effect will not be fully reflected until 1998.
The following table summarizes information regarding stock options outstanding
at December 31, 1997.
<TABLE>
<CAPTION>
--------------------------------------------------------------- -------------------------------
Options Outstanding Options Exercisable
--------------------------------------------------------------- -------------------------------
Weighted
Range Shares Average Weighted Weighted
of Outstanding Remaining Average Average
Exercise at Contractual Exercise Number Exercise
Prices December 31, 1997 Life Price Exercisable Price
------------------ -------------------- ------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
$0.05 - $0.70 631,542 6.96 $ 0.52 631,542 $ 0.52
1.23 - 7.30 505,766 8.16 6.31 476,304 6.40
7.60 - 21.30 357,837 8.99 16.65 332,619 17.22
21.75 - 21.75 605,941 9.63 21.75 605,941 21.75
22.38 - 33.13 734,722 9.57 33.99 734,722 33.99
$40.00 - $44.81 185,600 9.84 42.12 185,600 42.12
--------- ------- -------- --------- --------
3,021,408 8.75 $18.35 2,966,728 $18.56
========= ======= ======== ========= ========
</TABLE>
F-16
<PAGE>
5. NOTES RECEIVABLE FROM STOCKHOLDERS
In 1994, the Company issued 550,000 shares of common stock to an officer at a
purchase price of $0.20 per share in exchange for a full-recourse promissory
note bearing interest at 6.31% per year. Interest is payable annually, and the
principal is due in 2003.
In 1995, the Company issued 300,000 shares of common stock to an officer, at a
purchase price of $0.70 per share, in exchange for a full-recourse promissory
note bearing interest at 6.31% per year. Interest is payable annually, and the
principal is due in 2004.
6. INCOME TAXES
The provision for taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------------------
1997 1996 1995
--------------- ----------------- ---------------
<S> <C> <C> <C>
Current:
Federal $ 1,027 $ 353 $ 36
State 466 53 1
Foreign 100 33 113
------------ ---------- ---------
1,593 439 150
Deferred:
Federal - (109) -
------------ ---------- ---------
$ 1,593 $ 330 $ 150
============ ========== =========
</TABLE>
The Company's effective income tax provision differs from the Federal statutory
rate of 34% due to the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995
----------------- ----------------- ---------------
<S> <C> <C> <C>
Expected tax provision (benefit) at federal statutory rate $(1,114) $ 413 $ (814)
State taxes (net of federal benefit) 308 35 51
Net operating losses not currently usable 2,598 722 1,097
Non-deductible acquisition costs 519 - -
Foreign taxes 100 - 113
Research credits (350) - (278)
Foreign tax credits - - (158)
Other 239 49 139
Prior year net operating losses not benefited (707) (889) -
---------------------------------------------------------
Provision for income taxes $ 1,593 $ 330 $ 150
=========================================================
Effective tax rate N.M. 27.16% N.M.
</TABLE>
As of December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $37.0 million, of which approximately $23.7
million relate to CADIS preacquistion net operating losses. The Company also had
federal research and development tax credit carryforwards of approximately $1.7
million. The federal net operating loss and credit carryforwards will expire
between 2007 and 2012 if not utilized.
F-17
<PAGE>
Due to a change in ownership in 1991, the utilization of approximately $10.0
million of CADIS net operating loss carryforwards incurred prior to that date
are limited in accordance with the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. In addition, due to
the change in ownership which resulted from Aspect Development, Inc.'s
acquisition of CADIS, there is an overall annual limitation of approximately
$3.1 million with respect to the entire $23.7 million of CADIS's preacquisition
net operating losses.
The Company's net operating losses and credits may also be subject to an annual
limitation due to the ownership change provisions should the Company itself
experience an ownership change.
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1997 1996 1995
----------------- ------------------ ------------------
Deferred tax assets:
<S> <C> <C> <C>
Net operating loss carryforwards $ 13,000 $ 7,000 $ 5,300
Research credit carryforwards 1,700 1,100 800
Foreign tax credits 400 300 300
Other timing differences 2,000 800 500
-------- ------- -------
Total deferred tax assets 17,100 9,200 6,900
Valuation allowance (17,100) (9,200) (6,900)
-------- ------- -------
Net deferred tax assets $ -- $ -- $ --
======== ======= =======
</TABLE>
The valuation allowance increased by $1.1 million during the year ended December
31, 1995. Approximately $8.7 million of the valuation allowance relates to net
operating losses and other tax attributes acquired in the CADIS acquisition (see
Note 2) which have not been benefited. Approximately $7.7 million of the
valuation relates to benefits of stock option deductions which, if recognized,
will be allocated directly to shareholder's equity.
7. JOINT VENTURE
The Company entered into a Limited Liability Company ("LLC") Agreement with CMP
Media Inc. ("CMP") dated April 4, 1997. The LLC was established to provide
news, promotional materials, literature, product data, reference material,
application information tutorials, seminars, product and software demonstrations
and other services through the Internet and corporate intranets to the
electronic engineering community in North America. Currently, the ownership of
the LLC is shared equally between the Company and CMP, each contributing $1.0
million to establish the LLC. In fiscal 1997, the Company's share of losses in
the joint venture amounted to $0.6 million. This amount was charged to Interest
and other expense.
8. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company develops, markets and supports enterprise client/server software and
reference data products that enable manufacturers to improve product development
and business processes through component and supplier management. The Company
operates in a single industry segment.
The Company's foreign operations consist of sales, marketing, and support
activities in subsidiaries and distributors throughout the world and development
and support activities in India. The Company's export sales were as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net Revenues from unaffiliated customers:
Europe $ 976 $2,398 $2,189
Asia 1,046 229 748
------ ------ ------
Total export sales $2,022 $2,627 $2,937
====== ====== ======
Operating income generated by the Company and their corresponding identifiable
assets classified by major geographic area were as follows (in thousands):
<CAPTION>
Year Ended December 31,
----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net Revenues from unaffiliated
customers:
North America $41,431 $24,282 $12,626
Europe 7,452 5,947 2,189
Other international operations 1,046 229 748
------- ------- -------
Total net revenues $49,929 $30,458 $15,563
======= ======= =======
Income (loss) from operations:
<S> <C> <C> <C>
North America $(9,328) $(4,520) $(4,811)
Europe 3,520 4,789 1,823
Other international operations 129 (650) 408
------- ------- -------
Loss from operations $(5,679) $ (381) $(2,580)
======= ======= =======
Identifiable assets:
North America $74,144 $68,896 $13,396
Europe 5,340 3,425 587
Other international operations 2,236 952 176
------- ------- -------
Total identifiable assets $81,720 $73,273 $14,159
======= ======= =======
</TABLE>
F-18
<PAGE>
9. 401 (K) PLAN
Under the Company's 401(k) Plan, an employee may defer and invest up to 20% of
his or her compensation, subject to an annual limitation. As of December 31,
1997, the Company had not elected to make any matching contributions under the
Plan.
10. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT
In early 1998, the Company signed three new leases commencing between February
and April 1998, for new office facilities. Future minimum lease payments under
the lease are as follows (in thousands):
<TABLE>
<CAPTION>
Operating
Lease
------------
Year ending December 31,
<S> <C>
1998 $ 400
1999 460
2000 464
2001 290
2002 41
-------
Total minimum lease payments $ 1,655
=======
</TABLE>
Additionally, in February 1998, the Company executed a three-year sublease
agreement which commences in April 1998. Under this agreement, the Company will
receive annual rental income of approximately $0.5 million.
F-19
<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company, any Selling Stockholder or the Underwriters. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy securities other than the securities to which it relates or an offer to
sell or solicitation of an offer to buy such securities, in any jurisdiction in
which such offer or solicitation would be unlawful or to any person to whom it
is unlawful. Neither the deliver of this Prospectus nor any offer or sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----
<S> <C>
Available Information.......................................... 2
The Company.................................................... 2
Risk Factors................................................... 4
Capitalization................................................. 11
Price Range of Common Stock.................................... 12
Selected Consolidated Financial Data........................... 13
Management's Discussion and Analysis of Financial Condition
and Results Of Operations..................................... 16
Business....................................................... 25
Management..................................................... 36
Executive Compensation and Other Matters....................... 39
Beneficial Security Ownership of Management and Certain
Beneficial Owners............................................. 43
16(a) Beneficial Ownership Reporting Compliance................ 45
Selling Stockholders........................................... 46
Plan of Distribution........................................... 48
Description of Capital Stock................................... 49
Legal Matters.................................................. 50
Experts........................................................ 50
Index to Financial Statements.................................. F-1
</TABLE>
Through and including ______ __, 1998 (25 days after the date of this
Prospectus), all dealers effecting transactions in the Common Stock, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
[ASPECT LOGO]
1,296,459 Shares
COMMON STOCK
----------------
PROSPECTUS
----------------
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses payable by the Company
in connection with the sale and distribution of the securities being registered,
other than underwriting discounts and commissions. All of the amounts shown are
estimates except the Securities and Exchange Commission registration fee and the
Nasdaq National Market filing fee.
<TABLE>
<CAPTION>
To Be Paid
By The
Registrant
----------
<S> <C>
Securities and Exchange Commission registration fee............................ $ 19,793
Nasdaq National Market additional listing fee.................................. $ 17,500
Accounting fees and expenses................................................... $ 65,000
Printing expenses.............................................................. $ 8,000
Transfer agent and registrar fees and expenses................................. $ 500
Blue Sky fees and expenses (including legal fees).............................. $ 0
Legal fees and expenses........................................................ $ 60,000
Miscellaneous expenses......................................................... $ 0
---------
Total.................................................................... $170,793
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors, and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's Restated Certificate of
Incorporation and By-Laws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition, the
Registrant has entered into separate indemnification agreements with its
directors, officers and certain employees which would require the Registrant,
among other things, to indemnify them against certain liabilities which may
arise by reason of their status or service (other than liabilities arising from
willful misconduct of a culpable nature) and to maintain directors' and
officers' liability insurance, if available on reasonable terms.
These indemnification provisions [and the indemnification agreement entered
into between the Registrant and each of its officers and directors] may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act.
[The Company has obtained liability insurance for the benefit of its
directors and officers.]
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. [UPDATE]
Since April 3, 1995, the Registrant has issued and sold the following
securities which were not registered under the Securities Act of 1933, as
amended:
a. On May 1, 1996 the Registrant approved the issuance of an option to The
Hearst Corporation to purchase 100,000 shares of the Company's Common Stock at
an exercise price of $8.10 per share in connection with the settlement of a
dispute.
II-1
<PAGE>
b. From inception through March 31, 1996 the Registrant issued and sold an
aggregate of 497,857 shares of Common Stock to 45 employees and former employees
of the Registrant for aggregate consideration of approximately $78,000 upon
exercise of stock options granted pursuant to the Registrant's 1992 Stock Option
Plan.
c. In February 1997, pursuant to an Agreement and Plan of Reorganization
(the "ZSoft Agreement") by and between the Company and ZSoft, Inc. ("ZSoft"),
the Company issued 13,673 shares (the "Zhang Shares") of Common Stock, subject
to certain escrow provisions provided therein, to Yong Zhang, the sole
shareholder of ZSoft.
d. Pursuant to an exemption from registration provided by Rule 506 of
Regulation D promulgated under the Securities Act, on November 25, 1997, the
Registrant issued a total of 1,381,230 shares of Common Stock to the former
stockholders of CADIS, Inc. as contemplated by the Agreement and Plan of
Reorganization. 1,296,459 of those shares are being registered under this
Registration Statement on Form S-1.
There were no underwriters employed in connection with any of the
transactions set forth in Item 26.
The issuances described in Items 15(a) through 15(c) were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act as transactions by an issuer not involving a public offering.
In addition, certain issuances described in Item 15(d) were deemed exempt from
registration under the Securities Act in reliance on Rule 701 promulgated
thereunder as transactions pursuant to compensatory benefit plans and contracts
relating to compensation. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other instruments
issued in such transactions. All recipients either received adequate information
about the Registrant or had access, through employment or other relationships,
to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
--------- --------------------------------------------------------------------------------
<C> <S>
3.1(1) Restated Certificate of Incorporation.
3.2(1) Form of Restated Certificate of Incorporation to be filed with the Delaware
Secretary of State following the closing of this offering.
3.3(1) By-Laws.
4.1(1) Restated Rights Agreement dated December 3, 1993.
5.1 Opinion and consent of Gray Cary Ware & Freidenrich LLP.
10.1(1) Amended and Restated 1992 Stock Option Plan and forms of agreements thereunder.
10.2(1) 1996 Employee Stock Purchase Plan.
10.3(1) 1996 Outside Directors Stock Option Plan and forms of agreement thereunder.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- -------- ----------------------------------------------------------------------------------------------
<S> <C>
10.4(1) Sublease Agreement between the Company and Insignia Solutions, Inc. dated
December 9, 1995.
10.5(1) Agreement of Lease between the Company and Mareld Company, Inc., dated June 2,
1994.
10.6(1) Agreement of Lease between Aspect Development India and M.S. Janardhan
Corporation, dated September 18, 1995.
10.7(1) Agreement of Lease between Aspect-DCM Pvt. Ltd. and the co-owners of Leo Shopping
Complex, dated February 10, 1994.
10.8(1) Master Lease Agreement between the Company and Comdisco, Inc., dated July 2, 1992.
10.9(1) Business Loan Agreement between the Company and Silicon Valley Bank, dated
November 14, 1995.
10.10(2) Agreement and Plan of Reorganization dated November 18, 1997 among Aspect
Development, Inc., Hawaii Acquisition Corporation and CADIS, Inc.
10.11(3) Amendment to Agreement and Plan of Reorganization dated November 21, 1997 among
Aspect Development, Inc., Hawaii Acquisition Corporation and CADIS, Inc.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Arthur Andersen LLP, Independent Public Accountants
27.1 Financial Data Schedule.
</TABLE>
- -------------------------
(1) Incorporated by reference to identically numbered exhibit to the
Registrant's Registration Statement on Form SB-2 (file no. 333-3840-LA)
filed on April 19, 1996
(2) Incorporated by reference to Exhibit 2.1 to Registrant's Form 8-K filed
December 10, 1997
(3) Incorporated by reference to Exhibit 2.2 to Registration's Form 8-K filed
December 10, 1997
(b) Financial Statement Schedules
Financial Statement Schedules have been omitted because the
information required to be set forth therein is not applicable or is shown
in the financial statements or notes thereto. Refer to page 32 of this
Form S-1.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement; provided,
however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
B. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered,
II-4
<PAGE>
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
C. The undersigned Registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Mountain
View, State of California on April 3, 1998.
ASPECT DEVELOPMENT, INC.
By: /s/ David S. Dury
--------------------------------------
David S. Dury
Vice President and Chief
Financial Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Romesh T. Wadhwani and David S. Dury, or
either of them, as his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement on Form S-
1, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said attorney-
in-facts and agents, or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Romesh T. Wadhwani Chairman of the Board and Chief Executive April 3, 1998
- ----------------------- Officer (Principal Executive Officer)
Romesh T. Wadhwani
/s/ Joseph Prang President, Chief Operating Officer and April 3, 1998
- ----------------------- Director
Joseph Prang
/s/ David S. Dury Vice President and Chief Financial Officer April 3, 1998
- ----------------------- (Principal Financial and Accounting Officer)
David S. Dury
/s/ Steven B. Goldby Director April 3, 1998
- -----------------------
Steven B. Goldby
/s/ Dennis Sisco Director April 3, 1998
- -----------------------
Dennis Sisco
/s/ Mark Stevens Director April 3, 1998
- -----------------------
Mark Stevens
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit Number Exhibit Title
- -------------- ------------------------------------------------------------------------
<S> <C>
3.1(1) Restated Certificate of Incorporation.
3.2(2) By-Laws.
4.1(3) Restated Rights Agreement dated December 3, 1993.
5.1 Opinion and consent of Gray Cary Ware & Freidenrich LLP.
*10.1(3) Amended and Restated 1992 Stock Option Plan and forms of agreements
thereunder.
*10.2(3) 1996 Employee Stock Purchase Plan.
*10.3(3) 1996 Outside Directors Stock Option Plan and forms of agreement thereunder.
10.4(3) Sublease Agreement between the Company and Insignia Solutions, Inc. dated
December 9, 1995.
10.5(3) Agreement of Lease between the Company and Mareld Company, Inc., dated
June 2, 1994.
10.6(3) Agreement of Lease between Aspect Development India and M.S. Janardhan
Corporation, dated September 18, 1995.
10.7(3) Agreement of Lease between Aspect-DCM Pvt. Ltd. and the co-owners of Leo
Shopping Complex, dated February 10, 1994.
10.8(3) Master Lease Agreement between the Company and Comdisco, Inc., dated July
2, 1992.
10.9(3) Business Loan Agreement between the Company and Silicon Valley Bank, dated
November 14, 1995.
10.10(4) Agreement and Plan of Reorganization dated November 18, 1997 among Aspect
Development, Inc., Hawaii Acquisition Corporation and CADIS, Inc.
10.11(5) Amendment to Agreement and Plan of Reorganization dated November 21, 1997
among Aspect Development, Inc., Hawaii Acquisition Corporation and CADIS,
Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Exhibit Title
- -------------- -----------------------------------------------------
<S> <C>
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Arthur Andersen LLP, Independent Auditor.
27.1 Financial Data Schedule.
- ----------------------------------------
(1) Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form SB-2 (file no.
333-3840-LA) filed on April 19, 1996 (the "Form SB-2")
(2) Incorporated by reference to Exhibit 3.2 to the Form SB-2
(3) Incorporated by reference to identically numbered exhibit to the Form SB-2
(4) Incorporated by reference to Exhibit 2.1 to Registrant's Form 8-K filed December 10, 1997
(5) Incorporated by reference to Exhibit 2.2 to Registration's Form 8-K filed December 10, 1997
</TABLE>
(a) Financial Statement Schedules.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
<PAGE>
EXHIBIT 5.1
Gray Cary Ware & Freidenrich LLP
- ----------------------------
400 Hamilton Avenue, Palo Alto, CA 94301-1825
Phone 650-328-6561 Fax 650-327-3699 www.gcwf.com
March __, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Aspect Development, Inc.
Registration Statement on Form S-1
Ladies and Gentlemen:
As legal counsel for Aspect Development, Inc., a Delaware corporation (the
"Company"), we are rendering this opinion in connection with the preparation and
filing of a registration statement on Form S-1 (the "Registration Statement")
relating to the registration under the Securities Act of 1933, as amended, of
1,296,459 shares of Common Stock, par value $0.001 per share (the "Common
Stock"), issued by the Company to the Selling Stockholders in connection with
that certain Agreement and Plan of Reorganization dated November 18, 1997 by and
among the Company, Hawaii Acquisition Corporation, a Delaware corporation and a
wholly-owned subsidiary of the Company, and CADIS, Inc., a Delaware Corporation.
We have examined such instruments, documents and records as we deemed relevant
and necessary for the basis of our opinion hereinafter expressed. In such
examination, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the conformity
to the originals of all documents submitted to us as copies.
Based on such examination, we are of the opinion that the 1,296,459 shares of
Common Stock of the Company being registered pursuant to the Registration
Statement and to be sold by the Selling Stockholders are duly authorized
validly issued, fully paid, and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement referred to above and the use of our name wherever it
appears in said Registration Statement.
This opinion is to be used only in connection with the issuance of the Common
Stock while the Registration Statement is in effect.
Respectfully submitted,
GRAY CARY WARE & FREIDENRICH LLP
<PAGE>
EXHIBIT 21.1
ASPECT DEVELOPMENT, INC.
SUBSIDIARIES OF THE REGISTRANT
Subsidiary State or country of Incorporation
- ------------- ---------------------------------
Aspect Development Europe Limited United Kingdom
Aspect Development India Private Limited India
CADIS, Inc. Delaware
Aspect Development KK Japan
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 26, 1998, in the Registration Statement
(Form S-1) and related Prospectus of Aspect Development, Inc. for the
Registration of 1,296,459 shares of its common stock.
Palo Alto, California
April 3, 1998 /s/ Ernst & Young LLP
<PAGE>
EXHIBIT 23.2
CONSENT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (dated January 20, 1998) on the consolidated financial statements of
CADIS, Inc. as of December 31, 1997 and 1996 and for each of the three years in
the period ended December 31, 1997 (and to all references to our Firm) included
in this registration statement on Form S-1issued for the purpose of registering
1,296,459 shares of Aspect Development, Inc. common stock.
/s/ Arthur Andersen LLP
Denver, Colorado
April 3, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1997 AND 1996 AND THE RELATED
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS THEN ENDED AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 14,550 16,683
<SECURITIES> 40,506 41,148
<RECEIVABLES> 13,366 9,493
<ALLOWANCES> 295 250
<INVENTORY> 0 0
<CURRENT-ASSETS> 71,656 68,602
<PP&E> 14,447 7,435
<DEPRECIATION> 5,676 3,134
<TOTAL-ASSETS> 81,720 73,273
<CURRENT-LIABILITIES> 23,135 12,162
<BONDS> 0 0
0 1,986
0 0
<COMMON> 81,627 76,729
<OTHER-SE> (23,053) (17,983)
<TOTAL-LIABILITY-AND-EQUITY> 81,720 73,273
<SALES> 49,929 30,458
<TOTAL-REVENUES> 49,929 30,458
<CGS> 346 612
<TOTAL-COSTS> 8,049 4,507
<OTHER-EXPENSES> 47,559 26,332
<LOSS-PROVISION> 52 281
<INTEREST-EXPENSE> 53 119
<INCOME-PRETAX> (3,278) 1,215
<INCOME-TAX> 1,593 330
<INCOME-CONTINUING> (4,871) 885
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,871) 885
<EPS-PRIMARY> (0.35) .07
<EPS-DILUTED> (0.35) .06
</TABLE>
