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 September 30, 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 56,100,508 at October 31, 2003.
TABLE OF CONTENTS
ASPECT COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
| Page Number | ||||
| Part I: | Financial Information | |||
| Item 1: | Financial Statements (unaudited) | |||
| Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 | 3 | |||
| Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002 | 4 | |||
| Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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 | 14 | ||
| Item 3: | Quantitative and Qualitative Disclosures About Market Risk | 28 | ||
| Item 4: | Controls and Procedures | 28 | ||
| Part II: | Other Information | |||
| Item 1: | Legal Proceedings | 29 | ||
| Item 6: | Exhibits and Reports on Form 8-K | 29 | ||
| Signature | 30 | |||
2
ASPECT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share amounts-unaudited)
| September 30, 2003 | December 31, 2002 | |||||||||||
ASSETS |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 58,468 | $ | 66,051 | ||||||||
Short-term investments |
68,262 | 80,049 | ||||||||||
Accounts receivable, net |
45,569 | 51,145 | ||||||||||
Inventories |
7,964 | 6,839 | ||||||||||
Other current assets |
14,761 | 13,664 | ||||||||||
Total current assets |
195,024 | 217,748 | ||||||||||
Property and equipment, net |
71,953 | 86,528 | ||||||||||
Intangible assets, net |
5,980 | 9,790 | ||||||||||
Goodwill, net |
2,707 | 2,707 | ||||||||||
Other assets |
7,962 | 8,949 | ||||||||||
Total assets |
$ | 283,626 | $ | 325,722 | ||||||||
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS’ EQUITY |
||||||||||||
Current liabilities: |
||||||||||||
Convertible subordinated debentures |
$ | 956 | $ | 124,983 | ||||||||
Short-term borrowings |
7,038 | 7,186 | ||||||||||
Accounts payable |
6,753 | 6,798 | ||||||||||
Accrued compensation and related benefits |
16,338 | 16,051 | ||||||||||
Other accrued liabilities |
61,744 | 67,370 | ||||||||||
Deferred revenues |
50,449 | 30,220 | ||||||||||
Total current liabilities |
143,278 | 252,608 | ||||||||||
Long term borrowings |
35,902 | 41,243 | ||||||||||
Other long-term liabilities |
12,263 | 10,174 | ||||||||||
Total liabilities |
191,443 | 304,025 | ||||||||||
Redeemable convertible preferred stock |
32,726 | — | ||||||||||
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: |
||||||||||||
55,231,479 and 53,038,378 at September 30, 2003 and December 31, 2002, respectively |
552 | 530 | ||||||||||
Additional paid-in-capital |
220,627 | 197,747 | ||||||||||
Deferred stock compensation |
— | (381 | ) | |||||||||
Accumulated other comprehensive loss |
(781 | ) | (873 | ) | ||||||||
Accumulated deficit |
(160,941 | ) | (175,326 | ) | ||||||||
Total shareholders’ equity |
59,457 | 21,697 | ||||||||||
Total liabilities, redeemable convertible preferred stock, and shareholders’ equity |
$ | 283,626 | $ | 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 | Nine Months Ended | ||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
Net revenues: |
|||||||||||||||||||
Software license |
$ | 18,710 | $ | 21,529 | $ | 49,992 | $ | 62,248 | |||||||||||
Hardware |
11,582 | 16,047 | 31,905 | 51,609 | |||||||||||||||
Services: |
|||||||||||||||||||
Software license updates and product support |
54,558 | 49,742 | 160,518 | 154,046 | |||||||||||||||
Professional services and education |
7,779 | 9,183 | 24,047 | 31,214 | |||||||||||||||
Services |
62,337 | 58,925 | 184,565 | 185,260 | |||||||||||||||
Total net revenues |
92,629 | 96,501 | 266,462 | 299,117 | |||||||||||||||
Cost of revenues: |
|||||||||||||||||||
Cost of software license revenues |
4,896 | 42,581 | 12,184 | 53,606 | |||||||||||||||
Cost of hardware revenues |
9,314 | 12,655 | 28,365 | 45,212 | |||||||||||||||
Cost of services revenues |
25,333 | 29,846 | 77,550 | 98,611 | |||||||||||||||
Total cost of revenues |
39,543 | 85,082 | 118,099 | 197,429 | |||||||||||||||
Gross margin |
53,086 | 11,419 | 148,363 | 101,688 | |||||||||||||||
Operating expenses: |
|||||||||||||||||||
Research and development |
12,274 | 13,563 | 37,934 | 44,080 | |||||||||||||||
Selling, general and administrative |
26,809 | 36,319 | 77,271 | 118,774 | |||||||||||||||
Restructuring charges |
— | 22,699 | 2,997 | 22,699 | |||||||||||||||
Total operating expenses |
39,083 | 72,581 | 118,202 | 185,553 | |||||||||||||||
Income (loss) from operations |
14,003 | (61,162 | ) | 30,161 | (83,865 | ) | |||||||||||||
Interest income |
650 | 1,013 | 2,468 | 2,941 | |||||||||||||||
Interest expense |
(1,456 | ) | (2,805 | ) | (6,513 | ) | (9,145 | ) | |||||||||||
Other income (expense) |
(376 | ) | 3,352 | (277 | ) | (1,467 | ) | ||||||||||||
Income (loss) before income taxes |
12,821 | (59,602 | ) | 25,839 | (91,536 | ) | |||||||||||||
Provision (benefit) for income taxes |
2,575 | 377 | 5,072 | (28,002 | ) | ||||||||||||||
Net income (loss) before cumulative effect of change in
accounting principle |
10,246 | (59,979 | ) | 20,767 | (63,534 | ) | |||||||||||||
Cumulative effect of change in accounting principle |
— | — | (777 | ) | (51,431 | ) | |||||||||||||
Net income (loss) |
10,246 | (59,979 | ) | 19,990 | (114,965 | ) | |||||||||||||
Accrued preferred stock dividend and accretion of redemption
premium |
(1,704 | ) | — | (4,647 | ) | — | |||||||||||||
Amortization of beneficial conversion feature |
(349 | ) | — | (958 | ) | — | |||||||||||||
Net income (loss) attributable to common shareholders |
$ | 8,193 | $ | (59,979 | ) | $ | 14,385 | $ | (114,965 | ) | |||||||||
Basic and diluted earnings (loss) per share attributable to
common
shareholders before cumulative effect of change in accounting
principle (See Note 7) |
$ | 0.11 | $ | (1.14 | ) | $ | 0.20 | $ | (1.21 | ) | |||||||||
Cumulative effect of change in accounting principle |
— | — | $ | (0.01 | ) | $ | (0.98 | ) | |||||||||||
Basic and diluted earnings (loss) per share attributable to
common shareholders |
$ | 0.11 | $ | (1.14 | ) | $ | 0.19 | $ | (2.19 | ) | |||||||||
Basic and diluted weighted average shares outstanding |
54,612 | 52,678 | 53,834 | 52,381 | |||||||||||||||
See Notes to Condensed Consolidated Financial Statements
4
ASPECT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands-unaudited)
| Nine Months Ended | ||||||||||||
| September 30, | ||||||||||||
| 2003 | 2002 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | 19,990 | $ | (114,965 | ) | |||||||
Reconciliation of net income (loss) to cash provided by operating activities: |
||||||||||||
Depreciation |
18,549 | 26,814 | ||||||||||
Amortization of intangible assets and stock-based compensation |
4,256 | 11,982 | ||||||||||
Loss on disposal of assets |
297 | 2,460 | ||||||||||
Loss (gain) on extinguishment of debt |
17 | (7,249 | ) | |||||||||
Impairment of investments |
— | 8,859 | ||||||||||
Non-cash interest expense on debentures |
4,409 | 6,983 | ||||||||||
Cumulative effect of change in accounting principle |
777 | 51,431 | ||||||||||
Impairment of intangible assets |
2,000 | 38,631 | ||||||||||
Deferred taxes |
— | 8 | ||||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable, net |
7,645 | 19,852 | ||||||||||
Inventories |
(882 | ) | 7,485 | |||||||||
Other current assets and other assets |
(1,869 | ) | 4,165 | |||||||||
Accounts payable |
1,066 | 5,439 | ||||||||||
Accrued compensation and related benefits |
138 | (18 | ) | |||||||||
Other accrued liabilities |
(7,429 | ) | 3,382 | |||||||||
Deferred revenues |
19,581 | 4,761 | ||||||||||
Cash provided by operating activities |
68,545 | 70,020 | ||||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of investments |
(134,215 | ) | (152,231 | ) | ||||||||
Proceeds from sales and maturities of investments |
145,484 | 135,519 | ||||||||||
Property and equipment purchases |
(3,145 | ) | (9,463 | ) | ||||||||
Cash provided by (used in) investing activities |
8,124 | (26,175 | ) | |||||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of common stock, net |
6,393 | 2,802 | ||||||||||
Proceeds from issuance of preferred stock, net |
43,564 | — | ||||||||||
Payments on capital lease obligations |
(342 | ) | (592 | ) | ||||||||
Proceeds from borrowings |
— | 27,000 | ||||||||||
Payments on borrowings |
(5,147 | ) | (20,136 | ) | ||||||||
Payments on repurchase of convertible debentures |
(128,439 | ) | (59,769 | ) | ||||||||
Cash used in financing activities |
(83,971 | ) | (50,695 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents |
(281 | ) | 253 | |||||||||
Net decrease in cash and cash equivalents |
(7,583 | ) | (6,597 | ) | ||||||||
Cash and cash equivalents: |
||||||||||||
Beginning of period |
66,051 | 72,564 | ||||||||||
End of period |
$ | 58,468 | $ | 65,967 | ||||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash paid for interest |
$ | 2,195 | $ | 2,031 | ||||||||
Cash paid for income taxes |
$ | 396 | $ | — | ||||||||
Supplemental schedule of noncash investing and financing activities: |
||||||||||||
Cancellation of restricted stock, net of issuances |
$ | (56 | ) | $ | (139 | ) | ||||||
Accrued preferred stock dividend and amortization of redemption premium |
$ | 4,647 | $ | — | ||||||||
Amortization of beneficial conversion feature |
$ | 958 | $ | — | ||||||||
Beneficial conversion feature |
$ | 17,583 | $ | — | ||||||||
5
See Notes to Condensed Consolidated Financial Statements
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 nine months ended September 30, 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 September 30, 2003, the Company had 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 as 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).