<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
[X] Definitive Proxy Statement Rule 14a-6(e)(2))
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Aspect Telecommunications Corporation
------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
<PAGE>
[LOGO OF ASPECT]
March 23, 1999
To Our Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders of
Aspect Telecommunications Corporation, to be held on April 29, 1999. Enclosed
are the Secretary's notice of this meeting, a proxy statement, and a form of
proxy. Please note that the meeting will be held at 4:00 p.m., at the
Company's facilities located at 1730 Fox Drive, San Jose, California 95131.
Details of the business to be conducted at the meeting are given in the
attached Notice of Annual Meeting of Shareholders and Proxy Statement.
It is important that your shares be represented at the meeting, so please
complete and return the enclosed proxy as soon as possible.
Sincerely,
/s/ James R. Carreker
James R. Carreker
Chairman, President and Chief Executive Officer
<PAGE>
ASPECT TELECOMMUNICATIONS CORPORATION
-----------------
Notice of Annual Meeting of Shareholders
April 29, 1999
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Aspect
Telecommunications Corporation (the Company), a California corporation, will
be held on April 29, 1999 at 4:00 p.m., at 1730 Fox Drive, San Jose,
California 95131, for the following purposes:
1. To elect directors to serve for the ensuing year and until their
successors are elected.
2. To approve the adoption of the 1999 Equity Incentive Plan and the
reservation of 1,500,000 shares of the Company's Common Stock for
issuance pursuant to exercise of stock options granted thereunder.
3. To approve an amendment to the 1990 Employee Stock Purchase Plan to
increase the number of shares of Common Stock reserved for issuance
thereunder by 500,000 shares.
4. To ratify the appointment of Deloitte & Touche LLP as independent
auditors of the Company for the fiscal year ending December 31, 1999.
5. To transact such other business as may properly come before the
meeting and any adjournment(s) thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on March 3, 1999 are
entitled to notice of and to vote at the meeting and any adjournment(s)
thereof.
To assure your representation at the meeting, you are urged to mark, sign,
date, and return the enclosed proxy card as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. Any shareholder attending
the meeting may vote in person even if such shareholder returned a proxy.
/s/ Craig W. Johnson
Craig W. Johnson, Secretary
San Jose, California
March 23, 1999
<PAGE>
ASPECT TELECOMMUNICATIONS CORPORATION
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 29, 1999
AND
ANNUAL FINANCIAL REPORT TO SHAREHOLDERS
---------------------------
TABLE OF CONTENTS
PROXY STATEMENT
<TABLE>
<CAPTION>
Page
<S> <C>
INFORMATION CONCERNING SOLICITATION AND VOTING........................... 1
PROPOSAL NO. 1 - ELECTION OF DIRECTORS................................... 2
PROPOSAL NO. 2 - APPROVAL OF THE 1999 EQUITY INCENTIVE PLAN.............. 4
PROPOSAL NO. 3 - AMENDMENT TO THE 1990 EMPLOYEE STOCK PURCHASE PLAN...... 7
PROPOSAL NO. 4 - RATIFICATION OF THE APPOINTMENT OF INDEPENDENT
AUDITORS................................................................ 10
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT.............. 11
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 13
EXECUTIVE COMPENSATION................................................... 13
COMPENSATION COMMITTEE REPORT............................................ 16
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.............. 17
COMPANY STOCK PRICE PERFORMANCE.......................................... 18
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934..... 18
STOCK OPTION PLAN INFORMATION............................................ 19
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS............................ 19
OTHER MATTERS............................................................ 19
ANNUAL FINANCIAL REPORT TO SHAREHOLDERS
SELECTED CONSOLIDATED FINANCIAL DATA..................................... F-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................... F-2
CONSOLIDATED BALANCE SHEETS as of December 31, 1998 and 1997............. F-13
CONSOLIDATED STATEMENTS OF INCOME for the years ended December 31, 1998,
1997 and 1996........................................................... F-14
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1998, 1997 and 1996.................... F-15
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996.................... F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... F-17
INDEPENDENT AUDITORS' REPORT............................................. F-32
QUARTERLY FINANCIAL DATA (unaudited)..................................... F-33
CORPORATE INFORMATION
</TABLE>
i
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ASPECT TELECOMMUNICATIONS CORPORATION
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
General
The enclosed Proxy is solicited on behalf of the Board of Directors of Aspect
Telecommunications Corporation (Aspect or the Company) for use at the Annual
Meeting of Shareholders (Annual Meeting) to be held April 29, 1999, at 4:00
p.m., or at any adjournment(s) thereof, for the purposes set forth herein and
in the accompanying Notice of Annual Meeting of Shareholders. The Annual
Meeting will be held at the Company's facilities located at 1730 Fox Drive,
San Jose, California 95131. The telephone number at that location is +1 (408)
325-2200.
These proxy solicitation materials were mailed on or about March 23, 1999, to
all shareholders entitled to vote at the meeting. The cost of soliciting these
proxies will be borne by the Company. The Company has retained the services of
Georgeson and Company (Georgeson) to solicit proxies and distribute materials
to brokerage houses, banks, custodians, and other institutional owners. The
Company will pay Georgeson a fee of approximately $7,500 for these services,
plus expenses. In addition, the Company will reimburse brokerage firms and
other persons representing beneficial owners of shares for their expenses in
forwarding solicitation materials to such beneficial owners. The Company may
conduct further solicitation personally, by telephone, or by facsimile through
its officers, directors, and regular employees, none of whom will receive
additional compensation for assisting with the solicitation.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use, by delivering to the Company, at its
office at 1730 Fox Drive, San Jose, California 95131 (Attention: Eric J.
Keller, Senior Vice President, Finance and Chief Financial Officer), a written
notice of revocation or a duly executed proxy bearing a later date, or by
attending the meeting and voting in person.
Voting and Solicitation
Every shareholder voting for the election of directors may cumulate such
shareholder's votes and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of shares held by
such shareholder or distribute the shareholder's votes on the same principle
among as many candidates as the shareholder thinks fit, provided that votes
not be cast for more than five candidates. However, no shareholder shall be
entitled to cumulate votes unless the candidate's name has been placed in
nomination prior to the voting and the shareholder, or any other shareholder,
has given notice at the meeting prior to the voting of the intention to
cumulate the shareholder's votes. On all other matters, each share has one
vote.
Only shareholders of record at the close of business on March 3, 1999, are
entitled to notice of and to vote at the meeting. At the record date,
48,761,206 shares of the Company's Common Stock, with a par value of $.01 per
share, were issued and outstanding.
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the Inspector of Elections with the assistance of the Company's transfer
agent. The Inspector of Elections will also determine whether or not a quorum
is present. Except with respect to the election of directors where the five
candidates receiving the highest number of affirmative votes will be elected,
all other items to be submitted at the annual meeting for shareholder approval
will require for such approval: (i) the affirmative vote of a majority of
those shares present and voting, and (ii) the affirmative vote of a majority
of the required quorum. The required quorum is a majority of the shares issued
and outstanding on the record date, represented either in person or by proxy.
Votes that are cast for or against a proposal, abstentions, and broker non-
votes are counted as present for the purpose of determining the presence of a
quorum for the transaction of business. For purposes of determining the number
of shares voting on a particular proposal, votes cast for or against a
proposal and abstentions are counted as shares voting, whereas broker non-
votes are not counted as shares voting. Thus, an abstention will have the same
effect as a vote against the proposal, and broker non-votes can have the
effect of preventing approval of certain proposals where the number of
affirmative votes, though a majority of the votes cast, does not constitute a
majority of the required quorum.
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Aspect Telecommunications Corporation Proxy Statement
Any proxy which is returned using the form of proxy enclosed and which is not
marked as to the particular item will be voted for the election of directors,
for approval of the 1999 Equity Incentive Plan, for the amendment to the 1990
Employee Stock Purchase Plan, for the ratification of the appointment of the
designated independent auditors and as the proxy holders deem advisable on
other matters that may come before the meeting, as the case may be with
respect to the item not marked.
PROPOSAL NO. 1 - ELECTION OF DIRECTORS
Nominees
A board of five directors will be elected at the meeting. Unless otherwise
instructed, the proxy holders will vote the proxies received by them for the
five nominees named below. In the event that any nominee of the Company is
unable to or declines to serve as a director at the time of the Annual Meeting
of Shareholders, the proxies will be voted for any nominee who shall be
designated by the present Board of Directors to fill the vacancy. In the event
that additional persons are nominated for election as directors, the proxy
holders intend to vote all proxies received by them in such a manner in
accordance with cumulative voting as will assure the election of as many of
the nominees listed below as possible, and, in such event, the specific
nominees to be voted for will be determined by the proxy holders. It is not
expected that any nominee listed below will be unable to or will decline to
serve as a director. The term of office of each person elected as a director
will continue until the next Annual Meeting of Shareholders or until his or
her successor has been elected and qualified.
The names of the nominees, their ages, and certain other information about
them as of February 28, 1999 are set forth below:
<TABLE>
<CAPTION>
Director
Name of Nominee Age Principal Occupation Since
- --------------- --- -------------------- --------
<S> <C> <C> <C>
James R. Carreker....... 52 Chairman, President and Chief Executive Officer of the Company 1985
Craig A. Conway......... 44 President and Chief Executive Officer of One Touch Systems, Inc. N/A
Debra J. Engel.......... 46 Executive Advisor to 3Com Corporation 1996
Norman A. Fogelsong..... 47 Venture Capitalist with Institutional Venture Partners 1985
John W. Peth............ 50 President and Chief Executive Officer of 1992
Business Resource Group
</TABLE>
Except as set forth below, each of the nominees has been engaged in his or her
principal occupation set forth above during the past five years. There are no
family relationships among the directors or executive officers of the Company.
Mr. Carreker, a founder of the Company, has served as Chief Executive Officer
and as a director of the Company since its inception in August 1985. He has
served as Chairman of the Company's Board of Directors since October 1995 and
resumed the position of President of the Company in January 1999. Since
January 1997, Mr. Carreker has also served as a director of Herman Miller,
Inc., a company that manufactures and sells office systems products and
services.
Mr. Conway has been President and Chief Executive Officer of One Touch
Systems, Inc., an interactive broadcast network company, since April 1997.
From November 1993 to May 1996, Mr. Conway served as President and Chief
Executive Officer of TGV Software, a networking software company acquired by
Cisco Systems. Prior to 1993, Mr. Conway held a variety of senior executive
positions with technology companies including Oracle Corporation, where he
served eight years, most recently as Executive Vice President, Sales and
Marketing.
Ms. Engel has been a director of the Company since May 1996. Ms. Engel is
currently an Executive Advisor to 3Com Corporation, a data networking products
and services company. Until August 1998, Ms. Engel served as Senior Vice
President of Corporate Services of 3Com Corporation. Prior to joining 3Com in
November 1983, as Vice President, Human Resources, Ms. Engel was with Hewlett-
Packard Company for seven years, most recently as Corporate Staffing Manager
at Hewlett-Packard's corporate headquarters.
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Aspect Telecommunications Corporation Proxy Statement
Mr. Fogelsong has been a director of the Company since September 1985. Since
March 1989, Mr. Fogelsong has been a venture capitalist with Institutional
Venture Partners, a venture capital investment firm. Between March 1980 and
February 1989, Mr. Fogelsong was a venture capitalist with Mayfield Fund, a
venture capital investment firm. Mr. Fogelsong is also a director of Concur
Technologies, Inc., as well as several privately owned technology companies.
Mr. Peth has been a director of the Company since May 1992. Since December
1997, Mr. Peth has been the President and Chief Executive Officer of Business
Resource Group, a provider of office workspace products and services. He has
also served on the Board of Business Resource Group since June 1995. From
April 1991 through March 1997, Mr. Peth served as an executive officer of TAB
Products Company (TAB), an office filing and furniture systems manufacturer
and distributor, most recently as acting President and Chief Executive
Officer. He served on the Board of Directors of TAB from April 1991 through
January 1997. From December 1989 to March 1991, Mr. Peth served as the Office
Managing Partner, San Jose Region, for Deloitte & Touche LLP, a public
accounting firm.
Board Meetings and Committees
The Board of Directors held a total of eleven meetings during the year ended
December 31, 1998. The Board of Directors has an Audit Committee and a
Compensation Committee. It does not have a nominating committee or a committee
performing the functions of a nominating committee.
The Audit Committee of the Board of Directors currently consists of directors
Fogelsong and Peth, and held five meetings during the last fiscal year. The
Audit Committee recommends engagement of the Company's independent auditors
and is primarily responsible for approving the services performed by the
Company's independent auditors, and for reviewing and evaluating the Company's
accounting principles and its system of internal accounting controls.
The Compensation Committee of the Board of Directors currently consists of
directors Engel and Mr. James Patterson. Mr. Patterson will not be standing
for re-election to the Board at this meeting. Following the meeting, it is
expected that the Compensation Committee will be composed of directors Conway,
Engel and Fogelsong. The Committee held six meetings during the last fiscal
year. This Committee determines policy on executive compensation and makes
recommendations to the Board of Directors concerning the Company's stock and
option plans.
During the last fiscal year, each director attended at least 75% of the
meetings of the Board of Directors and the meetings of the committees of the
Board of Directors on which he or she serves.
Nonemployee directors are compensated for their service to the Company as
follows:
1. They are reimbursed for out-of-pocket travel expenses associated with their
attendance at Board meetings.
2. Each receives payments under the Annual Retainer Compensation Plan for the
Board of Directors. This plan allows eligible nonemployee directors to
elect to receive compensation in either cash or stock initially valued at
$24,000 per year. Each director who elects to receive compensation in
stock, also receives an additional cash payment in the amount of $1,200 per
quarter, designed to help offset the tax liability associated with the
stock grant.
3. They are granted options annually under the 1998 Directors' Stock Option
Plan. Nonemployee directors who are newly appointed to the Board receive
options to purchase 24,000 shares of Common Stock upon election to the
Company's Board of Directors. Directors continuing to serve on the Board
receive options to purchase 6,000 shares of Common Stock yearly as long as
they meet the eligibility requirements of the Plan.
Required Vote
The five nominees receiving the highest number of affirmative votes of the
shares entitled to be voted shall be elected as directors of the Company.
Votes against any nominee and votes withheld have no legal effect under
California law.
THE BOARD OF DIRECTORS RECOMMENDS VOTING FOR ALL OF THE NOMINEES LISTED ABOVE.
3
<PAGE>
Aspect Telecommunications Corporation Proxy Statement
PROPOSAL NO. 2 - APPROVAL OF THE 1999 EQUITY INCENTIVE PLAN
General
The 1999 Equity Incentive Plan was adopted by the Board of Directors on
February 23, 1999, and the Board has reserved a total of 1,500,000 shares of
Common Stock for issuance thereunder. The 1999 Equity Incentive Plan replaces
the Company's 1989 Stock Option Plan which expires on March 30, 1999. It will
become effective upon adoption by the Shareholders. The 1999 Equity Incentive
Plan provides for grants to employees (including officers and employee
directors) of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986 (the Code), as amended, and for grants of
nonstatutory stock options to employees (including officers and employee
directors) and consultants of the Company or any subsidiary or any affiliate
of the Company. The purpose of the 1999 Equity Incentive Plan is to attract
and retain the best available individuals for positions of substantial
responsibility, to provide additional incentive to employees and consultants
of the Company and to promote the success of the Company's business.
The 1999 Equity Incentive Plan is not a qualified deferred compensation plan
under Section 401(a) of the Code, and is not subject to the provision of the
Employee Retirement Income Security Act of 1974, as amended.
Summary of the 1999 Equity Incentive Plan
The following is a summary of the principal features of the 1999 Equity
Incentive Plan. The summary, however, does not purport to be a complete
description of all the provisions of the 1999 Equity Incentive Plan. Any
shareholder of the Company who wishes to obtain a copy of the actual plan
document may do so upon written request to the Chief Financial Officer at the
Company's principal offices at 1730 Fox Drive, San Jose, California 95131.
Administration
The 1999 Equity Incentive Plan may be administered by the Board of Directors
or a committee appointed by the Board. All questions of interpretation or
application of the 1999 Equity Incentive Plan are determined by the Board of
Directors or its appointed committee, and its decisions are final, conclusive
and binding upon all participants.
Eligibility
The 1999 Equity Incentive Plan provides that incentive stock options may be
granted only to employees (including officers and employee directors) of the
Company or any subsidiary or any affiliate of the Company, while nonstatutory
stock options may be granted to employees (including officers and employee
directors) and consultants of the Company or any subsidiary or any affiliate
of the Company.
Grant and Exercise of Option
The 1999 Equity Incentive Plan provides that the maximum number of shares of
Common Stock which may be granted to any individual during any fiscal year
shall be 500,000, subject to adjustment as provided in the Plan. In addition,
no person may hold in a calendar year more than $100,000 worth of incentive
stock options that first become exercisable in that calendar year. To the
extent options have been issued to a person above the $100,000 limit, such
options are treated as nonstatutory stock options.
Unless otherwise determined by the Board of Directors or its appointed
committees at the time of grant, an option granted under the 1999 Equity
Incentive Plan is not transferable by the optionee other than by will or the
laws of descent or distribution. Each option is exercisable, during the
lifetime of the optionee, only by such optionee, or by a transferee permitted
under the 1999 Equity Incentive Plan.
The Board of Directors or its appointed committees determines when options may
be exercised. Options generally remain exercisable for up to 60 days (or such
other period of time as is determined by the Board of Directors or its
appointed committee, but in the case of an Incentive Stock Option not to
exceed three months, with such determination being made at the time of grant)
following the optionee's termination of service as an employee or
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Aspect Telecommunications Corporation Proxy Statement
consultant of the Company or any subsidiary or any affiliate of the Company,
unless such termination is a result of death or of total and permanent
disability, in which case the options remain exercisable for up to a six-month
period.
Exercise Price and Term of Options
The exercise price of stock options granted under the 1999 Equity Incentive
Plan shall be equal to the fair market value of a share of the Company's
Common Stock on the date of grant of the option provided that the exercise
price of an incentive stock option granted to an optionee who immediately
before the grant of such option owns more than 10% of the total combined
voting power of all classes of stock of the Company or any parent or
subsidiary (a 10% Shareholder) may not be less than 110% of the fair market
value of a share of the Company's Common Stock on the date of grant of the
option. Fair market value is defined in the 1999 Equity Incentive Plan to be
the closing sale price of the Company's Common Stock on the Nasdaq National
Market (or such other stock exchange on which the Common Stock is listed) on
the date of grant (or, in the event that the Common Stock is not traded on
such date, on the last preceding trading date for which such quotation
exists). Incentive stock options may not have a term of more than ten years.
Furthermore, the maximum term for an incentive stock option granted to a 10%
Shareholder is five years. No option may be exercised by any person after its
term expires.
Adjustments Upon Changes in Capitalization
In the event any change such as a stock split or dividend is made in the
Company's capitalization that results in an increase or decrease in the number
of outstanding shares of Common Stock without receipt of consideration by the
Company, appropriate adjustment shall be made in the exercise price, in the
number of shares subject to each option, and in the limitation on grants to
employees, as well as in the number of shares available for issuance under the
Equity Incentive Plan.
Merger or Sale of Assets
In the event of the dissolution or liquidation of the Company, a sale of all
or substantially all of the assets of the Company, the merger or consolidation
of the Company with or into another corporation in which the Company is not
the surviving corporation, or any other capital reorganization in which more
than 50% of the shares of the Company entitled to vote are exchanged, each
option shall be assumed or an equivalent option substituted by the successor
corporation, unless the successor corporation does not agree to assume the
options or to substitute equivalent options, in which case such options shall
accelerate and the options shall become exercisable in full (including with
respect to shares as to which the options would not otherwise be vested and
exercisable) prior to consummation of the transaction at such time and on such
conditions as the Board of Directors shall determine.
Amendment and Termination
The Board may amend the 1999 Equity Incentive Plan at any time or from time to
time or may terminate it without approval of the shareholders, except that
shareholder approval shall be obtained as required by applicable laws.
However, no action by the Board or shareholders may alter or impair any option
previously granted under the 1999 Equity Incentive Plan, unless the optionee
consents. In addition, shareholder approval shall be obtained prior to the
reduction of the exercise price of outstanding options to the then current
fair market value. The Equity Incentive Plan shall terminate on February 23,
2009. Any options outstanding at that time under the 1999 Equity Incentive
Plan shall remain outstanding until they expire by their own terms.
U.S. Federal Income Tax Information
The following is a brief summary of the effect of U.S. federal income taxation
on the optionee and the Company with respect to the grant and exercise of
options under the 1999 Equity Incentive Plan. This summary does not purport to
be complete, and does not discuss the income tax laws of any municipality,
state, or foreign country in which an optionee may reside. The Company advises
all eligible employees and consultants to consult their own tax advisors
concerning tax implications of option grants and exercises, and the
disposition of stock acquired upon such exercises under the 1999 Equity
Incentive Plan.
Options granted under the 1999 Equity Incentive Plan may be either incentive
stock options, as defined in Section 422 of the Code, or nonstatutory stock
options.
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Aspect Telecommunications Corporation Proxy Statement
If an option granted under the 1999 Equity Incentive Plan is an incentive
stock option, the optionee will recognize no income upon grant of the
incentive stock option and incur no regular tax liability upon its exercise,
except to the extent that such exercise causes the optionee to incur
alternative minimum tax (see discussion below). The Company will not be
allowed a deduction for federal income tax purposes as a result of the
exercise of an incentive stock option regardless of the applicability of the
alternative minimum tax. Upon the sale or exchange of the shares more than two
years after grant of the option and more than one year after exercise of the
option by the optionee, any gain will be treated as long-term capital gain. If
both of these holding periods are not satisfied (a "disqualifying
disposition"), the optionee generally will recognize ordinary income equal to
the difference between the exercise price and the lower of the fair market
value of the stock at the date of the option exercise or the sale price of the
stock. The Company will be entitled to a deduction in the same amount as the
ordinary income recognized by the optionee. Any gain recognized on such a
disqualifying disposition of the shares in excess of the amount treated as
ordinary income will be characterized as long-term capital gain if the sale
occurs more than one year after exercise of the option or as short-term
capital gain if the sale is made earlier. The maximum tax rate on long-term
capital gain under current federal income tax laws is 20%. Capital losses are
allowed in full against capital gains plus $3,000 of other income.
All other options which do not qualify as incentive stock options are referred
to as nonstatutory stock options. An optionee will not recognize any taxable
income under U.S. tax laws at the time he or she is granted a nonstatutory
stock option. However, upon its exercise, the optionee generally will
recognize ordinary income for tax purposes generally measured as the excess of
the then fair market value of the shares over the option exercise price. The
taxable income recognized in connection with an option exercise by an optionee
who is also an employee of the Company will be subject to income and
employment tax withholding by the Company. The optionee's holding period for
long-term capital gain purposes commences as of the date he or she recognizes
ordinary income with respect to an option exercise. Upon the sale of such
shares by the optionee, any difference between the sale price and the fair
market value of the shares as of the date of exercise of the option, will be
treated as capital gain or loss, and will qualify for long-term capital gain
or loss treatment if the shares have been held for more than one year from the
date of exercise.
The Company will be entitled to a tax deduction in the amount and at the time
that the optionee recognizes ordinary income with respect to shares acquired
upon exercise of a nonstatutory stock option.
Alternative Minimum Tax
The exercise of an incentive stock option may subject the optionee to the
alternative minimum tax under Section 55 of the Code. The alternative minimum
tax is calculated by applying a tax rate of 26% to alternative minimum taxable
income of joint filers up to $175,000 ($87,000 for married taxpayers filing
separately) and 28% to alternative minimum taxable income above that amount.
Alternative minimum taxable income is equal to (i) taxable income adjusted for
certain items, plus (ii) items of tax preference less (iii) an exemption
amount of $45,000 for joint returns, $33,750 for unmarried individual returns
and $22,500 in the case of married taxpayers filing separately (which
exemption amounts are phased out for upper income taxpayers). Alternative
minimum tax will be due if the tax determined under the foregoing formula
exceeds the regular tax of the taxpayer for the year.
In computing alternative minimum taxable income, shares purchased upon
exercise of an incentive stock option are treated as if they had been acquired
by the optionee pursuant to exercise of a nonstatutory stock option. As a
result, the optionee recognizes alternative minimum taxable income equal to
the excess of the fair market value of the Common Stock on the date of
exercise over the option exercise price. Because the alternative minimum tax
calculation may be complex, optionees should consult their own tax advisors
prior to exercising incentive stock options.
If an optionee pays alternative minimum tax, the amount of such tax may be
carried forward as a credit against any subsequent year's regular tax in
excess of the alternative minimum tax for such year.
Required Vote
The affirmative vote of the holders of a majority of the Company's Common
Stock who are present at the Annual Meeting in person or by proxy and entitled
to vote is required to approve the adoption of the 1999 Equity Incentive Plan
and the reservation of 1,500,000 shares of Common Stock for issuance
thereunder.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE 1999 EQUITY
INCENTIVE PLAN AND THE RESERVATION OF 1,500,000 SHARES OF COMMON STOCK FOR
ISSUANCE THEREUNDER.
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Aspect Telecommunications Corporation Proxy Statement
PROPOSAL NO. 3 - AMENDMENT TO THE 1990 EMPLOYEE STOCK PURCHASE PLAN
At the Annual Meeting, the Company's shareholders are being asked to amend the
1990 Employee Stock Purchase Plan (the Purchase Plan) to reserve an additional
500,000 shares of Common Stock for issuance thereunder.
The Board of Directors recently approved certain amendments to the Purchase
Plan that will take effect for the offering period commencing on August 16,
1999 which do not require shareholder approval under applicable law but which
are described in this paragraph. The maximum number of shares a Purchase Plan
participant can purchase in any six-month offering period is now limited to
250 shares (as adjusted for changes in the capitalization of the Company or
changes in the length of an offering period). In addition, the Board of
Directors has reserved the right to terminate the Purchase Plan and/or the
ongoing offering period if continuation of the Purchase Plan and/or the
offering period would cause the Company to incur an adverse accounting
treatment as a result of a change in generally accepted accounting principles.
General
The Purchase Plan was adopted by the Board of Directors in March 1990 and was
approved by the Company's shareholders in April 1990. A total of 800,000
shares of Common Stock were originally reserved for issuance. Shareholders
approved increases to the number of shares of Common Stock reserved for
issuance under the plan by 800,000 shares in May 1992, by 500,000 shares in
May 1996 and by 1,000,000 in May 1998, bringing the total reserved shares to
3,100,000. At a meeting on March 12, 1999, the Board of Directors amended the
Purchase Plan, subject to shareholder approval, to increase the number of
shares of Common Stock reserved for issuance thereunder by 500,000 shares, for
a total of 3,600,000 reserved shares and to amend the provisions as described
above.
As of February 28, 1999, 2,495,183 shares of Common Stock had been purchased
pursuant to the Purchase Plan and 604,817 shares remained available for
purchase (not including the additional 500,000 shares reserved by the Board of
Directors, for which shareholder approval is being requested).
The Purchase Plan has two six-month offering periods each year commencing on
February 16 and August 16, or at such time or times as may be determined by
the Board of Directors. The Board of Directors may change the duration of the
offering period by announcement at least 15 days prior to the start of the
first offering period to be affected. During an offering period, an eligible
employee may make payroll deductions for the purpose of exercising an option
that is granted on the first day of the offering period. The Purchase Plan was
implemented by the Company effective January 1, 1991. The Purchase Plan is
intended to qualify under Section 423 of the Code.
Summary of the 1990 Employee Stock Purchase Plan
The following is a summary of the principal features of the Purchase Plan, as
amended. The summary, however, does not purport to be a complete description
of all the provisions of the Purchase Plan. Any shareholder of the Company who
wishes to obtain a copy of the actual plan document may do so upon written
request to the Chief Financial Officer at the Company's principal offices at
1730 Fox Drive, San Jose, California 95131.
Purpose
The purpose of the Purchase Plan is to provide employees of the Company and
its subsidiaries with an opportunity to purchase Common Stock of the Company
through payroll deductions.
Administration
The Purchase Plan may be administered by the Board of Directors or committees
appointed by the Board. At the present time, the Purchase Plan is being
administered by the Board of Directors. All questions of interpretation or
application of the Purchase Plan are determined by the Board of Directors or
its appointed committee, and its decisions are final, conclusive, and binding
upon all participants.
7
<PAGE>
Aspect Telecommunications Corporation Proxy Statement
Eligibility and Participation
Employees (including officers and employee directors) who are employed with
the Company (including subsidiaries of the Company approved by the Board of
Directors) for at least twenty hours per week and five months per calendar
year as of the first business day of each offering period of the Purchase Plan
(the Enrollment Date), are eligible to participate in the Purchase Plan and
are subject to certain limitations imposed by Section 423(b) of the Code and
limitations on stock ownership as set forth in the Purchase Plan. No employee
shall be granted an option under the Purchase Plan if (i) immediately after
the grant, such employee would own stock and/or hold outstanding options to
purchase stock possessing 5% or more of the total combined voting power or
value of all classes of stock of the Company or of any subsidiary of the
Company, or (ii) if such option would permit such employee to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries to
accrue at a rate that exceeds $25,000 worth of stock for each calendar year in
which such option is outstanding at any time. A total of approximately 1,937
employees were eligible to participate in the Purchase Plan on December 31,
1998.
Eligible employees become participants in the Purchase Plan by filing with the
Company a subscription agreement authorizing payroll deductions prior to the
applicable Enrollment Date, unless a late time for filing the subscription
agreement has been set by the Board of Directors. Payroll deductions commence
on the first payroll following the Enrollment Date and end on the last payroll
paid on or prior to the last day (the Exercise Date) of the offering period to
which the subscription agreement is applicable, unless sooner terminated by
the participant.
Grant and Exercise of Option
At the beginning of an offering period, each participant is granted an option
to purchase that number of shares equal to up to 10% of the participant's
aggregate compensation received on each payday during the offering period
divided by the lower of 85% of the fair market value of a share of the
Company's Common Stock (i) at the beginning of the offering period or (ii) at
the end of the offering period, subject to the limitations set forth below. In
no event may an employee be granted an option under the Purchase Plan provided
that in no event shall a participant be permitted to purchase more than 250
shares (as adjusted for stock splits, recapitalizations and the like) of
Common Stock under the Purchase Plan in any one six-month offering period. In
addition, such purchases shall be subject to the other limitations set forth
in the Purchase Plan. The Company may make a pro rata reduction in the number
of shares subject to options if the total number of shares that would
otherwise be subject to options granted at the beginning of an offering period
exceeds the number of remaining available shares in the Purchase Plan. Unless
an employee withdraws his or her participation in the Purchase Plan by giving
written notice to the Company of his or her election to withdraw all
accumulated payroll deductions prior to the end of an offering period, the
employee's option for the purchase of shares will be exercised automatically
at the end of the offering period. The maximum number of full shares subject
to the option that are purchasable with the accumulated payroll deductions in
his or her account will be purchased at the applicable purchase price
determined, as provided below. During his or her lifetime, a participant's
option to purchase shares under the Purchase Plan is exercisable only by the
participant.
Purchase Price
The purchase price per share at which shares are sold to participating
employees under the Purchase Plan is the lower of (i) 85% of the fair market
value per share of the Common Stock at the time the option is granted at the
commencement of the offering period, or (ii) 85% of the fair market value per
share of the Common Stock at the time the option is exercised on the last day
of the offering period. The fair market value of the Common Stock on a given
date shall be the closing sale price of the Common Stock for such date, as
reported on the Nasdaq National Market (or in the event that the Common Stock
is not traded on such date, on the last preceding trading date for which such
quotation exists).
Payroll Deductions
Money to purchase shares under the Purchase Plan is accumulated by payroll
deductions over the offering period. The deduction may not be less than 1% or
more than 10% of a participant's aggregate compensation during the offering
period. A participant may discontinue or decrease his or her payroll deduction
percentage, but may not increase his or her rate of payroll deductions at any
time during the offering period. The Board of Directors is authorized to limit
the number of participation rate decreases during any offering period. A
participant's payroll deduction may be decreased to 0% if the aggregate of his
or her payroll deductions for a calendar year would result in the participant
purchasing shares in excess of any of the limitations set forth in the
Purchase Plan.
8
<PAGE>
Aspect Telecommunications Corporation Proxy Statement
Termination of Employment
In the event an employee fails to remain an employee of the Company for at
least 20 hours per week during the applicable offering period, for any reason,
including retirement or death, the participant will be deemed to have
withdrawn from the Purchase Plan and the participant's option will be
terminated. In such event, the payroll deductions credited to the
participant's account will be returned to him or her or, in the case of death,
to the person or persons entitled thereto, as provided in the Purchase Plan.
Adjustment Upon Changes in Capitalization
In the event any change is made in the Company's capitalization in the middle
of an offering period, such as a stock split or stock dividend, which results
in an increase or decrease in the number of shares of Common Stock outstanding
without receipt of consideration by the Company, appropriate adjustment shall
be made in the purchase price, the number of shares subject to options under
the Purchase Plan and in the maximum number of shares that can be purchased by
a participant during an offering period provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration."
In the event of a proposed dissolution or liquidation of the Company, the
Offering Period will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board of Directors. In the
event of a proposed sale of all or substantially all of the assets of the
Company, or the merger of the Company with or into another corporation, each
option under the Purchase Plan shall be assumed or an equivalent substitute
option shall be substituted by such successor corporation or a parent or
subsidiary of such successor corporation, unless the Board of Directors elects
to shorten the Offering Period then in progress by setting a new purchase date
and notifying the optionees of the change in their purchase date.
Amendment and Termination of the Plan
The Board of Directors may at any time amend or terminate the Purchase Plan,
but no amendment or termination shall be made that would impair the rights of
any participant during an offering period in progress, without his or her
consent, provided, however, that an offering period may be terminated or
modified if the Board of Directors determines that the termination or
modification of the Purchase Plan is in the best interest of the Company and
its shareholders or if continuation of the Purchase Plan and/or offering
period would cause the Company to incur an adverse accounting treatment as a
result of a change in generally accepted accounting principles. In addition,
the Company shall obtain shareholder approval of any amendment to the Purchase
Plan in such a manner and to the extent necessary to comply with Rule 16b-3
under the Exchange Act, Section 423 of the Code, and/or any other applicable
law or regulation. The Purchase Plan will expire in March 2010, unless sooner
terminated by the Board of Directors.
The Board of Directors may at any time, except during an offering period in
progress, without shareholder consent and without regard to whether any
participant rights may be adversely affected, establish limitations or
procedures as the Board of Directors determines advisable, provided, however,
that such limitations or procedures are consistent with the Purchase Plan.
U.S. Federal Income Tax Information
The following is a brief summary of the effect of U.S. federal income taxation
on the optionee and the Company with respect to the grant and exercise of
options under the Purchase Plan. This summary does not purport to be complete,
and does not discuss the income tax laws of any municipality, state, or
foreign country in which an optionee may reside. The Company advises all
eligible employees to consult their own tax advisors concerning tax
implications of option grants and exercises, and the disposition of stock
acquired upon such exercises under the Purchase Plan.
The Purchase Plan, and the right of participants to make purchases thereunder,
is intended to qualify under the provisions of Sections 421 and 423 of the
Code. Under these provisions, no income will be taxable to a participant until
the shares purchased under the Purchase Plan are sold or otherwise disposed
of. Upon sale or other disposition of the shares, the participant will
generally be subject to tax; the amount of the tax will depend upon the
holding period. If the shares are sold or otherwise disposed of in a
"qualifying disposition," defined as being held more than two years from the
first day of the offering period and more than one year from the date of
transfer of the stock to the participant, then the
9
<PAGE>
Aspect Telecommunications Corporation Proxy Statement
participant will recognize ordinary income measured as the lesser of (i) the
excess of the fair market value of the shares at the time of such sale or
disposition over the purchase price, or (ii) an amount equal to 15% of the
fair market value of the shares as of the first day of the offering period.
Any additional gain will be treated as long-term capital gain. If the shares
are sold or otherwise disposed of in a "disqualifying disposition" (i.e.,
before the expiration of the aforementioned qualifying holding periods), the
participant will recognize ordinary income generally measured as the excess of
the fair market value of the shares on the date the shares are purchased over
the purchase price. Any additional gain or loss on such sale or disposition
will be long-term or short-term capital gain or loss, depending on the holding
period. The Company is entitled to a tax deduction for income tax purposes for
the amount that is taxed to participants as ordinary income from disqualifying
dispositions. The Company will be entitled to such deduction at the time that
participants recognize ordinary income.
Required Vote
The amendment to the Purchase Plan to increase the number of shares of Common
Stock reserved for issuance thereunder by 500,000 shares requires the
affirmative vote of the holders of a majority of the shares of the Company's
Common Stock who are present in person or by proxy and entitled to vote at the
meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO THE 1990
EMPLOYEE STOCK PURCHASE PLAN, WHICH WILL INCREASE SHARES AUTHORIZED AND
RESERVED UNDER THE PLAN BY 500,000 SHARES.
PROPOSAL NO. 4 - RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected Deloitte & Touche LLP, independent
auditors, to audit the financial statements of the Company for the year ending
December 31, 1999, and recommends that the shareholders vote for ratification
of such appointment. In the event the shareholders do not ratify such
appointment, the Board of Directors will reconsider its selection. Deloitte &
Touche LLP (or its predecessor Deloitte, Haskins & Sells, an accounting firm
that merged with a second public accounting firm to form Deloitte & Touche
LLP) has audited the Company's financial statements since 1986. One or more
representatives of Deloitte & Touche LLP are expected to be present at the
meeting, with the opportunity to make a statement if they desire to do so and
to be available to respond to appropriate questions.
The ratification of the appointment of Deloitte & Touche LLP requires the
affirmative vote of a majority of the shares represented and voting at the
meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF DELOITTE & TOUCHE LLP.
10
<PAGE>
Aspect Telecommunications Corporation Proxy Statement
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table sets forth information known to the Company with respect
to the beneficial ownership of the Company's Common Stock, as to (i) each
person who is known by the Company to beneficially own 5% or more of the
Company's Common Stock, (ii) each of the Company's directors, (iii) each of
the Company's Named Executive Officers (as defined hereafter) and (iv) all
directors and executive officers as a group. The information set forth below
is as of February 28, 1999.
<TABLE>
<CAPTION>
5% Shareholders, Directors, Named Executive Shares Beneficially Owned (1)
Officers, and Directors and Executive ---------------------------------
Officers as a Group Number Percent
- ------------------------------------------- ------ -------
<S> <C> <C>
Massachusetts Financial Services Company
(2)......................................... 5,848,579 12.0%
500 Boylston Street
Boston, MA 02116
Entities affiliated with FMR Corp. (3)....... 5,316,260 10.9%
82 Devonshire Street
Boston, MA 02109
Oak Associates, Ltd. (4)..................... 2,775,000 5.7%
3875 Embassy Parkway, Suite 250
Akron, OH 44333
James R. Carreker (5)........................ 1,606,016 3.3%
Debra J. Engel (6)........................... 22,620 *
Norman A. Fogelsong (7)...................... 1,024,872 2.1%
James L. Patterson (8)....................... 48,620 *
John W. Peth (9)............................. 36,620 *
Dennis L. Haar (10).......................... 389,706 *
Eric J. Keller (11).......................... 95,287 *
Robert A. Blatt (12)......................... 180,106 *
Kathleen M. Cruz (13)........................ 44,478 *
Clyde D. Foster (14)......................... 25,131 *
Mark J. Meltzer (15)......................... 75,015 *
All directors and executive officers as a
group (13 persons) (16)..................... 3,560,149 7.1%
</TABLE>
- -------
* Less than 1%
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
(2) Massachusetts Financial Services Company (MFS) has sole voting power over
5,714,579 shares and sole depositive power over 5,848,579 shares. This
information was determined as of December 31, 1998, from Schedule 13G
dated February 11, 1999, as filed by MFS with the Securities and Exchange
Commission.
(3) Includes 4,780,700 shares of Common Stock owned by investment funds (the
Funds) managed by Fidelity Management & Research Company, a wholly owned
subsidiary of FMR Corp. and an investment adviser registered under the
Investment Advisers Act of 1940. Edward C. Johnson III (Chairman of FMR
Corp.), FMR Corp. and the Funds each have sole power to dispose of the
shares owned by the Funds. Also includes 535,560 shares of Common Stock
owned by Fidelity Management Trust Company. Edward C. Johnson III and FMR
Corp. each have sole power to dispose of these shares and sole power to
vote 290,460 shares. The power to vote 245,100 shares has been retained by
institutional accounts for whom Fidelity Management Trust Company acts as
an investment manager. This information was determined as of December 31,
1998, from Schedule 13G dated February 16, 1999, as filed by FMR Corp.
with the Securities and Exchange Commission.
11
<PAGE>
Aspect Telecommunications Corporation Proxy Statement
(4) Oak Associates, Ltd. has sole voting power over 2,775,000 shares and
shared depositive power over 2,775,000 shares. This information was
determined as of December 31, 1998, from Schedule 13G dated February 16,
1999, as filed by Oak Associates, Ltd. with the Securities and Exchange
Commission.
(5) Includes 1,080,140 shares held by the Carreker Family Trust and 400 shares
owned directly. Also includes 31,000 shares held by the Arbutus
Educational Trust, a charitable remainder trust of which Mr. Carreker is
the trustee; and 494,476 shares issuable pursuant to options that are
exercisable by Mr. Carreker within 60 days of February 28, 1999.
(6) Includes 10,620 shares owned directly. Also includes 12,000 shares
issuable pursuant to options that are exercisable by Ms. Engel within 60
days of February 28, 1999.
(7) Includes 743,872 shares held by the Fogelsong Family Trust. Also includes
275,000 shares held of record by Institutional Venture Partners for which
Mr. Fogelsong works as a venture capitalist and for which he disclaims
beneficial ownership of the securities except to the extent of his
pecuniary interest therein. Also includes 6,000 shares issuable pursuant
to options that are exercisable by Mr. Fogelsong within 60 days of
February 28, 1999.
(8) Includes 42,620 shares held by the Patterson Family Trust. Also includes
6,000 shares issuable pursuant to options that are exercisable by Mr.
Patterson within 60 days of February 28, 1999. Mr. Patterson will not be
standing for reelection at the Annual Meeting of Shareholders.
(9) Includes 30,620 shares owned directly. Also includes 6,000 shares issuable
pursuant to options that are exercisable by Mr. Peth within 60 days of
February 28, 1999.
(10) Includes 39,180 shares owned directly. Also includes 350,526 shares
issuable pursuant to options that are exercisable by Mr. Haar within 60
days of February 28, 1999. As of January 31, 1999, Mr. Haar transitioned
from a Named Executive Officer to a part-time employee. Mr. Haar is
expected to continue to provide certain advisory services until July 31,
1999.
(11) Includes 3,101 shares owned directly. Also includes 92,186 shares
issuable pursuant to options that are exercisable by Mr. Keller within 60
days of February 28, 1999.
(12) Includes 19,745 shares owned directly. Also includes 160,361 shares
issuable pursuant to options that are exercisable by Mr. Blatt within 60
days of February 28, 1999.
(13) Includes 106 shares owned directly. Also includes 44,372 shares issuable
pursuant to options that are exercisable by Ms. Cruz within 60 days of
February 28, 1999.
(14) Includes 3,404 shares owned directly. Also includes 21,727 shares
issuable pursuant to options that are exercisable by Mr. Foster within 60
days of February 28, 1999. Mr. Foster's status changed from an executive
officer to a nonexecutive officer on December 18, 1998.
(15) Includes 42,933 shares owned directly. Also includes 32,082 shares
issuable pursuant to options that are exercisable by Mr. Meltzer within
60 days of February 28, 1999. Mr. Meltzer's status changed from an
executive officer to a nonexecutive officer on December 18, 1998.
(16) Includes 1,235,731 shares issuable pursuant to options that are
exercisable within 60 days of February 28, 1999 by all directors, Named
Executive Officers and other individuals who were executive officers as
of December 31, 1998.
12
<PAGE>
Aspect Telecommunications Corporation Proxy Statement
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into a Severance Agreement with former officer Dennis
L. Haar, who resigned his position as Executive Vice President, Channels,
effective January 31, 1999. Mr. Haar is expected to continue to provide
certain advisory services for the Company. In exchange for such services and
other agreed conditions, the Company will continue Mr. Haar's base pay and
benefits through July 31, 1999.
In March 1999, the Company offered employment agreements to each of its
officers. Pursuant to the terms of the agreements, if an officer is
involuntarily terminated other than for cause or is constructively terminated
within 12 months of a change of control of the Company, the officer is
entitled to certain severance benefits, including acceleration of vesting and
continuation of base salary and benefits for up to twelve months.
EXECUTIVE COMPENSATION
The following table presents compensation paid by the Company for services
rendered during fiscal years 1998, 1997 and 1996 for (i) the Chief Executive
Officer (CEO), (ii) the four most highly compensated executive officers (other
than the CEO) serving at the end of the last fiscal year whose salary plus
bonus exceeded $100,000 in fiscal 1998 and (iii) two former executive officers
who would have been included in the category described in subsection (ii) had
they still been executive officers of the Company at the end of fiscal 1998
(the group of seven individuals collectively referred to hereinafter as the
Named Executive Officers). The information set forth below is for years ended
December 31.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
----------------- -----------------
Securities
Name and Principal Stock Underlying All Other
Position Year Salary Bonus Awards Options (1) Compensation (2)
- ------------------ ---- -------- -------- ------ ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
James R. Carreker....... 1998 $299,363 $119,475 - 50,000 $ 4,860
Chairman, President and 1997 $276,884 $197,858 - 75,000 $ 4,810
Chief Executive Officer 1996 $254,021 $203,123 - 60,000 $ 4,590
Dennis L. Haar (3)...... 1998 $272,980 $124,740 - 50,000 $ 7,318
Executive Vice
President, 1997 $255,958 $130,211 $201 75,000 $ 6,286
Channels 1996 $221,397 $145,001 - 80,000 $ 5,178
Eric J. Keller (4)...... 1998 $252,062 $ 96,960 - 40,000 $ 6,157
Senior Vice President,
Finance 1997 $236,992 $ 70,206 - 25,000 $ 6,024
and Chief Financial
Officer 1996 $215,132 $ 96,011 - 100,000 $ 5,397
Robert A. Blatt......... 1998 $228,800 $ 71,150 - 40,000 $ 5,125
Vice President, 1997 $189,425 $ 71,983 $225 35,000 $ 5,008
Corporate Development 1996 $154,475 $ 47,812 - 30,000 $ 4,817
Kathleen M. Cruz (5).... 1998 $217,837 $ 36,113 - 25,000 $ 5,991
Senior Vice President, 1997 $207,077 $ 38,504 - 10,000 $ 5,892
Information Technology
and 1996 $108,508 $ 27,891 - 60,000 $ 3,203
Chief Information
Officer
Clyde D. Foster (6)..... 1998 $198,905 $132,773 - 20,000 $ 5,335
Vice President, 1997 $183,650 $ 25,813 - 3,000 $ 5,285
Global Solution
Services 1996 $125,895 $ 75,813 - 28,000 $ 460
Mark J. Meltzer (7)..... 1998 $228,013 $ 67,800 - - $ 2,034
Vice President, 1997 $122,552 $ 23,287 - 70,000 $48,567
General Counsel 1996 - - - - -
</TABLE>
- -------
(1) No stock appreciation rights (SARs) were granted in the periods presented.
13
<PAGE>
Aspect Telecommunications Corporation Proxy Statement
(2) Amounts shown include Company matching contributions to individual's
401(k) savings accounts and life insurance premiums for all officers. In
addition, Mr. Meltzer received compensation in the amount of $48,537 in
1997 related to relocation expenses. Contributions to 401(k) savings
accounts for the years 1998, 1997 and 1996 were $4,800, $4,750 and $4,500
respectively for all Named Executive Officers employed by the Company
during the three reporting years, except that in 1998 and 1997 Mr. Meltzer
received matching contributions of $1,974 and $30, respectively and in
1996 Ms. Cruz received a matching contribution of $2,448 and Mr. Foster
did not receive a matching contribution for that year.
(3) Mr. Haar transitioned from a Named Executive Officer to a part-time
employee on January 31, 1999. Mr. Haar is expected to continue to provide
certain advisory services until July 31, 1999.
(4) Mr. Keller joined the Company on January 15, 1996. Had he been employed
for all of the year ended December 31, 1996, his annual salary would have
been approximately $225,000.
(5) Ms. Cruz joined the Company on June 17, 1996. Had she been employed for
all of the year ended December 31, 1996, her annual salary would have been
approximately $200,027.
(6) Mr. Foster joined the Company on April 24, 1996. Had he been employed for
all of the year ended December 31, 1996, his annual salary would have been
approximately $182,348. Mr. Foster's status changed from an executive
officer to a nonexecutive officer on December 18, 1998.
(7) Mr. Meltzer joined the Company on June 9, 1997. Had he been employed for
all of the year ended December 31, 1997, his annual salary would have been
approximately $217,143. Mr. Meltzer's status changed from an executive
officer to a nonexecutive officer on December 18, 1998.
The Company's 1989 Stock Option Plan provides for the grant of options to
executive officers of the Company. Options granted to Named Executive Officers
under this plan were incentive stock options to the extent allowable under
Section 422 of the Internal Revenue Code and were otherwise nonstatutory stock
options. The options were granted at a price equal to the fair market value of
the Company's Common Stock on the date of grant. Such options typically expire
seven-to-ten years from the date of grant. The following table presents stock
option grants made during 1998 to the Named Executive Officers.
Option Grants in 1998
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------
Potential
Realizable Value at
% of Total Assumed Annual
Number of Options Rates of Stock
Securities Granted to Appreciation for
Underlying Employees Exercise or Option Term (4)
Options in Fiscal Base Price Expiration -------------------
Name Granted (1)(2) Year (3) Per Share Date 5% 10%
- ---- -------------- ---------- ----------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
James R. Carreker....... 50,000 0.7% $27.13 7/14/2008 $852,938 $2,161,513
Dennis L. Haar.......... 50,000 0.7% $27.13 7/14/2008 $852,938 $2,161,513
Eric J. Keller.......... 40,000 0.5% $27.13 7/14/2008 $682,351 $1,729,211
Robert A. Blatt......... 40,000 0.5% $27.13 7/14/2008 $682,351 $1,729,211
Kathleen M. Cruz........ 25,000 0.3% $27.13 7/14/2008 $426,469 $1,080,757
Clyde D. Foster......... 20,000 0.3% $26.00 5/14/2008 $327,025 $ 828,746
Mark J. Meltzer......... - - - - - -
</TABLE>
- -------
(1) Options to purchase the Company's Common Stock granted pursuant to the
Company's 1989 Stock Option Plan. Of the above grants, the following were
nonstatutory stock option grants: 41,945 for Mr. Carreker; 38,735 for Mr.
Haar; 29,043 for Mr. Keller; 28,430 for Mr. Blatt; 15,472 for Ms. Cruz and
9,821 for Mr. Foster. No SARs were granted during 1998.
(2) Options become exercisable at the rate of 25% on the first anniversary of
the grant date, and 2.0833% each month thereafter.
14
<PAGE>
Aspect Telecommunications Corporation Proxy Statement
(3) The Company granted options representing 7,549,395 shares to employees in
1998. Included in this number are 3,800,729 shares which were granted
under the Company's Stock Option Exchange Program on November 21, 1998. In
October 1998, the Company's Board of Directors approved an option exchange
program for all current outstanding options with exercise prices in excess
of $17.50 per share. Executive officers and nonemployee directors of the
Company were not eligible to participate in the exchange program. Under
this program, eligible employees could elect to exchange existing options
with higher exercise prices for the same number of replacement options
with an exercise price equal to the closing sale price of the Company's
Common Stock on November 21, 1998. Replacement options were granted with a
one-year exercise prohibition period. The vesting schedule for unvested
shares and the final expiration date of the replacement options remained
the same as the expiring option.
(4) The 5% and the 10% assumed rates of appreciation are mandated by the rules
of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future Common Stock price.
The following table presents information on stock options exercised during
1998 and the value of all stock options held on December 31, 1998, for the
Named Executive Officers.
Aggregated Option Exercises in 1998 and
December 31, 1998 Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options (2) Options (2)(3)
Shares at December 31, 1998 at December 31, 1998
Acquired Value ------------------------- -------------------------
Name on Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James R. Carreker....... - - 500,998 39,002 $5,549,542 $267,950
Dennis L. Haar.......... 25,000 $643,375 249,966 24,834 $2,267,720 $148,305
Eric J. Keller ......... - - 72,915 27,085 $ 68,358 $ 25,392
Robert A. Blatt......... - - 118,635 11,001 $1,143,903 $ 74,569
Kathleen M. Cruz........ 2,500 $ 24,688 - - - -
Clyde D. Foster......... - - - - - -
Mark J. Meltzer......... - - - - - -
</TABLE>
- -------
(1) The amount set forth represents the difference between the fair market
value of the shares on the date of exercise and the exercise price of the
option.
(2) No SARs were exercised or outstanding during 1998.
(3) Based on the closing sale price of the Company's Common Stock as reported
on the Nasdaq National Market on December 31, 1998, $17.25 per share,
minus the exercise price, multiplied by the number of shares underlying
the option.
15
<PAGE>
Aspect Telecommunications Corporation Proxy Statement
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate future
filings, including this Proxy Statement, in whole or in part, the following
Compensation Committee Report and the Performance Graph shall not be
incorporated by reference into any such filings.
COMPENSATION COMMITTEE REPORT
The Company's compensation for Executive Officers is determined by the
Compensation Committee of the Board of Directors (the Committee). The
Committee is composed of nonemployee directors and employs independent
authorities on executive compensation. The Committee meets on a scheduled
basis to evaluate the effectiveness of the compensation program in linking
company performance and executive pay. Additionally, the Committee is
routinely consulted to approve the compensation package of a newly hired
executive or of an executive whose scope of responsibility has significantly
changed. During 1998, the Committee met on six occasions.
The objective of the Company's executive compensation program is to align
executive compensation with the Company's long and short-term business
objectives and performance. Additionally, in the high technology marketplace
where the Company competes for executive talent, it is imperative that
executive compensation enable the Company to attract, retain and motivate
qualified executives able to contribute to the long-term success of the
Company. The following specific strategies are utilized to guide the Company's
executive compensation decisions:
- Key Stakeholder Alignment. Executive compensation should be designed to
align management's interests with shareholders' interests and the
creation of shareholder value.
- Risk and Reward. A significant portion of an executive's compensation
should be tied to their performance and contributions to the success of
the Company.
- Pay for Performance. The achievement of higher levels of performance
should be rewarded by higher levels of compensation. Similarly,
performance below minimum expectations may result in low or no variable
compensation to the executives.
- Compensate Competitively. The Company regularly compares its
compensation programs to those of other companies of comparable size
within similar industries. Generally, the Company's total compensation
is compared to the 50th percentile of the companies surveyed. This
places target pay substantially at market.
Each year, in December, the Committee meets with the CEO and Senior Vice
President of Human Resources to consider potential long-term executive
compensation and to propose specific compensation plans for the next fiscal
year. Executive compensation is based on independent market surveys supplied
by Hewitt Associates and Radford Consulting Group. Assessments are made on the
demonstrated and sustained performance of the individual executives. The
Committee then independently reviews the individual performance of the CEO
based upon the data and the Committee's evaluation of the CEO's demonstrated
and sustained performance and the expectations as to his future contributions
in leading the Company. The Committee presents for adoption its
recommendations on the compensation of each executive at a subsequent meeting
of the full Board of Directors.
During 1998, the Company's executive compensation program included these key
elements:
- Base Salary. The Company establishes the base salaries of its Executive
Officers based on competitive market practices derived from comparisons
with companies of similar size in similar industries. The approach is to
set pay levels around the 50th percentile of such data. Actual pay
decisions are made around this point and vary based on performance,
contribution and experience of the individual executive.
- Cash-Based Incentives. During 1998, eleven executives of the Company
participated in a cash incentive program under which payment was
contingent upon the achievement of specific company-wide goals in the
area of customer satisfaction, quality, operating profit, revenue
performance and cash management. This incentive program is substantially
the same program in effect at different target opportunities for other
employees in the Company. The CEO and some of the vice presidents are
eligible to participate in a second cash incentive program that focuses
on the achievement of specific strategic goals such as bookings, profit
contribution, new product introductions, quality standards as well as
performance goals that are more subjectively measured such as leadership
effectiveness. Both incentive programs are designed to award no payment
when the company does not achieve threshold levels of performance.
16
<PAGE>
Aspect Telecommunications Corporation Proxy Statement
The cash incentives are designed so that the total of base salary and
cash incentives, when taken together, will compensate executives at the
50th percentile of market levels when the measurements are achieved. The
cash incentive elements are sensitive to performance achievement versus
plan and payment of these cash bonuses is designed to range from no
bonus payment when performance is well below established targets, to
bonus amounts somewhat above market levels when performance is well
above established targets.
- Equity-Based Incentives. Stock options are designed to align the
interests of each executive with those of the shareholders. Each year,
the Committee considers the grant to executives of stock option awards.
The Committee believes that stock options provide added incentive for
executives to influence the strategic direction of the Company and to
create and grow value for customers, shareholders and employees. Options
are granted at fair market value and typically have three-to-four-year
vesting periods to encourage retention. The number of stock option
shares that are granted to individual executives is based on
demonstrated sustained performance and independent survey data
reflecting competitive stock option practices.
For 1999 and beyond, the Company asked a consulting firm in the area of value-
based executive compensation, to recommend a long term equity incentive
program for its senior executives. The goals of this program are to: (i)
encourage Company core values, including customer and shareholder focus, (ii)
focus on financial measures that are closely linked to increasing shareholder
value, (iii) retain executives and (iv) manage share dilution of Common Stock
outstanding as well as earnings and cash effects.
The consultants recommended and the Committee established a performance-based
stock option program. The actual number of option grants under this program
will be based on Aspect's financial performance in sales growth, earnings
growth and total shareholder return in relation to peers. The Company expects
that this program will be in effect for grants made in the year 2000 based on
performance as measured at the end of 1999. The grants will be issued at fair
market value and typically will utilize four-year vesting.
CEO Compensation
The CEO's base salary for 1998 was based on competitive market rates and the
Committee's review of his past performance. Effective January 1999, the
Committee kept the CEO's base salary essentially flat from 1998 at $300,000
annually and increased the amount of his performance based incentive pay at
risk, such that his total at-target cash compensation is competitive with that
of CEOs of comparably sized companies in similar industries. When considering
the CEO's cash-based incentives, it was the Committee's determination that the
personal portion of the incentive would not be earned for fiscal 1998. The
portion of the incentive in which all employees participate did yield a
payment based upon company performance on the performance measurements for
each quarter except the fourth fiscal quarter of 1998.
The 1993 Omnibus Budget Reconciliation Act (OBRA) established a $1,000,000
ceiling for deductions taken for tax years beginning on or before January 1,
1994, where deductions are for compensation paid to any of the five most
highly compensated executive officers identified in the Company's proxy
statement (although performance-related compensation as defined by OBRA in
excess of $1,000,000 will remain deductible). Because none of the compensation
figures for the five most highly compensated executive officers identified in
the Company's proxy statement approached the limitation, there has been no
requirement on the part of the Committee to use any of the available
exemptions from the deduction limit. However, the Committee remains aware of
the existence of these limitations, and the available exemptions, and will
address the issue of deductibility when and if compensation levels warrant it
in the future.
COMPENSATION COMMITTEE
Debra J. Engel
James L. Patterson
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, the Compensation Committee consisted of directors Engel and
Patterson. Neither of these persons has ever been an officer or employee of
the Company or any of its subsidiaries, nor were there any compensation
committee interlocks or other relationships during 1998 requiring disclosure
under Item 402(j) of Regulation S-K of the Securities and Exchange Commission.
17
<PAGE>
Aspect Telecommunications Corporation Proxy Statement
COMPANY STOCK PRICE PERFORMANCE
The following graph compares cumulative total shareholder returns for the
Company during the preceding five years to the S&P 500 Index, and the S&P High
Technology Composite Index.
COMPARISON OF CUMULATIVE TOTAL RETURN* SINCE DECEMBER 1993
Aspect Telecommunications Corporation, the S&P 500 Index and the S&P High
Technology Composite Index.
[COMPANY STOCK PERFORMANCE CHART APPEARS HERE]
<TABLE>
<CAPTION>
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Aspect
Telecommunications
Corporation............ 100 79 159 301 198 163
S&P High Technology
Composite Index........ 100 114 165 237 290 500
S&P 500 Index........... 100 98 132 159 208 264
</TABLE>
- -------
* Assumes that the value of the investment in Aspect Telecommunications
Corporation Common Stock and each index was $100 on December 31, 1993, and
that all dividends were reinvested.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the
Securities and Exchange Commission (SEC) initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. Officers, directors, and greater than ten percent shareholders
are required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file.
18
<PAGE>
Aspect Telecommunications Corporation Proxy Statement
To the Company's knowledge, based solely upon review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1998, all
Section 16(a) filing requirements applicable to its officers, directors, and
greater than ten percent beneficial owners were complied with, except as
follows: due to an administrative error, the reporting of changes in
beneficial ownership during August 1998 for Ms. Johnstone, Ms. Cruz, Mr.
Meyers and Mr. Miller, a former officer of the Company, were not filed timely
in one instance. As a result, a total of four transactions, one for each of
Ms. Johnstone, Ms. Cruz, Mr. Meyers and Mr. Miller were reported one day late.
STOCK OPTION PLAN INFORMATION
In addition to the 1999 Equity Incentive Plan, discussed in Proposal No. 2,
the Company maintains three other stock option plans: the 1996 Employee Stock
Option Plan (1996 Plan), the 1998 Directors' Stock Option Plan (Directors'
Plan) and the 1989 Option Plan (1989 Plan). Options are only granted to
executive officers under the 1989 Plan, which expires on March 30, 1999.
Options granted under the 1989 Plan are usually granted as incentive stock
options to the extent allowable under Section 422 of the Internal Revenue
Code, with the remaining options being nonstatutory, while all options granted
under the 1996 Plan are nonstatutory. In addition, the Company assumed stock
option plans and options thereunder in connection with its acquisitions of
Commerce Soft, Inc. and Voicetek Corporation. No further grants have been made
under such plans since their assumption.
The terms of the 1989 Plan and the 1996 Plan state that options must be
granted at a price equal to 100% of fair market value of the Company's stock
on the date of grant. Options are typically granted with a three-or-four-year
vesting schedule and typically expire 30 days after the optionee's termination
date or seven-to-ten years after grant date, whichever is sooner. The maximum
number of shares that may be granted to any individual during a year, under
the 1989 Plan or the 1996 Plan, is 500,000 shares.
In February 1999 the Board of Directors authorized a 1,100,000 share increase
to the shares available under the 1996 Plan. As of February 28, 1999,
approximately 427,932, 876,839 and 276,000 shares were available for grant
under the 1989 Plan, the 1996 Plan and the Directors' Plan, respectively.
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS
Proposals by shareholders of the Company that are intended to be presented by
such shareholders at the Company's 2000 Annual Meeting of Shareholders must be
received by the Company no later than November 24, 1999, in order that they
may be included in the proxy statement and form of proxy relating to that
meeting.
OTHER MATTERS
The Company knows of no other matters to be submitted to shareholders at the
meeting. If any other matters properly come before the meeting, it is the
intention of the persons named in the enclosed form of proxy to vote the
shares they represent as the Board of Directors may recommend.
THE BOARD OF DIRECTORS
ASPECT TELECOMMUNICATIONS CORPORATION
March 23, 1999
19
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
ASPECT TELECOMMUNICATIONS CORPORATION
ANNUAL FINANCIAL REPORT TO SHAREHOLDERS
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands, except per share and employee
data)
------------------------------------------------
1998(a) 1997(a) 1996(a) 1995(a) 1994
YEARS ENDED DECEMBER 31, -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues $512,316 $390,642 $308,703 $198,972 $147,239
Gross margin 284,132 221,669 174,781 111,596 81,561
(% of net revenues) 55% 57% 57% 56% 55%
Research and development 67,877 45,723 34,585 23,450 15,774
(% of net revenues) 13% 12% 11% 12% 11%
Selling, general and
administrative 150,118 104,431 82,478 50,726 37,662
(% of net revenues) 29% 27% 27% 25% 26%
Income from operations 56,238 52,605 57,718 35,620 28,125
(% of net revenues) 11% 13% 19% 18% 19%
Net income $ 32,490 $ 35,182 $ 37,633 $ 23,991 $ 17,573
(% of net revenues) 6% 9% 12% 12% 12%
Basic earnings per share $ 0.64 $ 0.71 $ 0.86 $ 0.58 $ 0.43
Weighted average shares
outstanding(c) 50,459 49,302 43,917 41,314 40,708
Diluted earnings per share $ 0.61 $ 0.67 $ 0.75 $ 0.52 $ 0.40
Weighted average shares
outstanding--assuming
dilution 53,146 52,307 52,163 49,352 48,373
<CAPTION>
AS OF DECEMBER 31,
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents, and
short-term investments $196,111 $146,216 $115,797 $ 93,633 $102,597
Working capital 258,177 169,814 140,079 108,588 113,128
Total assets 560,659 370,343 283,093 215,871 166,035
Long-term debt(b)(c) 153,744 6,531 4,500 59,500 55,000
Shareholders' equity(c) $298,157 $267,795 $219,448 $112,285 $ 80,813
Shares outstanding(c) 49,309 49,997 48,807 41,753 40,652
Capital spending $ 28,884 $ 24,922 $ 33,210 $ 16,627 $ 13,112
Regular full-time employees 2,280 1,610 1,330 950 640
</TABLE>
(a) In May 1998, the Company acquired Voicetek Corporation. The transaction
was accounted for as a purchase, and a charge of $10 million, or $0.19 per
share on a diluted basis, was recorded for purchased in-process
technology.
In February 1998, the Company entered into a litigation settlement and
patent cross-license agreement with Lucent Technologies Inc. The transaction
resulted in a charge in fiscal 1997 of $14 million, or $0.17 per share on a
diluted basis.
In September 1997, the Company acquired Commerce Soft Inc. The transaction
was accounted for as a purchase, and a charge of $5 million, or $0.09 per
share on a diluted basis, was recorded for purchased in-process technology.
During 1997, the Company recorded a gain on the sale of appreciated equity
securities of $2 million, or $0.02 per share on a diluted basis.
During 1996, the Company acquired Envoy Holdings Limited and Prospect
Software, Inc. The transactions were accounted for as pooling of interests.
Results for years prior to 1996 have not been restated since the adjustments
would not be material.
In October 1995, the Company acquired TCS Management Group, Inc. The
transaction was accounted for as a purchase, and a charge of $2 million, or
$0.02 per share on a diluted basis, was recorded for purchased in-process
technology.
See Notes 2 and 11 to the Consolidated Financial Statements.
(b) In August 1998, the Company completed a private placement of approximately
$150 million ($490 million principal amount at maturity) of zero coupon
convertible subordinated debentures due 2018.
(c) In October 1996, the Company converted a previously issued $55 million
convertible subordinated debenture into approximately 6 million shares of
common stock.
F-1
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Background and Acquisitions
In May 1998, Aspect Telecommunications Corporation (Aspect or the Company)
acquired Voicetek Corporation (Voicetek), a leading supplier of interactive
voice response (IVR) and intelligent network (IN) applications, based in
Chelmsford, Massachusetts. The transaction was intended to augment Aspect
customer premise IVR product offerings, strengthen the Company's position in
the network service provider marketplace, and extend the Company's original
equipment manufacturer (OEM) sales channel capabilities. The transaction was
accounted for as a purchase. The Company paid approximately $72 million in
cash for all Voicetek common and preferred shares outstanding and converted
all outstanding Voicetek options into options to purchase approximately
450,000 shares of Aspect common stock with a fair value of approximately $11
million plus transaction costs of approximately $3 million, and assumed
certain operating assets and liabilities. The total purchase price and final
allocation among the tangible and intangible assets and liabilities acquired
(including purchased in-process technology) are summarized as follows:
<TABLE>
<CAPTION>
(in thousands except Amortization
years) Period (years)
<S> <C> <C> <C> <C>
Total purchase price: Purchase price allocation:
Total cash consideration $71,843 Tangible assets $ 9,135
Value of options assumed 11,184 Intangible assets
Transaction costs 2,962 Developed and core technology 28,835 7
Assembled workforce 2,441 4
Customer relationships and sales channel 7,685 5
Goodwill 50,875 7
In-process technology 9,899 Expensed
Tangible liabilities (13,751)
Deferred tax liabilities (9,130)
------- --------
$85,989 $ 85,989
======= ========
</TABLE>
The above valuation is based on management's estimates of the after-tax net
cash flows, and gives explicit consideration to the SEC's views on purchased
in-process technology as set forth in its September 9, 1998, letter to the
American Institute of Certified Public Accountants. Specifically, the
valuation gave consideration to the following: (i) a fair market value premise
was employed, excluding any Aspect-specific considerations that would result
in estimates of investment value for the subject assets; (ii) comprehensive
due diligence concerning all potential intangible assets including
trademarks/tradenames, patents, copyrights, non-compete agreements, assembled
workforce, and customer relationships and sales channel; (iii) the value of
core technology was explicitly addressed, with a view toward ensuring that the
relative allocations to core technology and in-process technology were
consistent with the relative contributions of each to the final product; (iv)
the allocation to in-process technology was based on a calculation that
considered only the efforts completed as of the transaction date, and only the
cash flows associated with said completed efforts for one generation of the
products currently in process; and (v) it was assessed by the Company's
independent accountants and deemed reasonable in light of all the quantitative
and qualitative information available.
As noted above, Aspect recorded a one-time charge of $10 million in the second
quarter of 1998 for purchased in-process technology related to two development
projects that had not reached technological feasibility, had no alternative
future use, and for which successful development was uncertain. The conclusion
that each in-process development effort, or any material subcomponent, had no
alternative future use was reached in consultation with engineering personnel
from both Aspect and Voicetek.
The first of these projects is an IVR product that represents the next
generation of Voicetek's Generations platform, ported to a Windows NT
environment. The primary project tasks open include porting to Windows NT,
compliance to industry-standard protocols, and various feature enhancements.
At the time of acquisition, development remained on all tasks, and the
estimated cost to complete was approximately $1.5 million. The second
development project is a suite of personal communications services, which will
provide modular, integrated applications for voice-activated dialing, single
number service, personal assistant call screening, and unified message
control. At the time of acquisition, most of the remaining development effort
was focused on completing voice-activated dialing, additional coding for final
feature
F-2
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
development, and further testing. The estimated cost to complete was
approximately $2 million. Management expects that both products being
developed will become available for sale in fiscal 1999; however, no
assurances can be given as to the availability, if any. Aspect will begin to
benefit from the acquired research and development related to these products
once they begin shipping. Failure to reach successful completion of these
projects could result in impairment of the associated capitalized intangible
assets and could require the Company to accelerate the time period over which
the intangibles are being amortized, which could have a material adverse
effect on the Company's business, financial condition, or results of
operations.
Significant assumptions used to determine the value of in-process technology
included several factors. First, a forecast of net cash flows that were
expected to result from the development effort, using projections prepared by
Voicetek management, portions of which (1998 and 1999) were provided to
Aspect's Board of Directors. Second, a percentage complete for each project
(40% for the first project and 50% for the second project) estimated by
considering a number of factors, including the costs invested to date relative
to the expected total cost of the development effort and the amount of
progress completed as of the transaction date, on a technological basis,
relative to the overall technological achievements required to achieve the
intended functionality of the eventual product. The technological issues were
addressed by engineering representatives from both Aspect and Voicetek. Third,
discount rates of approximately 28% and 23%, respectively, computed under two
discount rate scenarios. The first discount rate was equivalent to the
discount rate that would be employed in a fair value analysis; i.e., one that
considers all cash flows associated with the project and resulting product,
and therefore represents a blended rate of all the risks associated with the
product. The second discount rate employed was moderately lower, and was
intended to be reflective of the fact that the "exclusion method' considers
only the completed portion of the development and cash flows associated with
the same. The results of each scenario were not materially different, and our
final allocation to in-process research and development was based on an
average of the results of the two scenarios for each project. As of December
31, 1998, technological feasibility had not been reached with respect to
either project, and no significant departures from the assumptions included in
the valuation analysis have occurred.
In August 1998, the Company completed a private placement of approximately
$150 million ($490 million principal amount at maturity) of zero coupon
convertible subordinated debentures due 2018. The debentures are priced at a
yield to maturity of 6% per annum and are convertible into Aspect common stock
anytime prior to maturity at a conversion rate of 8.713 shares per $1,000
principal amount. Holders can require Aspect to repurchase the debentures on
August 10, 2003, August 10, 2008, and August 10, 2013, for cash; or at the
election of Aspect, for Aspect common stock, if certain conditions are met.
The debentures are not secured by any Aspect assets and are subordinated in
right of payment to all of Aspect senior indebtedness and effectively
subordinated to the debt of Aspect subsidiaries. On October 30, 1998, the
Company filed a registration statement with the SEC to register the debentures
and shares of Aspect common stock issuable upon conversion for resale. The
registration statement was declared effective on February 2, 1999.
On February 27, 1998, Aspect and Lucent Technologies Inc. (Lucent) announced
that they had agreed to dismiss their patent lawsuits against each other,
released each other from claims of past infringement, and settled their patent
disputes by entering into a cross-license agreement. Under the terms of the
agreement, Aspect agreed to pay Lucent a one-time fee and future royalties
that are not expected to be material to Aspect's future results of operations.
As a result of this subsequent event affecting the 1997 consolidated financial
statements, the Company recorded a non-recurring charge of $14 million ($0.17
per share on a diluted basis).
In September 1997, the Company acquired Commerce Soft Inc. (Commerce Soft), a
developer of customer interaction technology, and its results of operations
are included in the accompanying condensed financial statements since the date
of acquisition. The transaction was accounted for as a purchase that resulted
in a one-time charge of $5 million in 1997 related to in-process technology.
The Company acquired Envoy Holdings Limited (Envoy) in September 1996, and
Prospect Software, Inc. (Prospect), in October 1996. Both transactions were
accounted for as pooling of interests.
Except for historical information contained herein, the matters discussed in
this report are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended; Section 21E of the Securities and
Exchange Act of 1934, as amended; and the Private Securities Litigation Reform
Act of 1995; and are made under the safe-harbor provisions thereof. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. See
"Business Environment and Risk Factors" below. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's
F-3
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
analysis only as of the date hereof. Aspect undertakes no obligation to
publicly release any revision to these forward-looking statements that may be
made to reflect events or circumstances after the date hereof.
Results of Operations
Net revenues increased by 31% to $512 million in 1998 from $391 million in
1997, and 1997 revenues increased by 27% from $309 million in 1996. Net
revenues for 1998 include results of Voicetek for the period since its
acquisition in May 1998. Excluding Voicetek revenues, the Company's revenues
increased by an estimated 25% from 1997 to 1998. Growth in revenues from 1996
through 1998 was significantly higher in international markets than in the
United States.
Product revenues grew by 24% to $343 million in 1998 from $276 million in
1997, and 1997 product revenues grew by 20% from $231 million in 1996. The
increases in product revenues for both periods were primarily attributable to
increased market demand for the Company's products, as the volume of new
systems and add-ons increased from year to year. Product revenues in 1998 also
include Voicetek product revenues since May 1998. There were no significant
changes in average selling prices for new call center systems across the
periods presented.
Customer support revenues increased by 48% to $169 million in 1998 from $114
million in 1997. Support revenues in 1997 increased 46% to $114 million from
$78 million in 1996. Growth in customer support revenues for both periods
resulted primarily from increases in maintenance revenues as a result of the
growth in the Company's installed base, including the installed base added
through acquisitions; and expansion of the Company's Global Solution Services
(GSS) consulting and systems integration organization established in 1996.
Customer support revenues include fees for providing contractually agreed-upon
system service and maintenance (which typically commence twelve months from
the date a system is installed and, accordingly, are primarily affected by
growth in the installed base); installation of products; GSS revenues; and
other support services.
No single customer accounted for 10% or more of net revenues in any of the
years presented. Net revenues outside the United States as a percentage of
total net revenues over the periods presented were 32% in 1998, 28% in 1997,
and 25% in 1996. Revenues generated from international operations are
generally denominated in foreign currencies. The Company enters into foreign
exchange contracts as a hedge against intercompany account balances. Gains and
losses on these contracts substantially offset foreign exchange gains or
losses on the balances being hedged, and the impact has not been material in
any of the three years presented. At December 31, 1998, we had net foreign
exchange contracts outstanding with a market value of approximately $65
million (which approximated their face value). The majority of these contracts
expired in January 1999.
Gross margin on product revenues was 68% in 1998 and 1997, and 66% in 1996.
The increase between 1996 and 1997 primarily reflects growth in add-on
revenues, which generally carry higher margins, and other factors. On a
forward-looking basis, the Company expects that the following factors, among
others, could have a material impact on product gross margins: the change in
business focus; the mix of products sold; the channel of distribution; the
portion of system revenues related to accounts purchasing multiple systems;
the mix and level of third-party product included as part of systems
integration projects; the results of recently acquired subsidiaries and newly
established business units; and cross-licensing or royalty arrangements with
third parties.
Gross margin on customer support revenues was 29% in 1998, 30% in 1997, and
28% in 1996. The decrease in customer support margins between 1997 and 1998
reflects customer support revenues not growing proportionately with the costs
associated with providing the related services; in particular, in the
Company's consulting and systems integration organization. The improvement in
customer support gross margins between 1996 and 1997 was primarily
attributable to increases in maintenance revenues, with lower increases in
costs associated with providing customer support. On a forward-looking basis,
the Company anticipates that customer support margins will fluctuate from
period to period due to fluctuations in customer support revenues (since many
of the costs of providing customer support do not vary proportionately with
customer support revenues), ongoing efforts to expand the Company's customer
support infrastructure, and the Company's ability to build a successful GSS
organization.
Research and development (R&D) expenses increased by 48% to $68 million in
1998, and 32% to $46 million in 1997 from $35 million in 1996. R&D
expenditures reflect the Company's ongoing efforts to remain competitive
through both new product development and expanded features for existing
products. The increases across the periods presented reflect increased
staffing, associated infrastructure costs, and the impact of Voicetek's R&D
expenses in 1998, including
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Aspect Telecommunications Corporation Annual Financial Report to Shareholders
amortization costs associated with developed and core technology intangible
assets. As a percentage of net revenues, R&D expenses were 13% in 1998, 12% in
1997, and 11% in 1996. The Company continues to believe that a significant
investment in R&D is required to remain competitive, and anticipates, on a
forward-looking basis, that such expenses in 1999 will increase in absolute
dollars, although such expenses as a percentage of net revenues may fluctuate
between periods.
Selling, general and administrative (SG&A) expenses increased by 44% to $150
million in 1998, and 27% to $104 million in 1997 from $82 million in 1996. The
increases across the periods presented were primarily caused by increased
staffing, infrastructure expansion, and other costs related to expansion of
the Company's business; the impact of Voicetek's SG&A expenses in 1998;
amortization of intangible assets; and, in 1997, increased legal expenses.
Increases in SG&A expenses in 1998 and 1997 were partially offset by the
donation of appreciated equity securities in lieu of cash to fund the
Company's corporate giving program. SG&A expenses as a percentage of net
revenues were 29% in 1998, and 27% in 1997 and 1996. The Company anticipates,
on a forward-looking basis, that SG&A expenses will continue to increase in
absolute dollars for 1999, when compared with 1998, although such expenses as
a percentage of net revenues may fluctuate between periods.
Purchased in-process technology represents non-recurring charges of $10
million in 1998, or $0.19 per diluted share, related to the acquisition of
Voicetek; and $5 million in 1997, or $0.09 per diluted share, associated with
the acquisition of Commerce Soft.
The intellectual property settlement represents a non-recurring charge of $14
million, or $0.17 per diluted share, related to the resolution of the
Company's litigation with Lucent in February 1998, which was recorded as a
subsequent event in the fourth quarter of 1997.
Net interest and other income decreased in 1998 to $3 million following an
increase to $8 million in 1997 from $2 million in 1996. The decrease in 1998
resulted from the following: interest expense associated with the issuance of
$150 million of convertible subordinated debentures in August 1998; lower
interest earning balances primarily due to the acquisition of Voicetek and the
implementation of a stock repurchase program; and generally lower interest
rates. The increase in net interest and other income during 1997 was due
primarily to a $2 million gain on the sale of appreciated equity securities,
higher interest earning balances, and the conversion into common stock in
October 1996 of the Company's previously issued $55 million convertible
subordinated debenture.
The Company's effective tax rate was 45.2% in 1998 compared with 41.6% in 1997
and 37.1% in 1996. These tax rates reflect the tax effect of non-deductible
purchased in-process technology charges resulting from the acquisitions of
Voicetek and Commerce Soft in 1998 and 1997, respectively. Excluding these
items, the Company's effective tax rate would have been 38.7% in 1998 and
38.5% in 1997.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedging accounting
when certain conditions are met. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company does not
believe adoption of this statement will have a material impact on the
Company's financial position or results of operations.
Liquidity and Capital Resources
At December 31, 1998, the Company's principal source of liquidity consisted of
cash, cash equivalents, and short-term investments totaling $196 million,
which represented 35% of total assets. The primary sources of cash during 1998
were $146 million net proceeds from the August 1998 private placement of
convertible subordinated debentures, cash provided by operating activities of
$43 million, and proceeds from the issuance of common stock under various
stock plans of $13 million.
The primary uses of cash during 1998 were net purchases of short-term
investments of $89 million, $72 million for the acquisition of Voicetek, $32
million for the repurchase of the Company's common stock, $29 million for the
purchase of property and equipment, and $17 million for payments on various
notes payable.
At December 31, 1998, the Company's outstanding borrowings, including current
and non-current portions of notes payable, totaled $157 million, and comprised
$154 million of convertible subordinated debentures and $3 million
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Aspect Telecommunications Corporation Annual Financial Report to Shareholders
remaining on a $4.5 million note payable incurred in connection with the
acquisition of TCS in 1995. Payment of the remaining balance is being delayed
pending resolution of various tax matters relating to periods prior to the
Company's acquisition of TCS. In October 1998, the Company's Board of
Directors approved the repurchase of up to 5 million shares of its common
stock, of which 2 million shares had been purchased through December 31, 1998.
The Company believes, on a forward-looking basis, that its cash, cash
equivalents, short-term investments, and anticipated cash flow from operations
will be sufficient to meet the Company's presently anticipated cash
requirements during at least the next twelve months.
Year 2000 and Proximate Dates
Many computer systems are expected to experience problems handling dates
around the year 2000. Described below are the actions we have taken or plan to
take to address the potential problems that could result as systems attempt to
handle dates around the millennium.
State of Readiness. Our Year 2000 (Y2K) activities include the following
phases: gathering data and taking inventory; testing systems and products to
discover or confirm Y2K compliance; execution of remediation activities to fix
non-compliant products and systems; and ongoing monitoring and testing of
products and systems. The major business areas impacted are as follows:
. Products and Installations: The Company is visiting customers to install
Y2K solutions and has furnished test facilities and equipment to allow
customers to verify compliance. We believe that substantially all of the
Company's products are Y2K compliant, or that we have upgrades available to
make them Y2K compliant.
. Procurement: We are surveying the Y2K readiness of critical and sole-source
suppliers. We are in the process of making second requests of suppliers who
have not yet fully responded, and will continue to follow up with suppliers
for whom initial assessments have been completed.
. Manufacturing: Certain of the Company's manufacturing is outsourced to two
primary suppliers and we are confirming their Y2K status. Our assembly and
test equipment is scheduled for ongoing upgrades to Y2K complaint
configurations through September 1999. Our primary manufacturing
application software has been upgraded to a version that has successfully
passed Y2K testing.
. Information Technology Systems: The Company has conducted a survey of its
information technology hardware and software and expects that substantially
all non-Y2K complaint hardware and software will be upgraded or replaced by
September 1999.
. Facilities and Infrastructure: An assessment of the Y2K readiness of owned
and leased assets was substantially completed in January 1999. We are
currently confirming compliance status and upgrading components as
necessary.
Costs. While the Company has not yet completed its evaluation of the required
activities, the estimated costs of Y2K compliance efforts are not expected to
be material to the Company.
Risks. We believe the most reasonably likely worst-case Y2K scenarios include
the following:
. Customers could change their buying patterns in a number of ways, including
accelerating or delaying purchases of, or replacement of, our products and
services.
. We could experience a disruption in service to our customers as a result of
the failure of third-party products, including the following:
- Third-party products that are non-compliant and are incorporated into
our products could cause our products to fail;
- A breakdown in telephone, e-mail, voice mail, Web, or file transfer
programs could impact the responsiveness of our help desk;
- Y2K problems at a number of our suppliers including banks, telephone
companies, and transport and mail services could have a pervasive impact
on our business as a whole; and/or
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Aspect Telecommunications Corporation Annual Financial Report to Shareholders
- Product features that rely on date parameters, such as scheduled
operating procedures and operating reports, could malfunction.
Our products may not contain all of the necessary date code or other changes
to operate in the year 2000. Any failure of such products to perform could
result in the following:
. Claims and lawsuits against us;
. Significantly impaired customer satisfaction, resulting in customers
withholding cash owed to us and delaying or canceling orders; and/or
. Managerial and technical resources being diverted away from product
development and other business activities.
Any of the above stated consequences, in addition to others that we cannot yet
foresee, could have a significant adverse impact on our business, operating
results, or financial condition.
Contingency Plans. Until the Y2K compliance of our suppliers and the
compliance timetables of our customers become clearer, it is not practical to
develop comprehensive contingency plans. We presently anticipate that
contingency plans will be complete by October 1999. Once contingency plans are
implemented, however, we cannot be certain that such plans will prevent
significant Y2K problems from occurring.
Business Environment and Risk Factors
We operate in a rapidly changing environment that involves a number of risks,
some of which are beyond our control. You should read the cautionary
statements in this document, wherever they appear, as applying to all related
forward-looking statements. Our actual results may differ materially from our
projections due to, among others, the occurrence of the risks set forth below.
The risks set forth below, among others, could have a material adverse effect
on our business, operating results, or financial condition.
Our Company's Business Focus Is Changing. We are shifting our focus from
providing telecommunications equipment to becoming a leading supplier of
enterprise software for customer relationship solutions. Historically, we have
supplied the hardware, software, and associated support services for
implementing call center solutions. Our shift to an enterprise software
business model will require substantial change by the Company, potentially
resulting in significant disruption, including the following:
. Changes in management and technical personnel;
. Modifications to the pricing and positioning of our products, which could
impact revenues and operating results;
. Expanded or differing competition resulting from entry into the enterprise
software market; and/or
. An increasing percentage of our revenues likely to be subject to
recognition over longer periods.
If we are unable to successfully make this transition in a timely manner,
there could be a material adverse effect on our business, operating results,
or financial condition.
The Prices of Our Common Stock and Convertible Subordinated Debentures Are
Volatile. The price of our common stock and our convertible subordinated
debentures may be subject to significant volatility. You cannot consider our
past financial performance as a reliable indicator of performance for any
future period, and should not use historical data to predict future results or
trends. For any given quarter, a shortfall in our operating results from the
levels expected by securities analysts or others could immediately and
adversely affect the price of the convertible subordinated debentures and our
common stock. If we do not learn of such shortfalls until late in a fiscal
quarter, there could be an even more immediate and adverse effect on the price
of the convertible subordinated debentures and our common stock. In addition,
this volatility could be exacerbated by the relatively low trading volume of
our common stock and debentures. We operate in a rapidly changing high-
technology industry that exhibits significant stock market volatility. Should
the price of our securities decline rapidly, we may become subject to class
action securities litigation. Such litigation would be a costly diversion for
our management team.
F-7
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Aspect Telecommunications Corporation Annual Financial Report to Shareholders
Our Revenues and Operating Results Are Uncertain and May Fluctuate. Our
revenues may fluctuate significantly from period to period. There are many
reasons for this variability, including the following:
. The shift in our focus from providing telecommunications equipment to
becoming a leading supplier of enterprise software for customer
relationship solutions;
. Reduced demand for our products and services, as was the case in the
quarter ended December 31, 1998;
. A limited number of large systems or multisystem orders accounting for a
significant portion of product revenues in any particular quarter;
. The timing of consulting and systems integration projects;
. Dependence on new customers for a significant percentage of product
revenues;
. Fluctuations in the results of operations of existing operations, recently
acquired subsidiaries, newly established business units, or distributors of
our products or services;
. The mix of products and services and channels of distribution; and/or
. Changes in market growth rates for different products and services.
In addition, our products typically represent substantial capital commitments
by customers, involving a long sales cycle. As a result, customer purchase
decisions may be significantly affected by a variety of factors including
trends in capital spending for telecommunications or enterprise software for
customer relationship solutions, and market competition and the availability
or announcement of alternative technologies.
Our Revenues Are Dependent on a Small Number of Products. Sales and
installations of Aspect automatic call distributor systems account for a
substantial portion of net revenues. Demand for our products could be
adversely affected by the shift in our focus from providing telecommunications
equipment to becoming a leading supplier of enterprise software for customer
relationship solutions. Demand for our products could also be adversely
affected by failure to meet customer specifications or problems with system
performance, system availability, installation, or service delivery
commitments.
Technology Is Rapidly Changing. The market for our products and services is
subject to rapid technological change and new product introductions. Current
competitors or new market entrants may develop new, proprietary products with
features that could adversely affect the competitive position of our products.
We may not successfully anticipate market demand for new products or services,
or introduce them in a timely manner.
Our Market Is Intensely Competitive. We believe that the market for our
products is intensely competitive and that competition is likely to intensify.
Our competitors include the following:
. Providers of automatic call distributor systems and of private branch
exchange systems that include automatic call distributor features;
. Systems integrators;
. Telephone operating companies that market automatic call distributor
functionality;
. Participants in the front-office enterprise software applications market;
. Companies with technologies that independently balance calls across several
call centers; and/or
. Providers of interactive voice response systems.
As the hardware requirements for a traditional call center diminish, other
companies, including companies offering alternative or complementary
technologies, may obtain a significant position in the call transaction
processing market. For example, the anticipated convergence of voice and data
over a single network could result in increased competition for us.
In addition, many current and potential competitors, including Lucent,
Northern Telecom Limited, Rockwell International Corporation, and Siemens AG,
have longer operating histories, considerably greater resources, larger
customer bases, and a broader international presence than Aspect. We expect to
encounter significant competition from these and other sources.
F-8
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Aspect Telecommunications Corporation Annual Financial Report to Shareholders
Acquisitions and Investments May Be Difficult and Disruptive. In the past
several years, we have made a number of acquisitions and have made minority
equity investments in other companies. These acquisitions and investments can
be costly and disruptive, and we may be unable to successfully integrate a new
business or technology into our business. We may continue to make such
acquisitions and investments and there are a number of risks that future
transactions could entail. These risks include the following:
. Inability to successfully integrate or commercialize acquired technologies
or otherwise realize anticipated synergies or economies of scale on a
timely basis;
. Diversion of management attention;
. Disruption of our ongoing business;
. Inability to retain key technical and managerial personnel for both
companies;
. Inability to establish and maintain uniform standards, controls,
procedures, and processes;
. Potential permanent impairment of our equity investments;
. Governmental or competitive responses to the proposed transactions; and/or
. Impairment of relationships with employees, vendors, and/or customers
including, in particular, acquired original equipment manufacturer and
value-added reseller relationships.
In addition, acquisitions or investments we make may result in significant
write-offs, the creation of goodwill, or the issuance of additional equity or
debt securities.
We May Be Involved in Litigation. We may be involved in litigation for a
variety of matters, including intellectual property infringement, securities
law violations, employee claims, and/or product liability claims. Any claim
brought against the Company would likely have a financial impact, both because
of the effect on our common stock performance and the disruption and diversion
of management attention such a claim would cause. There has been extensive
litigation regarding patents and other intellectual property rights in our
industry, and we are periodically notified of such claims by third parties.
For example, in March 1997, Lucent filed a lawsuit alleging that we infringed
four of Lucent's U.S. patents. In its complaint, Lucent sought to enjoin us
from allegedly continuing to infringe the Lucent patents and sought an
unspecified amount of compensatory damages, treble damages for alleged willful
infringement, and interest, expenses, and attorneys' fees. On February 4,
1998, we filed a lawsuit asserting that Lucent infringed seven Aspect patents.
Lucent responded by filing for a declaratory judgment regarding these Aspect
patents. On February 27, 1998, we announced that we had entered into a patent
cross-license agreement with Lucent, under which each party agreed to dismiss
the patent lawsuits against each other, released each other from claims of
past infringement, and settled the patent disputes. Under the agreement, we
paid Lucent a one-time fee and, for the duration of the cross-license
agreement, will pay royalties that are not expected to be material to our
future results of operations. As part of the settlement, we recorded a non-
recurring charge of $14 million ($0.17 per diluted share).
We believe that participants in our industry intend to use patent portfolio
litigation to generate revenues. In the future, claims asserting infringement
of patent or proprietary rights may be asserted or prosecuted against us.
Although we periodically negotiate with third parties to establish patent
license or cross-license agreements, such negotiations may not succeed.
Moreover, even if we negotiate license agreements with a third party, future
disputes with such parties are possible. If we are unable to resolve an
intellectual property dispute through a license, settlement, or successful
litigation, we could be subject to damage assessments and be prevented from
making, using, or selling certain products or services.
In the future, we could become involved in other types of litigation, such as
shareholder lawsuits for alleged violations of securities laws, claims by
employees, and product liability claims. Any litigation could result in
substantial cost to us and diversion of our efforts.
Our Intellectual Property May Be Copied, Obtained, or Developed by Third
Parties. Our success depends in part upon our internally developed technology.
Despite the precautions we take to protect our intellectual property,
unauthorized third parties may copy or otherwise obtain and use our
technology. In addition, third parties may develop similar technology
independently.
F-9
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
Doing Business Internationally Involves Significant Risk. We market our
products and services worldwide and anticipate entering additional countries
in the future. For the years ended December 31, 1998, 1997, and 1996,
international sales made up approximately 32%, 28%, and 25% of our total
revenues, respectively. The financial resources required to enter new
international markets may be substantial, and international operations are
subject to additional risks, including the following:
. The cost and timing of the multiple governmental approvals and product
modifications required by many countries;
. Market acceptance;
. Exchange rate fluctuations;
. Delays in telecommunications deregulation;
. Difficulties in staffing and managing foreign subsidiary operations; and/or
. Potentially negative tax and foreign and domestic trade legislation, which
could result in the creation of trade barriers such as tariffs, duties,
quotas, and other restrictions.
If we fail to successfully enter certain major international markets, our
competitive position could be impaired, and we may be unable to compete on a
global scale.
We May Experience Difficulty Managing Our Growth. Our rapid growth is expected
to place a significant strain on our operational and financial systems. We are
upgrading these systems and may experience substantial disruption and incur
significant expenses during these transitions. We must carefully manage
accounts receivables to limit credit risk. We must also maintain inventories
at levels consistent with product demand. Inaccurate data (for example, credit
histories or supply/demand forecasts) could quickly result in excessive
balances or insufficient reserves.
We May Experience Difficulty Expanding Our Distribution Channels. We have
historically sold our products and services through our direct sales force and
a limited number of distributors. Changes in our product focus, customer
preferences, the competitive environment, or other factors may require us to
broaden original equipment manufacturer distribution channels, as well as
expand third-party distributor, electronic, and other alternative distribution
channels. We may not be successful in expanding these distribution channels.
We Are Dependent on Key Personnel. We depend on certain key management and
technical personnel and on our ability to attract and retain highly qualified
personnel in labor markets characterized by high turnover among, high demand
for, and limited supply of, qualified people. We have recently perceived
increased levels of turnover among such personnel, particularly among
technology companies located in the Silicon Valley area of California. For
example, the Company has recently undergone significant changes in senior
management and technical personnel and may experience additional changes as a
result of the Company's shift from providing telecommunications equipment to
becoming a supplier of enterprise software for customer relationship
solutions. These organizational changes may be disruptive to our operations
and may make retention of highly qualified personnel increasingly challenging.
Our Operations Are Geographically Concentrated. Significant elements of our
product development, manufacturing, information technology systems, corporate
offices, and support functions are concentrated at a single location in the
Silicon Valley area of California. In the event of a natural disaster, such as
an earthquake or flood, or localized extended outages of critical utilities or
transportation systems, we could experience a significant business
interruption.
Our Sources of Component Supply Are Limited. We depend on certain critical
components in the production of our products and services. Certain of these
components are obtained only from a single supplier and only in limited
quantities. In addition, some of our major suppliers use proprietary
technology that could require significant redesign of our products in the case
of a change in vendor. Further, suppliers could discontinue, or modify
components in a manner incompatible with our current use, and use
manufacturing processes and tools that cannot be easily migrated to other
vendors. If any of these vendors experience difficulty meeting our
requirements for components, we may be unable to meet development or delivery
commitments.
Our Debt and Debt Service Obligations Are Significant. The Company incurred
$150 million of principal indebtedness ($490 million principal at maturity)
from the sale of convertible subordinated debentures in August 1998. This new
debt resulted in a ratio of long-term debt to total shareholders' equity of
approximately 52% at December 31, 1998. As a
F-10
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Aspect Telecommunications Corporation Annual Financial Report to Shareholders
result of this sale, we have substantially increased our principal and
interest obligations. The degree to which we are leveraged could materially
and adversely affect our ability to obtain additional financing and could make
us more vulnerable to industry downturns and competitive pressures. Our
ability to meet our debt service obligations will depend on our future
performance, which will be subject to financial, business, and other factors
affecting our operations, many of which are beyond our control.
We May Have Problems Coping with Y2K Issues. We believe the most reasonably
likely worst-case Y2K scenarios include the following:
. Customers could change their buying patterns in a number of ways, including
accelerating or delaying purchases of, or replacement of, our products and
services.
. We could experience a disruption in service to our customers as a result of
the failure of third-party products, including the following:
- Third-party products that are non-compliant and are incorporated into
our products could cause our products to fail;
- A breakdown in telephone, e-mail, voice mail, Web, or file transfer
programs could impact the responsiveness of our help desk;
- Y2K problems at a number of our suppliers including banks, telephone
companies, and transport and mail services could have a pervasive impact
on our business as a whole; and/or
- Product features that rely on date parameters, such as scheduled
operating procedures and operating reports, could malfunction.
Our products may not contain all of the necessary date code or other changes
to operate in the year 2000. Any failure of such products to perform could
result in the following:
. Claims and lawsuits against us;
. Significantly impaired customer satisfaction, resulting in customers
withholding cash owed to us and delaying or canceling orders; and/or
. Managerial and technical resources being diverted away from product
development and other business activities.
Quantitative and Qualitative Disclosures About Financial Market Risk
We are exposed to financial market risk from fluctuations in foreign currency
exchange rates and interest rates. We manage our exposure to these and other
risks through our regular operating and financing activities and, when
appropriate, through our hedging activities. Our policy is not to use hedges
or other derivative financial instruments for speculative purposes. We deal
with a diversified group of major financial institutions to limit the risk of
nonperformance by any one institution on any financial instrument. Separate
from our financial hedging activities, material changes in foreign exchange
rates, interest rates, and, to a lesser extent, commodity prices could cause
significant changes in the costs to manufacture and deliver our products and
in our customers' buying practices. We have not substantially changed our risk
management practices during 1998 and do not currently anticipate significant
changes in financial market risk exposures in the near future that would
require us to change our risk management practices.
Foreign Currency Exchange. We use foreign currency exchange contracts as a
hedge against intercompany account balances. Market value gains and losses on
these contracts are substantially offset by fluctuations in the underlying
balances being hedged. At December 31, 1998, our primary net foreign currency
market exposures included deutsche marks, British pounds, and Dutch guilders.
A sensitivity analysis assuming a hypothetical 10% movement in foreign
exchange rates and interest rates applied to our hedging contracts and
underlying balances being hedged at December 31, 1998, indicated that these
market movements would not have a material effect on our business, operating
results, or financial condition. Actual gains or losses in the future may
differ materially from this analysis, depending on actual changes in the
timing and amount of interest rate and foreign currency exchange rate
movements and our actual balances and hedges. Foreign currency rate
fluctuations can impact the U.S. dollar translation of our foreign operations
in our consolidated financial statements. In 1998, these fluctuations have not
been material to our business, operating results, or financial condition.
F-11
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
Interest and Investment Income. Our interest and investment income is subject
to changes in the general level of U.S. interest rates. Changes in U.S.
interest rates affect the interest earned on our cash equivalents and short-
term investments. A sensitivity analysis assuming a hypothetical 10% movement
in interest rates applied to our investment balances at December 31, 1998,
indicated that such market movement would not have a material effect on our
business, operating results, or financial condition. Actual gains or losses in
the future may differ materially from this analysis, depending on our actual
balances and changes in the timing and amount of interest rate movements.
Debt and Interest Expense. The fair market value of our zero coupon
convertible subordinated debentures is sensitive to changes in interest rates
and to the prices of our common stock into which it can be converted. Because
the yield to maturity on the debentures is fixed, our interest expense on the
debt does not fluctuate with market rates. Based upon a hypothetical immediate
100-basis-point increase in interest rates at December 31, 1998, the market
value of the Company's fixed-rate long-term debt would decrease by
approximately 4%. Conversely, a 100-basis-point decrease in interest rates at
December 31, 1998, would increase the market value of the Company's fixed-rate
long-term debt outstanding by approximately 4%. Actual gains or losses in the
future may differ materially from this analysis, depending on actual changes
in the timing and amount of interest rate movements and our actual balances.
Adoption of the Euro
In 1998, the Company established a task force to address the issues raised by
the introduction of a European single currency (the Euro) for initial
implementation as of January 1, 1999, and during the transition period through
January 1, 2002. The Company's primary focus has been on the changes needed to
deal with a mix of Euro and local denomination transactions from January 1,
1999, the first day of the changeover. Product prices in local currencies will
be converted to the Euro as required. Management does not expect that
introduction of the Euro will result in any material increase in costs to the
Company, and all costs associated with the introduction of the Euro will be
expensed to operations as incurred. While the Company will continue to
evaluate the impact of the Euro over time, based on currently available
information, management does not believe that the introduction and use of the
Euro currency will materially affect the Company's foreign exchange and
hedging activities, nor will it have a material effect on the Company's
business, operating results, or financial condition.
F-12
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
------------ -------- --------
(in thousands, except share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 67,071 $106,046
Short-term investments 129,040 40,170
Accounts receivable (net of allowance for doubtful
accounts:
$4,415 in 1998 and $1,716 in 1997) 132,818 86,896
Inventories 18,916 12,306
Other current assets 14,820 20,413
-------- --------
Total current assets 362,665 265,831
Property and equipment, net 69,192 58,704
Intangible assets, net 119,052 42,654
Other assets 9,750 3,154
-------- --------
Total assets $560,659 $370,343
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,239 $ 9,401
Current portion of notes payable 3,300 6,399
Accrued compensation and related benefits 21,049 14,256
Accrued intellectual property settlement -- 14,000
Other accrued liabilities 34,729 36,335
Customer deposits and deferred revenue 27,171 15,626
-------- --------
Total current liabilities 104,488 96,017
Notes payable -- 6,531
Deferred taxes 4,270 --
Convertible subordinated debentures 153,744 --
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value:
2,000,000 shares authorized, none outstanding in 1998
and 1997 -- --
Common stock, $.01 par value:
100,000,000 shares authorized, shares outstanding:
49,309,383 in 1998 and 49,996,731 in 1997 142,132 144,524
Accumulated other comprehensive loss (420) (684)
Retained earnings 156,445 123,955
-------- --------
Total shareholders' equity 298,157 267,795
-------- --------
Total liabilities and shareholders' equity $560,659 $370,343
-------- --------
</TABLE>
See Notes to Consolidated Financial Statements.
F-13
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Aspect Telecommunications Corporation Annual Financial Report to Shareholders
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
------------------------ -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net revenues:
Product $342,903 $276,471 $230,539
Customer support 169,413 114,171 78,164
-------- -------- --------
Total net revenues 512,316 390,642 308,703
-------- -------- --------
Cost of revenues:
Cost of product revenues 108,397 89,529 77,374
Cost of customer support revenues 119,787 79,444 56,548
-------- -------- --------
Total cost of revenues 228,184 168,973 133,922
-------- -------- --------
Gross margin 284,132 221,669 174,781
Operating expenses:
Research and development 67,877 45,723 34,585
Selling, general and administrative 150,118 104,431 82,478
Purchased in-process technology 9,899 4,910 --
Intellectual property settlement -- 14,000 --
-------- -------- --------
Total operating expenses 227,894 169,064 117,063
-------- -------- --------
Income from operations 56,238 52,605 57,718
Interest and other income 7,317 7,966 4,884
Interest expense (4,306) (293) (2,774)
-------- -------- --------
Income before income taxes 59,249 60,278 59,828
Provision for income taxes 26,759 25,096 22,195
-------- -------- --------
Net income $ 32,490 $ 35,182 $ 37,633
======== ======== ========
Basic earnings per share $ 0.64 $ 0.71 $ 0.86
Weighted average shares outstanding 50,459 49,302 43,917
Diluted earnings per share $ 0.61 $ 0.67 $ 0.75
Weighted average shares outstanding--assuming
dilution 53,146 52,307 52,163
</TABLE>
See Notes to Consolidated Financial Statements.
F-14
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
-------------------- Retained Comprehensive
(in thousands, except Shares Amount Earnings Income (Loss) Total
share amounts) ---------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1,
1996 41,752,922 $ 62,082 $ 50,538 $ (335) $112,285
Comprehensive income:
Net income -- -- 37,633 -- 37,633
Net unrealized gain on
securities (net of tax
of $1,584) -- -- -- 2,432 2,432
Accumulated translation
adjustments (net of
tax of $255) -- -- -- 392 392
--------
Comprehensive income 40,457
--------
Adjustment in connection
with pooling of inter-
ests 490,836 378 602 -- 980
Issuance of common stock
under stock purchase
plans 178,426 3,149 -- -- 3,149
Issuance of common stock
under other stock plans 725,232 4,633 -- -- 4,633
Income tax benefit for
employee stock option
transactions -- 4,177 -- -- 4,177
Issuance of common stock
related to the
conversion of the
convertible
subordinated
debentures, net of
unamortized debt
issuance costs of
$1,233 5,659,164 53,767 -- -- 53,767
---------- -------- -------- ------ --------
BALANCES, DECEMBER 31,
1996 48,806,580 128,186 88,773 2,489 219,448
---------- -------- -------- ------ --------
Comprehensive income:
Net income -- -- 35,182 -- 35,182
Net unrealized loss on
securities (net of tax
of $825) -- -- -- (1,267) (1,267)
Accumulated translation
adjustments (net of
tax of $1,242) -- -- -- (1,906) (1,906)
--------
Comprehensive income 32,009
--------
Issuance of common stock
under stock purchase
plans 238,478 4,291 -- -- 4,291
Issuance of common stock
under other stock plans 774,364 5,242 -- -- 5,242
Income tax benefit for
employee stock option
transactions -- 2,195 -- -- 2,195
Issuance of common stock
related to acquisition 177,309 4,610 -- -- 4,610
---------- -------- -------- ------ --------
BALANCES, DECEMBER 31,
1997 49,996,731 144,524 123,955 (684) 267,795
---------- -------- -------- ------ --------
Comprehensive income:
Net income -- -- 32,490 -- 32,490
Net unrealized loss on
securities (net of tax
of $569) -- -- -- (873) (873)
Accumulated translation
adjustments (net of
tax of $741) -- -- -- 1,137 1,137
--------
Comprehensive income 32,754
--------
Issuance of common stock
under stock purchase
plans 172,435 3,078 -- -- 3,078
Issuance of common stock
under other stock plans 1,150,217 10,193 -- -- 10,193
Value of stock options
issued in Voicetek
acquisition -- 11,184 -- -- 11,184
Income tax benefit for
employee stock option
transactions -- 4,755 -- -- 4,755
Stock repurchased under
stock repurchase
program (2,010,000) (31,602) -- -- (31,602)
---------- -------- -------- ------ --------
BALANCES, DECEMBER 31,
1998 49,309,383 $142,132 $156,445 $(420) $298,157
---------- -------- -------- ------ --------
</TABLE>
See Notes to Consolidated Financial Statements.
F-15
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------ -------- -------- -------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 32,490 $ 35,182 $37,633
Reconciliation of net income to cash provided
by operating activities:
Depreciation and amortization 35,615 17,170 16,296
Purchased in-process technology 9,899 4,910 --
Gain on the sale of equity securities -- (2,070) --
Noncash interest expense on debentures 3,530 -- --
Deferred taxes 3,359 (9,284) 1,263
Changes in assets and liabilities, net of
effects from companies acquired in
1998 and 1997:
Accounts receivable (40,649) (34,865) (12,024)
Inventories (3,701) 2,904 (4,265)
Other current assets and other assets (2,630) 7,463 (5,454)
Accounts payable 5,309 (645) (3,966)
Accrued compensation and related benefits 10,311 5,406 67
Accrued intellectual property settlement (14,000) 14,000 --
Other accrued liabilities (6,949) 19,131 9,147
Customer deposits and deferred revenue 10,459 (3,624) 10,078
-------- -------- -------
Cash provided by operating activities 43,043 55,678 48,775
Cash flows from financing activities:
Repurchase of common stock (31,602) -- --
Other common stock transactions--net 13,271 9,533 7,782
Payments on notes payable (16,944) -- --
Net proceeds from issuance of debentures 145,708 -- --
-------- -------- -------
Cash provided by financing activities 110,433 9,533 7,782
Cash flows from investing activities:
Short-term investment purchases (266,511) (41,936) (93,174)
Short-term investment sales and maturities 177,641 69,781 96,531
Acquisition of intellectual property (3,284) (9,750) --
Property and equipment purchases (28,884) (24,922) (33,210)
Purchase of company, net of cash acquired (71,382) (278) --
-------- -------- -------
Cash used in investing activities (192,420) (7,105) (29,853)
Effect of exchange rate changes on cash and
cash equivalents (31) (56) (810)
-------- -------- -------
Increase (decrease) in cash and cash equiva-
lents (38,975) 58,050 25,894
Cash and cash equivalents:
Beginning of year 106,046 47,996 22,102
-------- -------- -------
End of year $ 67,071 $106,046 $47,996
-------- -------- -------
Supplemental disclosure of cash flow informa-
tion:
Cash paid for interest $ 503 $ 379 $ 3,127
Cash paid for income taxes $ 31,625 $ 24,047 $18,852
Supplemental schedule of noncash investing and
financing activities:
Stock options issued in conjunction with
acquisition of company $ 11,184 -- --
Income tax benefit from employee stock
transactions $ 4,755 $ 2,195 $ 4,177
Notes payable issued in connection with the
acquisition of intellectual property, net of
discount of $1,570 -- $ 8,430 --
Conversion of convertible subordinated
debentures into shares of common stock, net
of amortized debt issuance costs of $1,233 -- -- $53,767
</TABLE>
See Notes to Consolidated Financial Statements.
F-16
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization and Significant Accounting Policies
Organization
Aspect Telecommunications Corporation (Aspect or the Company) is a provider of
integrated software suites designed to enable companies to deliver responsive
and cost-effective customer service using call center solutions to interact
with their customers via voice, data, the Internet, and e-mail. Aspect also
consults, trains, and delivers system integration services to help
organizations effectively plan, integrate and manage call centers. The Company
markets its products and services worldwide to enterprises in a broad array of
industries including financial services, government, health care, retailing,
technology, telecommunications, and transportation.
Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity date of three months or less to be cash equivalents.
Investments
The Company has classified all of its marketable securities as available-for-
sale securities. While the Company may hold debt securities to maturity, the
Company has classified all debt securities as available-for-sale securities,
as the sale of such securities may be required prior to maturity to implement
management's strategies. The carrying value of these securities is adjusted to
fair market value, with unrealized gains and losses, net of deferred taxes,
being excluded from earnings and reported as a separate component of
accumulated other comprehensive income (loss) in the Consolidated Statements
of Shareholders' Equity. Cost is based on the specific identification method
for purposes of computing realized gains or losses.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives of two to thirty years.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful life.
Intangible Assets
Intangible assets of $119 million (net of accumulated amortization of $24
million) at December 31, 1998, consist of $52 million of goodwill and $67
million of other intangible assets. Intangible assets of $43 million (net of
accumulated amortization of $9 million) at December 31, 1997, consist of $8
million of goodwill and $35 million of other intangible assets. Other
intangible assets include purchased existing technology, purchased
intellectual property, assembled workforce, and customer relationships and
sales channels. These intangible assets are amortized on a straight-line basis
over periods of two to ten years (See Note 2).
Long-Lived Assets
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
Software Development Costs
The costs for the development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
costs would be
F-17
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
capitalized in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, "Accounting for the Costs of Software to be Sold, Leased or
Otherwise Marketed." Because the Company believes its current process for
developing software is essentially completed concurrently with the
establishment of technological feasibility, no costs have been capitalized to
date.
Revenue Recognition
Beginning in 1998, the Company adopted Statement of Position 97-2 "Software
Revenue Recognition" as amended by Statements of Position 98-4 and 98-9. The
effect of adoption did not have a material impact on the Company's financial
position or results of operations. The Company generally recognizes product
and license revenue upon delivery under an executed agreement, when the fee is
fixed and determinable, and when collection is probable. Customer support
revenues include ongoing maintenance contract revenues, which are recognized
ratably over the contract period, consulting and system integration revenues
which are recognized on a percentage of completion basis, and installation
revenues which are recognized at the time the service is provided. Revenues
are recorded net of sales returns and allowances. Product warranty costs are
accrued when revenue is recognized.
Customer Deposits and Deferred Revenue
Customer deposits primarily represent payments received from customers upon
product order. Deferred revenue primarily represents payments received from
customers for maintenance or products prior to revenue recognition.
Advertising Expenses
The Company expenses the costs of advertising, including promotional expenses,
as incurred. Advertising expenses for the years ended December 31, 1998, 1997,
and 1996, were $3.2 million, $1.4 million, and $1.6 million, respectively.
Income Taxes
The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting
for Income Taxes," which uses the asset and liability method.
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with APB No. 25, "Accounting for Stock Issued to
Employees."
Per Share Information
Basic net income per share is computed using the weighted average number of
common shares outstanding during the period. Diluted net income per share
further includes the dilutive impact of stock options and, for 1996, the
incremental shares related to convertible subordinated debentures that were
redeemed in October 1996. The shares issuable upon conversion of the 1998
debentures were not included in the computation as this inclusion would have
been anti-dilutive. See Note 13 for the calculation of basic and diluted
earnings per share for all periods presented.
Foreign Currency Translation and Foreign Exchange Contracts
Operations of the Company's foreign subsidiaries are measured using the local
currency as the functional currency for each subsidiary. Assets and
liabilities of the foreign subsidiaries are translated into U.S. dollars at
the exchange rates in effect as of the balance sheet dates, and results of
operations for each subsidiary are translated using the average rates in
effect for the periods presented. Translation adjustments are reported as a
separate component of accumulated other comprehensive income (loss) in the
Consolidated Statements of Shareholders' Equity. Foreign currency transaction
gains and losses, which are included in the Consolidated Statements of Income,
have not been material in any of the three years presented. The Company enters
into foreign exchange contracts which are designed to act as a hedge against
intercompany account balances. Market value gains and losses on these
contracts offset foreign exchange gains or losses on the balances being
hedged.
F-18
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain Significant Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and assumptions.
The Company sells its products primarily to large organizations in diversified
industries worldwide. The Company performs ongoing credit evaluations of its
customers' financial condition and generally does not require its customers to
provide collateral or other security to support accounts receivable. The
Company maintains an allowance for doubtful accounts based on an assessment of
the collectibility of such accounts.
The Company operates in a rapidly changing environment that involves a number
of risks, some of which are beyond the Company's control, that could have a
material adverse effect on the Company's business, operating results, or
financial condition. These risks include variability and uncertainty of
revenues and operating results; stock prices, product concentration,
technological change, and new products; changing business focus, competition;
intellectual property/litigation; management of growth; dependence on key
personnel; limited sources of component supply; licenses from third parties;
geographic concentration; acquisitions and investments; international
operations; regulatory requirements; debt and debt service; expansion of
distribution channels; and year 2000 compliance issues.
Reclassifications
Certain prior-year amounts have been reclassified to conform to the current-
year presentation.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) adopted SFAS No.
130, "Reporting Comprehensive Income," which requires that an enterprise
report, by major components and as a single total, the change in its net
assets during the period from non-owner sources. The Company adopted the
statement during the first quarter of 1998 and has presented comprehensive
income (loss) in the Consolidated Statements of Shareholders' Equity.
Accumulated other comprehensive loss at December 31, 1998 and 1997 is
comprised of accumulated net translation adjustments of ($814,000) and
($1,951,000), respectively, and accumulated net unrealized gains on available-
for-sale securities of $394,000 and $1,267,000, respectively.
New Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1). This statement provides guidance for an enterprise
on accounting for the costs of computer software developed or obtained for
internal use. SOP 98-1 is effective for fiscal years beginning after December
15, 1998. On a forward-looking basis, the Company anticipates that accounting
for transactions under SOP 98-1 will not have a material impact on the
Company's financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedging accounting
when certain conditions are met. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company does not
believe adoption of this statement will have a material impact on the
Company's financial position or results of operations.
Note 2: Business Combinations and Other Acquisitions
In May 1998, the Company acquired Voicetek Corporation (Voicetek), a leading
supplier of interactive voice response (IVR) and intelligent network (IN)
applications, based in Chelmsford, Massachusetts. The transaction was intended
to augment Aspect customer premise IVR product offerings, strengthen the
Company's position in the network service provider marketplace, and extend the
Company's original equipment manufacturer sales channel capabilities. The
transaction was accounted for as a purchase. The Company paid approximately
$72 million in cash for all Voicetek
F-19
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
common and preferred shares outstanding and converted all outstanding Voicetek
options into options to purchase approximately 450,000 shares of Aspect common
stock with a fair value of approximately $11 million plus transaction costs of
approximately $3 million, and assumed certain operating assets and
liabilities. The total purchase price and final allocation among the tangible
and intangible assets and liabilities acquired (including purchased in-process
technology) are summarized as follows:
<TABLE>
<CAPTION>
(in thousands except Amortization
years) Period (years)
<S> <C> <C> <C> <C>
Total purchase price: Purchase price allocation:
Total cash consideration $71,843 Tangible assets $ 9,135
Value of options assumed 11,184 Intangible assets:
Transaction costs 2,962 Developed and core technology 28,835 7
Assembled workforce 2,441 4
Customer relationships and sales channel 7,685 5
Goodwill 50,875 7
In-process technology 9,899 Expensed
Tangible liabilities (13,751)
Deferred tax liabilities (9,130)
------- --------
$85,989 $ 85,989
======= ========
</TABLE>
The above valuation is based on management's estimates of the after-tax net
cash flows, and gives explicit consideration to the SEC's views on purchased
in-process technology as set forth in its September 9, 1998 letter to the
American Institute of Certified Public Accountants. Specifically, the
valuation gave consideration to the following: (i) a fair market value premise
was employed, excluding any Aspect-specific considerations that would result
in estimates of investment value for the subject assets; (ii) comprehensive
due diligence concerning all potential intangible assets including
trademarks/tradenames, patents, copyrights, non-compete agreements, assembled
workforce, and customer relationships and sales channel; (iii) the value of
core technology was explicitly addressed, with a view toward ensuring that the
relative allocations to core technology and in-process technology were
consistent with the relative contributions of each to the final product; (iv)
the allocation to in-process technology was based on a calculation that
considered only the efforts completed as of the transaction date, and only the
cash flows associated with said completed efforts for one generation of the
products currently in process; and (v) it was assessed by the Company's
independent accountants and deemed reasonable in light of all the quantitative
and qualitative information available.
As noted above, Aspect recorded a one-time charge of $10 million in the second
quarter of 1998 for purchased in-process technology related to two development
projects that had not reached technological feasibility, had no alternative
future use, and for which successful development was uncertain. The conclusion
that each in-process development effort, or any material subcomponent, had no
alternative future use was reached in consultation with engineering personnel
from both Aspect and Voicetek.
The first of these projects is an IVR product that represents the next
generation of Voicetek's Generations platform, ported to a Windows NT
environment. The primary project tasks open include porting to Windows NT,
compliance to industry-standard protocols, and various feature enhancements.
At the time of acquisition, development remained on all tasks, and the
estimated cost to complete was approximately $1.5 million. The second
development project is a suite of personal communications services, which will
provide modular, integrated applications for voice-activated dialing, single
number service, personal assistant call screening, and unified message
control. At the time of acquisition, most of the remaining development effort
was focused on completing voice-activated dialing, additional coding for final
feature development, and further testing. The estimated cost to complete was
approximately $2 million. Management expects that both products being
developed will become available for sale in fiscal 1999; however, no
assurances can be given as to the availability, if any. Aspect will begin to
benefit from the acquired research and development related to these products
once they begin shipping. Failure to reach successful completion of these
projects could result in impairment of the associated capitalized intangible
assets and could require the Company to accelerate the time period over which
the intangibles are being amortized, which could have a material adverse
effect on the Company's business, financial condition, or results of
operations.
F-20
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant assumptions used to determine the value of in-process technology
included several factors. First, a forecast of net cash flows that were
expected to result from the development effort, using projections prepared by
Voicetek management, portions of which (1998 and 1999) were provided to
Aspect's Board of Directors. Second, a percentage complete for each project
(40% for the first project and 50% for the second project) estimated by
considering a number of factors, including the costs invested to date relative
to the expected total cost of the development effort and the amount of
progress completed as of the transaction date, on a technological basis,
relative to the overall technological achievements required to achieve the
intended functionality of the eventual product. The technological issues were
addressed by engineering representatives from both Aspect and Voicetek. Third,
discount rates of approximately 28% and 23%, respectively, computed under two
discount rate scenarios. The first discount rate was equivalent to the
discount rate that would be employed in a fair value analysis; i.e., one that
considers all cash flows associated with the project and resulting product,
and therefore represents a blended rate of all the risks associated with the
product. The second discount rate employed was moderately lower, and was
intended to be reflective of the fact that the "exclusion method' considers
only the completed portion of the development and cash flows associated with
the same. The results of each scenario were not materially different, and our
final allocation to in-process research and development was based on an
average of the results of the two scenarios for each project. As of December
31, 1998, technological feasibility had not been reached with respect to
either project and no significant departures from the assumptions included in
the valuation analysis have occurred.
The operating results of Voicetek have been included in the consolidated
statements of operations since the date of acquisition. Had the acquisition
taken place at the beginning of 1997, the unaudited pro forma results of
operations would have been as follows for the year ended December 31, (in
thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net revenues $520,383 $418,848
Net income $ 31,656 $ 15,421
Basic earnings per share $ 0.63 $ 0.31
Diluted earnings per share $ 0.60 $ 0.29
</TABLE>
The pro forma results of operations give effect to certain adjustments,
including amortization of purchased intangibles and goodwill, interest income
associated with funding the acquisition and entries to conform to the
Company's accounting policies. The $10 million charge for purchased in-process
technology has been excluded from the pro forma results as it is a material
non-recurring charge.
In October 1997, the Company acquired certain rights to two intellectual
property portfolios by paying $9.8 million in cash and issuing $10 million in
notes payable. In July and September 1998, the Company acquired remaining
rights under these intellectual portfolios (see Note 7).
In September 1997, the Company acquired Commerce Soft Inc. (Commerce Soft), a
developer of customer interaction technology. In connection with the
acquisition, the Company issued approximately 177,000 shares of common stock
for all the outstanding stock of Commerce Soft and assumed outstanding
Commerce Soft stock options, which were converted to options to purchase
approximately 21,000 shares of the Company's common stock. The transaction was
accounted for as a purchase that resulted in a one-time charge of $5 million
related to in-process technology. The remaining portion of the purchase price
that exceeded the net assets of Commerce Soft was recorded as intangible
assets and is being amortized over a period of two years. The operating
results of Commerce Soft have been included in the consolidated statements of
income since the date of acquisition. Pro forma results, as though Commerce
Soft were acquired at the beginning of 1996, are not disclosed as they are
insignificant to the 1997 and 1996 results of operations.
In October 1996, the Company acquired Prospect Software, Inc. (Prospect), by
issuing 280,000 shares of common stock for all of the outstanding stock of
Prospect. Prospect is a provider of application development tools for building
connectivity to a variety of call center systems and network-based computer
applications. The acquisition was accounted for as a pooling of interests.
In September 1996, the Company acquired Envoy Holdings Limited (Envoy) by
issuing approximately 211,000 shares of common stock for all of the
outstanding stock of Envoy. Envoy Systems Limited, the primary operating
subsidiary of
F-21
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Envoy, provides call center and telebusiness solutions to help improve
customer service through consulting services, software, and systems
integration. The acquisition was accounted for as a pooling of interests.
All financial data for 1996 reflects the acquisitions of Envoy and Prospect,
and all material intercompany transactions during such period have been
eliminated. As the historical operations of Envoy and Prospect were not
significant to any year presented, the Company's financial statements for
prior years have not been restated and the financial effect of the prior
years' results of operations of Envoy and Prospect has been accounted for as a
$602,000 increase to retained earnings in 1996.
Summarized results of operations of the separate companies for the nine months
ended September 30, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
Net Revenues Net Income
------------ ----------
<S> <C> <C>
Aspect $215,613 $26,646
Envoy 2,638 157
Envoy acquisition costs -- (374)
Prospect 2,378 883
Eliminations (475) (123)
-------- -------
$220,154 $27,189
-------- -------
</TABLE>
Note 3: Investments
Short-term investments at December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1998
-----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Corporate notes and bonds $ 52,111 $202 $(23) $ 52,290
Municipal obligations 38,868 266 -- 39,134
Government obligations 37,576 83 (43) 37,616
-------- ---- ---- --------
Total $128,555 $551 $(66) $129,040
-------- ---- ---- --------
<CAPTION>
1997
-----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Corporate notes and bonds $ 2,946 $ 2 $ (4) $ 2,944
Municipal obligations 32,760 29 (13) 32,776
Government obligations 2,455 2 -- 2,457
Foreign debt issues 1,991 2 -- 1,993
-------- ---- ---- --------
Total $ 40,152 $ 35 $(17) $ 40,170
-------- ---- ---- --------
</TABLE>
The maturity of short-term investments at December 31, 1998, was as follows
(in thousands):
<TABLE>
<CAPTION>
Market Value
--------------------
Within One to
One Year Three Years
-------- -----------
<S> <C> <C>
Corporate notes and bonds $6,824 $ 43,638
Municipal obligations -- 39,134
Goverment obligations -- 39,444
------ --------
Total $6,824 $122,216
------ --------
</TABLE>
F-22
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in other current assets at December 31, 1997, is an investment in
equity securities with a market value of $2,261,000 (cost of $169,000). During
1998 this investment in equity securities was donated in lieu of cash to fund
the Company's corporate giving program.
The Company realized a gain of $2,070,000 from the sale of appreciated equity
securities in 1997. Realized gains and losses were not significant in 1998 and
1996.
Note 4: Inventories
Inventories at December 31 consist of (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Raw materials $ 9,494 $ 5,331
Work in progress 4,829 3,624
Finished goods 4,593 3,351
------- -------
Total $18,916 $12,306
------- -------
</TABLE>
Note 5: Property and Equipment
Property and equipment at December 31 consist of (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Land $ 3,914 $ 3,912
Building and improvements 9,825 9,820
Computer and development equipment 76,186 55,669
Field spares 17,785 15,034
Office equipment 31,002 23,669
Leasehold improvements 19,051 12,064
-------- --------
Total 157,763 120,168
Accumulated depreciation and
amortization (88,571) (61,464)
-------- --------
Property and equipment, net $ 69,192 $ 58,704
-------- --------
</TABLE>
Note 6: Other Accrued Liabilities
Other accrued liabilities at December 31 consist of (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Accrued product warranty costs $ 3,347 $ 3,948
Accrued sales and use taxes 7,825 3,254
Income taxes payable -- 12,048
Other accrued expenses 23,557 17,085
------- -------
Total $34,729 $36,335
------- -------
</TABLE>
F-23
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7: Convertible Subordinated Debentures and Notes Payable
In August 1998, the Company completed a private placement of approximately
$150 million ($490 million principal amount at maturity) of zero coupon
convertible subordinated debentures due 2018. The debentures are priced at a
yield to maturity of 6% per annum and are convertible into Aspect common stock
anytime prior to maturity at a conversion rate of 8.713 shares per $1,000
principal amount. Holders can require Aspect to repurchase the debentures on
August 10, 2003, August 10, 2008, and August 10, 2013, for cash; or at the
election of Aspect, for Aspect common stock, if certain conditions are met.
The debentures are not secured by any Aspect assets and are subordinated in
right of payment to all of Aspect senior indebtedness and effectively
subordinated to the debt of Aspect's subsidiaries. On October 30, 1998, the
Company filed a registration statement with the Securities and Exchange
Commission to register the debentures and shares of Aspect Common Stock
issuable upon conversion for resale. Debt issuance costs of approximately $4.5
million, net of amortization of approximately $0.1 million, are included in
other assets at December 31, 1998, and are being amortized over the life of
the debt.
In October 1997, the Company acquired certain rights to two intellectual
property portfolios by paying $9.8 million in cash and issuing $10 million in
notes payable. These notes were stated net of $1.6 million in discounts with
imputed interest rates of 7%, and were payable in installments over the next
five to six years. In July and September 1998, the Company acquired remaining
rights under these intellectual portfolios by making additional payments of
$7.5 million and $3.8 million, respectively.
A note relating to the 1995 acquisition of TCS was payable on October 31,
1998. In November 1998, $1.2 million was paid on this note and the Company
intends to pay an additional $1.3 million in February 1999. Payment of the
remaining balance of $2 million on this note is being delayed pending
resolution of various tax matters relating to periods prior to the Company's
acquisition of TCS.
Note 8: Shareholders' Equity
Stock Option Plans
Under the Company's stock option plans, incentive and nonqualified stock
options may be granted to employees, officers, and directors. All options must
be granted at fair market value. Options granted to nondirectors become
exercisable as determined by the Board of Directors (generally over three or
four years) and typically expire seven to ten years after the date of grant.
Options granted to outside directors become exercisable over four years and
currently expire ten years after the date of grant.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise
Shares Price
---------- ---------
<S> <C> <C>
Outstanding, January 1, 1996 6,842,762 $ 8.75
Granted 2,554,000 $25.84
Canceled (525,089) $13.05
Exercised (723,724) $ 6.16
---------- ------
Outstanding, December 31, 1996 8,147,949 $14.06
---------- ------
Granted 2,256,584 $22.82
Canceled (684,971) $19.00
Exercised (771,030) $ 6.77
---------- ------
Outstanding, December 31, 1997 8,948,532 $16.52
---------- ------
Granted 7,549,395 $20.70
Canceled (4,819,269) $25.52
Exercised (1,149,816) $ 8.92
---------- ------
Outstanding, December 31, 1998 10,528,842 $15.55
---------- ------
</TABLE>
F-24
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (in years) Price Exercisable Price
--------------- ----------- --------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.16-$ 5.63 1,210,667 3.62 $ 3.34 1,208,592 $ 3.34
$ 6.50-$ 8.50 292,201 7.18 $ 7.88 156,464 $ 7.52
$ 8.66-$12.56 1,661,646 5.88 $10.41 1,296,556 $10.30
$12.75-$18.50 5,987,766 8.23 $17.65 880,232 $16.94
$19.63-$28.50 1,363,312 8.10 $24.92 423,280 $24.31
$28.88-$32.02 13,250 8.66 $30.04 2,806 $31.04
------------- ---------- ---- ------ --------- ------
$ 0.16-$32.02 10,528,842 7.28 $15.55 3,967,930 $11.05
------------- ---------- ---- ------ --------- ------
</TABLE>
At December 31, 1998, 2,166,450 shares were available for future grant under
the Company's stock option plans. At December 31, 1997 and 1996, options to
purchase 3,981,370 and 2,814,004 shares, respectively, were exercisable at
weighted-average exercise prices of $11.44 and $6.91, respectively.
Stock Option Exchange Program
In October 1998, the Company's Board of Directors approved an option exchange
program for all current outstanding options with exercise prices in excess of
$17.50 per share. Executive officers and non-employee directors of the Company
were not eligible to participate in the exchange program. Under this program,
eligible employees could elect to exchange existing options with higher
exercise prices for the same number of replacement options with an exercise
price equal to the closing sale price of the Company's common stock on
November 21, 1998. Replacement options were granted with a one-year exercise
prohibition period. The vesting schedule for unvested shares and the final
expiration date of the replacement options remained the same as the expiring
option. On November 21, 1998, 3.8 million options with exercise prices ranging
from $19.63 to $32.02 per share were exchanged for the same number of options
with an exercise price of $18.50 per share.
Stock Repurchase Program
In October 1998, the Company's Board of Directors approved a stock repurchase
program to acquire up to 5 million shares of its common stock. The shares may
be purchased in the open market or through private transactions. The number of
shares to be purchased and the timing of purchases will be based on several
conditions, including the price of the Company's common stock, general market
conditions and other factors. No time limit was set for the completion of the
program. As of December 31, 1998, 2,010,000 shares have been repurchased at an
average acquisition price of $15.72. The Company has retired all shares
repurchased during the year.
Employee Stock Purchase Plan
In April 1990, the Board of Directors established the 1990 Employee Stock
Purchase Plan, under which 3,100,000 common shares are authorized for sale to
qualified employees through payroll withholdings at a price equal to 85% of
the lower of the fair market value as of the beginning or end of the offering
period. At December 31, 1998, 2,033,941 shares had been issued under this
plan.
Shares Reserved for Issuance
At December 31, 1998, the Company had reserved shares of common stock for
issuance as follows:
<TABLE>
<S> <C>
Stock option plans 12,695,292
Stock purchase plan 1,066,059
Other stock plans 7,430
----------
Total 13,768,781
----------
</TABLE>
F-25
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
The Company utilizes stock options to attract new employees and retain
existing employees. Such options provide the grantee an opportunity to
purchase the Company's common stock at the fair market value of such shares as
of the date of grant, pursuant to a vesting period. The options expire based
on the earlier of the employee's termination date or typically ten years from
the grant date. In 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). SFAS 123 requires that the fair value of
stock-based awards to employees be calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which differ significantly from the Company's stock-based
awards. These models also require highly subjective assumptions, including
future stock price volatility and expected time until exercise, which greatly
affect the calculated values. Accordingly, management believes that the pro
forma amounts below, which are based on the methodology required under SFAS
123, do not necessarily provide a reliable single measure of the fair value of
the Company's stock-based awards.
SFAS 123 encourages, but does not require, companies to record compensation
cost for stock-based awards at fair value. Under this method, compensation
cost is measured based on the fair value of the stock award when granted, and
is recognized as an expense over the service period, which is usually the
vesting period. The Company accounts for stock-based awards using the
intrinsic value method prescribed in APB No. 25, "Accounting for Stock Issued
to Employees." Accordingly, no compensation cost has been recognized for its
stock option plans and its stock purchase plan. Had the compensation cost for
the Company's stock-based awards been determined based on the fair value at
the grant dates for awards under those plans beginning in 1995 consistent with
the method of SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below (in thousands,
except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C> <C>
Net income As reported $32,490 $35,182 $37,633
Pro forma $15,632 $21,267 $27,849
Basic earnings per share As reported $ 0.64 $ 0.71 $ 0.86
Pro forma $ 0.31 $ 0.43 $ 0.63
Diluted earnings per share As reported $ 0.61 $ 0.67 $ 0.75
Pro forma $ 0.29 $ 0.41 $ 0.56
</TABLE>
The initial impact of adopting SFAS 123 disclosures may not be representative
of the effect on pro forma net income and earnings per share in future years
because the impact of outstanding nonvested stock options granted prior to
1995 has been excluded from the pro forma calculations, options vest over
several years, and additional option grants may be made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions: expected life, seven months following vesting; stock volatility,
approximately 63% in 1998, and 50% in 1997 and 1996; risk-free interest rate,
approximately 5% in 1998, and 6% in 1997 and 1996; and no dividends during the
expected term. The Company's calculations are based on a multiple option
valuation approach and forfeitures are recognized as they occur. The weighted-
average fair value of options granted during 1998, 1997, and 1996 was
approximately $8.50, $9.50, and $10.00, respectively.
The fair value of the employees' purchase rights under the Employee Stock
Purchase Plan was estimated using the Black-Scholes model with the following
weighted-average assumptions: expected life, six months; expected volatility,
72% in 1998 and 1997, and 54% in 1996; risk-free interest rate, approximately
5% in 1998, and 6% in 1997 and 1996; and no dividends during the expected
term. The weighted-average fair value of purchase rights granted in 1998,
1997, and 1996, was approximately $9.00, $9.00, and $6.00, respectively.
F-26
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9: Income Taxes
Tax provisions for the years ended December 31 consist of (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $17,882 $27,183 $16,303
State 3,533 4,855 2,371
Foreign 1,985 2,342 2,258
------- ------- -------
Subtotal 23,400 34,380 20,932
Deferred:
Federal 3,159 (8,217) 1,294
State 200 (1,067) (31)
------- ------- -------
Subtotal 3,359 (9,284) 1,263
------- ------- -------
Total $26,759 $25,096 $22,195
------- ------- -------
</TABLE>
Income before income taxes for the years ended December 31 consists of (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Domestic $57,348 $53,095 $53,707
Foreign-net 1,901 7,183 6,121
------- ------- -------
Total $59,249 $60,278 $59,828
------- ------- -------
</TABLE>
A reconciliation of the statutory federal income tax rate and the effective
tax rate as a percentage of income before income taxes for the years ended
December 31 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate 35.0% 35.0% 35.0%
State income taxes--net
of federal effect 4.1 4.1 3.8
Nondeductible goodwill
amortization 2.6 -- --
Research and development
tax credits (1.5) (1.6) (0.8)
Tax exempt investment
income (1.2) (1.0) (0.7)
Foreign sales
corporation benefit (1.0) (0.8) (0.5)
Other 0.7 2.8 0.3
---- ---- ----
Subtotal 38.7 38.5 37.1
Nondeductible charge for
purchased in-process
technology 6.5 3.1 --
---- ---- ----
Total 45.2% 41.6% 37.1%
---- ---- ----
</TABLE>
F-27
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating
loss carryforwards. Significant components of the Company's deferred income
tax assets and liabilities as of December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Deferred tax assets:
Accruals $ 9,510 $12,258
Depreciation and amortization 3,678 2,992
Net operating loss carryforward of purchased
company 5,500 --
Other deferred tax assets 473 618
-------- -------
Total deferred tax assets $ 19,161 $15,868
-------- -------
Deferred tax liabilities:
Unrealized gains on investments $ (257) $ (793)
Nondeductible intangible amortization (13,641) --
Other deferred tax liabilities (873) (136)
-------- -------
Total deferred tax liabilities $(14,771) $ (929)
-------- -------
Net deferred tax asset $ 4,390 $14,939
-------- -------
</TABLE>
At December 31, 1998 and 1997, other current assets included net current
deferred tax assets of $8.7 million and $14.9 million, respectively. At
December 31, 1998, the Company had approximately $15.7 million of U.S. net
operating loss carryovers from its acquisition of Voicetek. These net
operating losses will expire beginning in 2004. The amount of net operating
losses relating to the Voicetek acquisition that can be utilized in any given
year to reduce certain future taxable income may be limited.
Note 10: Commitments
Certain manufacturing and administrative facilities are leased under operating
leases through 2013. Certain leases provide for escalating rental payments
over the lease period, and rent expense for such leases is recognized on a
straight-line basis over the terms of the leases. Rent expense was $10.4
million, $6.4 million, and $5.6 million, in 1998, 1997, and 1996,
respectively.
Future minimum payments under the Company's operating leases at December 31,
1998, are (in thousands):
<TABLE>
<S> <C>
1999 $10,906
2000 10,125
2001 7,859
2002 6,174
2003 4,660
2004 and thereafter 33,878
-------
Total $73,602
-------
</TABLE>
Note 11: Litigation
The segment of the telecommunications market that includes the Company's
products has been characterized by extensive litigation regarding patents and
other intellectual property rights. As is common in the telecommunications
industry, the Company has been in the past and may in the future be notified
of claims that its products or services are subject to patents or other
proprietary rights of third parties. While the Company is not aware that its
products or processes infringe any valid third-party patents or proprietary
rights, there can be no assurance that infringement or invalidity claims (or
claims for indemnification resulting from infringement claims) will not be
asserted or prosecuted against the Company. Periodically, the Company
negotiates with third parties to establish patent license or cross-license
agreements. There can be no assurance that such negotiations will result in
the Company obtaining a license on
F-28
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
satisfactory terms or at all. Moreover, license agreements with third parties
may not include all intellectual property rights that may be issued to or
owned by the licensors, and thus future disputes with these companies are
possible. In the event an intellectual property dispute is not settled through
a license, litigation could ensue. Any litigation, or interference proceedings
that may be declared by the United States Patent and Trademark Office to
determine the priority of inventions, could result in substantial expense to
the Company and significant diversion of effort by the Company's technical and
managerial personnel. An adverse determination in such litigation or
proceeding, could prevent the Company from making, using, or selling certain
of its products, and subject the Company to damage assessments, all of which
could have a material adverse effect on the Company's business, operating
results, or financial condition.
On March 5, 1997, Lucent filed a lawsuit in the United States District Court
for the Eastern District of Pennsylvania alleging that the Company infringed
four of Lucent's U.S. patents (the Lucent Patents). In its complaint, Lucent
sought to enjoin the Company from allegedly continuing to infringe the Lucent
Patents and sought an unspecified amount of compensatory damages; treble
damages for alleged willful infringement; and interest, expenses, and
attorneys' fees. On February 4, 1998, the Company filed a complaint in the
United States District Court, Northern District of California, asserting that
Lucent infringed seven Aspect patents. Lucent responded by filing for a
declaratory judgment regarding these Aspect patents in the United States
District Court, Northern District of Texas. On February 27, 1998, the Company
announced that it entered into a patent cross-license agreement with Lucent,
under which each party agreed to dismiss their patent lawsuits against each
other, released each other from claims of past infringement, and settled their
patent disputes. Under the agreement, Aspect paid Lucent a one-time fee and,
for the duration of the cross-license agreement, will pay royalties that are
not expected to be material to Aspect's future results of operations. As part
of the settlement, Aspect recorded a non-recurring charge of $14 million
($0.17 per diluted share) for the quarter and year ended December 31, 1997.
In addition, the Company is from time to time involved in litigation or claims
that arise in the normal course of business. The Company does not expect that
any current litigation or claims will have a material adverse effect on the
Company's business, operating results, or financial condition.
Note 12: Employee Benefit Plan
Qualified employees are eligible to participate in the Company's 401(k) tax-
deferred savings plan. Participants may contribute up to 17% of their eligible
earnings (up to a maximum contribution of $10,000 in 1998) to this plan, for
which the Company, at the discretion of the Board of Directors and within
certain limitations, may make matching contributions, in addition to
discretionary contributions to cover the administrative costs of the plan.
Contributions made by the Company to the plan were $2.3 million in 1998 and
1997, and $1.8 million in 1996.
Note 13: Earnings Per Share
Basic and diluted EPS for the years ended December 31 are calculated as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Basic EPS:
Weighted average shares outstanding 50,459 49,302 43,917
Net income $32,490 $35,182 $37,633
------- ------- -------
Basic EPS $ 0.64 $ 0.71 $ 0.86
------- ------- -------
Diluted EPS:
Weighted average shares outstanding 50,459 49,302 43,917
Dilutive effect of options 2,687 3,005 3,780
Weighted average shares issuable upon assumed
conversion of debt -- -- 4,466
------- ------- -------
Total 53,146 52,307 52,163
Net income $32,490 $35,182 $37,633
Interest expense during the period on convertible
subordinated debentures, net of tax -- -- 1,460
------- ------- -------
Net income adjusted for diluted calculation $32,490 $35,182 $39,093
------- ------- -------
Diluted EPS $ 0.61 $ 0.67 $ 0.75
------- ------- -------
</TABLE>
F-29
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1998, the Company had common stock options outstanding which
could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted earnings per share as the common
stock options' exercise prices were greater than the average market price of
the common shares for the period. For the years ended December 31, 1998, 1997
and 1996, 2.9 million, 2.7 million and 0.3 million shares, respectively, of
such common stock were excluded from the diluted earnings per share
computations. Additionally, as of December 31, 1998, there were 4.3 million
shares of common stock issuable upon conversion of debentures. The weighted
average of these shares (1.7 million shares), and the effect of accrued
interest expense on the debentures was not included in the calculation of
diluted earnings per share for the year ended December 31, 1998 because the
inclusion would have been anti-dilutive.
Note 14: Segment, Geographic and Customer Information
The Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information" (SFAS 131), at December 31, 1998. SFAS 131
establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas and major customers. Under SFAS 131, the Company's operations
are reported as one operating segment. For the year ended December 31, 1998,
the Company recorded revenue from customers throughout the United States and
Canada; Europe; Latin America and Asia Pacific.
The following presents net revenues for the years ended December 31, 1998,
1997, and 1996 and long-lived assets as of December 31, 1998, 1997, and 1996
by geographic area (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
United States $438,833 $337,020 $270,059
United Kingdom 82,678 60,876 45,221
Other International (<10%) 60,468 43,514 24,070
Eliminations (69,663) (50,768) (30,647)
-------- -------- --------
Total Consolidated $512,316 $390,642 $308,703
-------- -------- --------
Long-lived assets:
United States $199,044 $ 98,979 $ 77,687
United Kingdom 9,778 6,605 6,490
Other International (<10%) 6,765 4,494 3,188
Eliminations (17,593) (5,566) (3,396)
-------- -------- --------
Total Consolidated $197,994 $104,512 $ 83,969
-------- -------- --------
</TABLE>
Net revenues are based on the country from which customers are invoiced and
revenue is recognized. No single customer accounted for 10% or more of net
revenues in 1998, 1997, or 1996.
Note 15: Financial Instruments Fair Value Disclosure
The following summary disclosures are made in accordance with the provisions
of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" (SFAS
107), which requires the disclosure of fair value information about both on-
and off-balance sheet financial instruments where it is practicable to
estimate the value. Fair value is defined in SFAS 107 as the amount at which
an instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale.
F-30
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Because SFAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements, any aggregation of the fair
value amounts presented would not represent the underlying value of the
Company. Amounts at December 31 consist of (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $67,071 $67,071 $106,046 $106,046
Short-term investments 129,040 129,040 40,170 40,170
Investments in equity securities 3,600 3,600 2,261 2,261
Commitments:
Foreign exchange contracts $64,943 $66,018 $ 11,063 $ 11,059
</TABLE>
At December 31, 1998 and 1997, the Company had approximately $134 million and
$30 million respectively, of outstanding foreign exchange sale contracts
(primarily British pound and deutsche mark). Of these open sale contracts,
approximately $65 million and $11 million were hedges against intercompany
balances at December 31, 1998 and 1997 respectively, and the remaining sale
contracts of approximately $69 million and $19 million respectively, were
offset by purchase contracts with common expiration dates in January of the
following year. Unrealized gains or losses on foreign exchange contracts were
not significant at December 31, 1998 and 1997. Other than the items disclosed
in the previous table, the Company has not entered into any other material
financial derivative instruments.
The fair value of cash and cash equivalents reported in the balance sheets
approximate their carrying value. The fair value of short-term investments,
investment in equity securities, and foreign exchange contracts is based on
quoted market prices.
F-31
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Aspect Telecommunications
Corporation:
We have audited the accompanying consolidated balance sheets of Aspect
Telecommunications Corporation and its subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Aspect Telecommunications
Corporation and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
January 18, 1999
F-32
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
QUARTERLY FINANCIAL DATA (unaudited)
<TABLE>
<CAPTION>
1998 QUARTERS ENDED 1997 QUARTERS ENDED
-------------------------------------- ------------------------------------
(in thousands, except DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31
per share data) -------- -------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $134,816 $137,952 $126,091 $113,457 $106,290 $99,192 $93,542 $91,618
Gross margin 71,640 77,809 69,768 64,915 60,882 56,210 53,390 51,187
(% of net revenues) 53% 56% 55% 57% 57% 57% 57% 56%
Income from operations 9,172 17,938 8,127 21,001 5,899 12,845 17,020 16,841
Net income $ 5,662 $ 11,242 $ 1,689 $ 13,897 $ 4,371 $ 7,009 $12,576 $11,226
(% of net revenues) 4% 8% 1% 12% 4% 7% 13% 12%
Diluted earnings per
share $ 0.11 $ 0.21 $ 0.03 $ 0.26 $ 0.08 $ 0.13 $ 0.24 $ 0.21
Quarterly stock price:
High $ 24.00 $ 36.25 $ 31.25 $ 30.38 $ 26.94 $ 26.25 $ 24.63 $ 33.63
Low $ 11.63 $ 23.81 $ 23.75 $ 21.00 $ 18.88 $ 17.88 $ 16.50 $ 18.75
Income from operations and net income in Q2 1998 include a $10 million ($0.19
per diluted share) non-recurring charge for purchased in-process technology.
Income from operations and net income in Q4 1997 include a $14 million ($0.17
per diluted share) non-recurring charge for an intellectual property
settlement. Income from operations and net income in Q3 1997 include a $5
million ($0.09 per diluted share) non-recurring charge for purchased in-
process technology. Net income in Q2 1997 includes a non-recurring $2 million
($0.02 per diluted share) gain on the sale of appreciated equity securities.
<CAPTION>
1998 QUARTERS ENDED 1997 QUARTERS ENDED
-------------------------------------- ------------------------------------
(in thousands, except DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31
per share data) -------- -------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income excluding
non-recurring items $ 5,662 $ 11,242 $ 11,588 $ 13,897 $ 12,981 $11,919 $11,303 $11,226
Diluted earnings per
share excluding non-
recurring items $ 0.11 $ 0.21 $ 0.22 $ 0.26 $ 0.25 $ 0.23 $ 0.22 $ 0.21
</TABLE>
F-33
<PAGE>
Aspect Telecommunications Corporation Annual Financial Report to Shareholders
CORPORATE INFORMATION
EXECUTIVE OFFICERS* BOARD OF DIRECTORS ANNUAL MEETING
James R. Carreker James R. Carreker Aspect
Chairman, President, Chairman, President, and Telecommunications
and Chief Executive Chief Executive Officer Corporation's annual
Officer meeting of shareholders
Aspect Telecommunications will be held at
Deborah E. Barber Senior Corporation 4:00 p.m. on April 29,
Vice President, Human 1999, at the Company's
Resources and Corporate Debra J. Engel Executive headquarters.
Services Advisor3Com Corporation
CORPORATE HEADQUARTERS
Robert A. Blatt Vice Norman A. Fogelsong
President, Corporate General Aspect
Development PartnerInstitutional Telecommunications
Venture Partners 1730 Fox Drive
Kathleen M. Cruz Senior San Jose, California
Vice President, James L. Patterson 95131-2312
Information Technology Management Consultant Tel: + 1 (408) 325-2200
and Chief Information 1 (800) 226-8441
Officer John W. Peth President Fax: + 1 (408) 325-2260
and Chief Executive www.aspect.com
Beatriz V. Infante OfficerBusiness Resource
Executive Vice President, Group SALES OFFICES AND
Products and Services DISTRIBUTORS NORTH
SECRETARY AMERICA
Eric J. Keller Senior Vice
President, Finance and Craig W. Johnson Atlanta, Georgia
Chief Financial Officer Director, Venture Law Chicago, Illinois
Group Dallas, Texas
* As defined by Section Greenbelt, Maryland
16 of the Securities INDEPENDENT AUDITORS Irvine, California
and Exchange Act of Mexico City, Mexico
1934 Deloitte & Touche LLP San Jose, California
San Jose, California Seattle, Washington
OTHER OFFICERS Toronto, Ontario,
LEGAL COUNSEL Canada
Rod D. Butters Vice White Plains, New York
President, Product Venture Law Group
Strategy and Marketing Menlo Park, California EUROPE
Sheldon L. Dinkes Vice TRANSFER AGENT Amsterdam, The
President, OEM/Intelligent Netherlands
Network Sales Boston EquiServe, Brussels, Belgium
L.P.Boston, Copenhagen, Denmark
Clyde D. Foster Vice Massachusetts Dublin, Ireland
President, Global Solution Dusseldorf, Germany
Services INVESTOR RELATIONS Frankfurt, Germany
London, England
Paul J. Gagne Vice Additional copies of Manchester, England
President, Strategic this Annual Report and Paris, France
Architecture and other financial Zurich, Switzerland
Technologies information are
available without charge ASIA-PACIFIC
Frederick H. Harder Vice upon request to:
President, Product Hong Kong
Readiness andOperations Investor Relations Singapore
Department Sydney, Australia
Linda F. Johnstone Vice Tokyo, Japan
President, Europe, Middle Aspect
East and Africa Telecommunications TCS MANAGEMENT GROUP,
1730 Fox Drive INC.
Mark J. Meltzer Vice
President, General Counsel San Jose, California London, England
95131-2312 Nashville, Tennessee
John D. Meyers Vice
President, Platforms and Telephone: +1 (408) 325- (c) 1999 Aspect
Systems Software 2629 Telecommunications.
Aspect, the Aspect
Ronald W. Sandstrom Vice E-mail: logo, and Affinity
President, Customer Self- [email protected] Alliance are
Service Applications trademarks or
STOCK LISTING registered trademarks
D. Scott Sibuns Vice of Aspect
President, Call Center Aspect Telecommunications
Applications Telecommunications Corporation in the
Corporation's common United States and/or
R. Dixon (Dirk) Speas, Jr. stock is traded on the other countries. All
Vice President, Asia- Nasdaq Stock Market other product or
Pacific and Latin America under the symbol "ASPT." service names
As of December 31, 1998, mentioned in this
there were approximately document may be
David M. Yoffie Vice 920 shareholders of trademarks of the
President, Manufacturing record of the Company's companies with which
and Logistics common stock. they are associated.
DIVIDEND POLICY
The Company has never
paid cash dividends on
its capital stock. The
Company currently
anticipates that it will
retain all available
funds for use in its
business.
<PAGE>
1042-PS-99
<PAGE>
DETACH HERE
[LOGO] ASPECT
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
ASPECT TELECOMMUNICATIONS CORPORATION
1999 ANNUAL MEETING OF SHAREHOLDERS
The undersigned shareholder of Aspect Telecommunications Corporation, a
California corporation, hereby acknowledges receipt of the Notice of Annual
Meeting of Shareholders and the Proxy Statement, each dated March 23, 1999, and
hereby appoints James R. Carreker, Eric J. Keller and Craig W. Johnson, or any
of them, proxies and attorneys-in-fact, with full power to each of substitution,
on behalf and in the name of the undersigned, to represent the undersigned at
the 1999 Annual Meeting of Shareholders of Aspect Telecommunications Corporation
to be held on April 29, 1999 at 4:00 p.m. at the Company's facilities located at
1730 Fox Drive, San Jose, California, and at any adjournment(s) thereof, and to
vote all shares of Common Stock that the undersigned would be entitled to vote
if then and there personally present, on the matters set forth on the reverse
side.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR THE ELECTION OF ALL LISTED DIRECTORS, FOR THE
APPROVAL OF THE 1999 EQUITY INCENTIVE PLAN, FOR THE AMENDMENT TO THE 1990
EMPLOYEE STOCK PURCHASE PLAN, FOR THE RATIFICATION OF THE APPOINTMENT OF
DELOITTE & TOUCHE LLP AS INDEPENDENT AUDITORS, AND AS SAID PROXIES DEEM
ADVISABLE ON SUCH OTHER MATTERS AS MAY COME BEFORE THE MEETING.
- --------------- ---------------
SEE REVERSE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE
SIDE SIDE
- --------------- ---------------
<PAGE>
[LOGO] ASPECT
c/o EquiServe
P.O. Box 8040
Boston, MA 02268-8040
DETACH HERE
<TABLE>
<S> <C>
[X] Please mark
votes as in
this example.
FOR AGAINST ABSTAIN
1. Election of Directors (page 2). 2. Approval of the 1999 Equity Incentive Plan [_] [_] [_]
and the reservation of 1,500,000 shares of
Nominees: James R. Carreker; Craig A. Conway; the Company's Common Stock for issuance
Debra J. Engel; Norman A. Fogelsong; thereunder (page 4).
John W. Peth. 3. Approval of an amendment to the 1990 [_] [_] [_]
Employee Stock Purchase Plan to increase
FOR WITHHELD the number of shares of Common Stock
ALL [_] [_] FROM ALL reserved for issuance thereunder by
NOMINEES NOMINEES 500,000 shares (page 7).
4. Ratification of Deliotte & Touche LLP as [_] [_] [_]
[_] ___________________________________________ independent auditors (page 10).
For all nominee(s) except as noted above.
and, in their discretion, upon such other matter or matters which
may properly come before the meeting and any adjournment(s) thereof.
MARK HERE IF YOU PLAN TO ATTEND THE MEETING [_]
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [_]
(This Proxy should be marked, dated, signed by the shareholder(s)
exactly as his or her name appears hereon, and returned promptly in
the enclosed envelope. Persons signing in a fiduciary capacity
should so indicate. If shares are held by joint tenants or as
community property, both should sign.)
Signature:______________________________ Date: ______________ Signature:______________________________ Date: ______________
</TABLE>
