UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
| For the quarterly period ended March 31, 2003 |
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
| For the transition period from to |
Commission file number: 0-18391
ASPECT COMMUNICATIONS CORPORATION
| California | 94-2974062 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1320 Ridder Park Drive, San Jose, California 95131-2312
(Address of principal executive offices and zip code)
Registrant’s telephone number: (408) 325-2200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No o
The number of shares outstanding of the Registrant’s Common Stock, $.01 par value, was 53,668,047 at April 30, 2003.
ASPECT COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
| Page Number | ||||
| Part I: | Financial Information | |||
| Item 1: | Financial Statements (unaudited) | |||
| Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002 | 3 | |||
| Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2002 | 4 | |||
| Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 | 5 | |||
| Notes to Condensed Consolidated Financial Statements | 6 | |||
| Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 | ||
| Item 3: | Quantitative and Qualitative Disclosures About Market Risk | 24 | ||
| Item 4: | Controls and Procedures | 24 | ||
| Part II: | Other Information | |||
| Item 1: | Legal Proceedings | 25 | ||
| Item 2: | Changes in Securities and Use of Proceeds | 25 | ||
| Item 4: | Submission of Matters to a Vote of Security Holders | 25 | ||
| Item 6: | Exhibits and Reports on Form 8-K | 25 | ||
| Signature | 26 |
ASPECT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share amounts-unaudited)
| March 31, 2003 | December 31, 2002 | |||||||||||
ASSETS |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 112,746 | $ | 66,051 | ||||||||
Short-term investments |
87,810 | 80,049 | ||||||||||
Accounts receivable, net |
41,845 | 51,145 | ||||||||||
Inventories |
9,907 | 6,839 | ||||||||||
Other current assets |
15,294 | 13,664 | ||||||||||
Total current assets |
267,602 | 217,748 | ||||||||||
Property and equipment, net |
81,128 | 86,528 | ||||||||||
Intangible assets, net |
8,518 | 9,790 | ||||||||||
Goodwill, net |
2,707 | 2,707 | ||||||||||
Other assets |
10,597 | 8,949 | ||||||||||
Total assets |
$ | 370,552 | $ | 325,722 | ||||||||
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY |
||||||||||||
Current liabilities: |
||||||||||||
Convertible subordinated debentures |
$ | 121,178 | $ | 124,983 | ||||||||
Short-term borrowings |
7,020 | 7,186 | ||||||||||
Accounts payable |
5,907 | 6,798 | ||||||||||
Accrued compensation and related benefits |
15,707 | 16,051 | ||||||||||
Other accrued liabilities |
59,515 | 67,370 | ||||||||||
Deferred revenues |
41,631 | 30,220 | ||||||||||
Total current liabilities |
250,958 | 252,608 | ||||||||||
Long term borrowings |
39,500 | 41,243 | ||||||||||
Other long-term liabilities |
9,945 | 10,174 | ||||||||||
Total liabilities |
300,403 | 304,025 | ||||||||||
Redeemable convertible preferred stock |
28,594 | — | ||||||||||
Shareholders’ equity: |
||||||||||||
Preferred stock, $.01 par value: 2,000,000 shares authorized, none outstanding |
— | — | ||||||||||
Common stock, $.01 par value: 200,000,000 shares authorized, shares outstanding: 53,626,738
and 53,038,378 at March 31, 2003 and December 31, 2002, respectively |
536 | 530 | ||||||||||
Additional paid-in-capital |
215,032 | 197,747 | ||||||||||
Deferred stock compensation |
(212 | ) | (381 | ) | ||||||||
Accumulated other comprehensive loss |
(1,026 | ) | (873 | ) | ||||||||
Accumulated deficit |
(172,775 | ) | (175,326 | ) | ||||||||
Total shareholders’ equity |
41,555 | 21,697 | ||||||||||
Total liabilities, redeemable convertible preferred stock, and shareholders’ equity |
$ | 370,552 | $ | 325,722 | ||||||||
See Notes to Condensed Consolidated Financial Statements
3
ASPECT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data-unaudited)
| Three months ended | |||||||||||
| March 31, | |||||||||||
| 2003 | 2002 | ||||||||||
Net revenues: |
|||||||||||
License |
$ | 14,952 | $ | 22,939 | |||||||
Services |
60,291 | 63,849 | |||||||||
Hardware |
9,165 | 17,733 | |||||||||
Total net revenues |
84,408 | 104,521 | |||||||||
Cost of revenues: |
|||||||||||
Cost of license revenues |
3,636 | 5,394 | |||||||||
Cost of services revenues |
27,024 | 34,203 | |||||||||
Cost of hardware revenues |
8,977 | 18,534 | |||||||||
Total cost of revenues |
39,637 | 58,131 | |||||||||
Gross margin |
44,771 | 46,390 | |||||||||
Operating expenses: |
|||||||||||
Research and development |
13,035 | 15,571 | |||||||||
Selling, general and administrative |
24,633 | 42,755 | |||||||||
Total operating expenses |
37,668 | 58,326 | |||||||||
Income (loss) from operations |
7,103 | (11,936 | ) | ||||||||
Interest income |
917 | 1,022 | |||||||||
Interest expense |
(2,751 | ) | (3,559 | ) | |||||||
Other income (expense) |
68 | 2,302 | |||||||||
Income (loss) before income taxes |
5,337 | (12,171 | ) | ||||||||
Provision (benefit) for income taxes |
1,247 | (22,919 | ) | ||||||||
Net income (loss) before cumulative effect of change in accounting principle |
4,090 | 10,748 | |||||||||
Cumulative effect of change in accounting principle |
— | (51,431 | ) | ||||||||
Net income (loss) |
4,090 | (40,683 | ) | ||||||||
Accrued preferred stock dividend and accretion of redemption premium |
(1,274 | ) | — | ||||||||
Amortization of beneficial conversion feature |
(265 | ) | — | ||||||||
Net income (loss) attributable to common shareholders |
$ | 2,551 | $ | (40,683 | ) | ||||||
Basic earnings per share before cumulative effect of change in accounting principle |
$ | 0.21 | |||||||||
Cumulative effect of change in accounting principle |
(0.99 | ) | |||||||||
Basic earnings (loss) per share attributable to common shareholders |
$ | 0.05 | $ | (0.78 | ) | ||||||
Diluted earnings per share before cumulative effect of change in accounting principle |
$ | 0.14 | |||||||||
Cumulative effect of change in accounting principle |
(0.51 | ) | |||||||||
Diluted earnings (loss) per share attributable to common shareholders |
$ | 0.05 | $ | (0.37 | ) | ||||||
Basic weighted average shares outstanding |
53,315 | 52,065 | |||||||||
Diluted weighted average shares outstanding |
54,591 | 100,580 | |||||||||
See Notes to Condensed Consolidated Financial Statements
4
ASPECT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands-unaudited)
| Three Months Ended | ||||||||||||
| March 31, | ||||||||||||
| 2003 | 2002 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | 4,090 | $ | (40,683 | ) | |||||||
Reconciliation of net income(loss) to cash provided by operating activities: |
||||||||||||
Depreciation |
6,394 | 9,399 | ||||||||||
Amortization of intangible assets and stock-based compensation |
1,390 | 4,301 | ||||||||||
Loss (gain) on extinguishment of debt |
17 | (2,077 | ) | |||||||||
Non-cash interest expense on debentures |
1,804 | 2,616 | ||||||||||
Cumulative effect of change in accounting principle |
— | 51,431 | ||||||||||
Deferred taxes |
14 | 278 | ||||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable, net |
9,734 | (4,759 | ) | |||||||||
Inventories |
(2,998 | ) | 4,648 | |||||||||
Other current assets and other assets |
(3,285 | ) | (23,898 | ) | ||||||||
Accounts payable |
203 | 6,783 | ||||||||||
Accrued compensation and related benefits |
(377 | ) | 1,858 | |||||||||
Other accrued liabilities |
(9,835 | ) | (4,434 | ) | ||||||||
Deferred revenues |
11,408 | 1,738 | ||||||||||
Cash provided by operating activities |
18,559 | 7,201 | ||||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of investments |
(55,266 | ) | (29,949 | ) | ||||||||
Proceeds from sales and maturities of investments |
47,468 | 22,337 | ||||||||||
Property and equipment purchases |
(1,047 | ) | (3,613 | ) | ||||||||
Cash used in investing activities |
(8,845 | ) | (11,225 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of common stock, net |
898 | 2,042 | ||||||||||
Proceeds from issuance of preferred stock, net |
43,736 | — | ||||||||||
Payments on capital lease obligations |
(179 | ) | (185 | ) | ||||||||
Proceeds from borrowings |
— | 2,000 | ||||||||||
Payments on borrowings |
(1,730 | ) | (576 | ) | ||||||||
Payments on repurchase of convertible debentures |
(5,612 | ) | (10,126 | ) | ||||||||
Cash provided by (used in) financing activities |
37,113 | (6,845 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents |
(132 | ) | 108 | |||||||||
Net increase (decrease) in cash and cash equivalents |
46,695 | (10,761 | ) | |||||||||
Cash and cash equivalents: |
||||||||||||
Beginning of period |
66,051 | 72,564 | ||||||||||
End of period |
$ | 112,746 | $ | 61,803 | ||||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid for interest |
$ | 764 | $ | 723 | ||||||||
Cash paid for income taxes |
$ | 235 | $ | — | ||||||||
Supplemental schedule of noncash investing and financing activities: |
||||||||||||
Accrued preferred stock dividend and amortization of redemption premium |
$ | 1,274 | $ | — | ||||||||
Amortization of beneficial conversion feature |
$ | 265 | $ | — | ||||||||
See Notes to Condensed Consolidated Financial Statements
5
ASPECT COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
Note 1: Basis of Presentation
The condensed consolidated financial statements include the accounts of Aspect Communications Corporation (Aspect or the Company) and all of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s 2002 Annual Report on Form 10-K.
Note 2: Stock Based Compensation
At March 31, 2003, the Company has based its calculation on six stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The following table illustrates the effect on net income and earnings per share if the company had applied the fair-value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation (in thousands, except per share amounts).
| Three Months Ended March 31, | ||||||||
| 2003 | 2002 | |||||||
Net income (loss) attributable to common shareholders |
$ | 2,551 | $ | (40,683 | ) | |||
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards |
(2,234 | ) | (4,656 | ) | ||||
Add back: Amortization of deferred stock compensation |
118 | 134 | ||||||
Pro forma net income (loss) attributable to common shareholders |
$ | 435 | $ | (45,205 | ) | |||
Basic
earnings (loss) per share: |
||||||||
As reported |
$ | 0.05 | $ | (0.78 | ) | |||
Pro forma |
$ | 0.01 | $ | (0.87 | ) | |||
Diluted
earnings (loss) per share: |
||||||||
As reported |
$ | 0.05 | $ | (0.37 | ) | |||
Pro forma |
$ | 0.01 | $ | (0.45 | ) | |||
Note 3: Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist of (in thousands):
| March 31, | December 31, | ||||||||
| 2003 | 2002 | ||||||||
Raw materials |
$ | 8,146 | $ | 4,643 | |||||
Work in progress |
— | 31 | |||||||
Finished goods |
1,761 | 2,165 | |||||||
Total inventories |
$ | 9,907 | $ | 6,839 | |||||
6
Note 4: Other Current Assets
Other current assets consist of (in thousands):
| March 31, | December 31, | ||||||||
| 2003 | 2002 | ||||||||
Prepaid expenses |
$ | 10,477 | $ | 8,821 | |||||
Restricted cash |
2,772 | 2,880 | |||||||
Other receivables |
2,045 | 1,963 | |||||||
Total other current assets |
$ | 15,294 | $ | 13,664 | |||||
Note 5: Product Warranties
The Company generally warrants its products against certain manufacturing and other defects. These product warranties are provided for specific periods of time and/or usage of the product depending on the nature of the product, geographic location of its sale and other factors. The Company accrues for estimated product warranty claims based primarily on historical experience of actual warranty claims as well as current information on repair costs. The following table summarizes the activity related to the product warranty reserve for the three month period ended March 31, 2003 (in thousands):
Balance at December 31, 2002 |
$ | 837 | ||
Additions |
119 | |||
Deductions |
(217 | ) | ||
Balance at March 31, 2003 |
$ | 739 | ||
The Company also indemnifies its customers against any claim that its products infringe any copyright, patent or trademark, or incorporate any misappropriated trade secrets. The Company has not been subject to any material infringement claims by customers in the past and does not have any significant claims pending as of March 31, 2003.
Note 6: Comprehensive Income (Loss)
Comprehensive income (loss) for the three months ended March 31 is calculated as follows (in thousands):
| 2003 | 2002 | |||||||
Net income (loss) attributable to common shareholders |
$ | 2,551 | $ | (40,683 | ) | |||
Unrealized loss on investments, net |
(22 | ) | (436 | ) | ||||
Accumulated translation adjustments, net |
(131 | ) | (4 | |||||