ASPECT COMMUNICATIONS CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
		For the quarterly period ended March 31, 2004

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

(Exact name of registrant as specified in its charter)


California (State or other jurisdiction of incorporation or organization)		94-2974062 (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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

The number of shares outstanding of the Registrant’s Common Stock, $.01 par value, was 58,488,566 at March 31, 2004.

ASPECT COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share amounts — unaudited)


	March 31, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	78,918		$	75,653
Short-term investments		116,081			88,339
Accounts receivable, net		39,062			39,561
Inventories		5,607			6,176
Other current assets		20,663			19,145

Total current assets		260,331			228,874
Property and equipment, net		66,225			68,599
Intangible assets, net		4,480			5,223
Goodwill, net		2,707			2,707
Other assets		5,528			5,182

Total assets	$	339,271		$	310,585

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	143		$	1,732
Accounts payable		6,590			4,936
Accrued compensation and related benefits		19,518			17,773
Other accrued liabilities		56,568			64,790
Deferred revenues		63,407			50,200

Total current liabilities		146,226			139,431
Long term borrowings		40,013			39,436
Other long-term liabilities		9,219			11,021

Total liabilities		195,458			189,888
Redeemable convertible preferred stock, $0.01 par value: 2,000,000 shares authorized, 50,000 outstanding.		35,817			33,681
Shareholders’ equity:
Common stock, $0.01 par value: 200,000,000 shares authorized, shares outstanding: 58,488,566 at March 31, 2004 and 56,959,444 at December 31, 2003, respectively		585			570
Additional paid-in capital		239,825			232,199
Accumulated other comprehensive income		449			548
Accumulated deficit		(132,863	)		(146,301	)

Total shareholders’ equity		107,996			87,016

Total liabilities, redeemable convertible preferred stock and shareholders’ equity	$	339,271		$	310,585

See Notes to Condensed Consolidated Financial Statements

ASPECT COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data — unaudited)


	Three months ended March 31,
	2004			2003
Net revenues:
Software license	$	16,605		$	14,952
Hardware		11,530			9,165
Services:
Software license updates and product support		54,257			52,304
Professional services and education		9,095			7,987

Services		63,352			60,291

Total net revenues		91,487			84,408

Cost of revenues:
Cost of software license revenues		2,280			3,636
Cost of hardware revenues		8,331			8,977
Cost of services revenues		25,239			27,024

Total cost of revenues		35,850			39,637

Gross margin		55,637			44,771
Operating expenses:
Research and development		11,360			13,035
Selling, general and administrative		26,539			24,670

Total operating expenses		37,899			37,705

Income from operations		17,738			7,066
Interest income		757			917
Interest expense		(1,127	)		(2,751	)
Other income (expense)		316			68

Net income before income taxes		17,684			5,300
Provision for income taxes		2,110			1,247

Net income before cumulative effect of change in accounting principle		15,574			4,053
Cumulative effect of change in accounting principle		—			(777	)

Net income		15,574			3,276
Accrued preferred stock dividend and accretion of redemption premium		(1,779	)		(1,274	)
Amortization of beneficial conversion feature		(357	)		(265	)

Net income attributable to common shareholders	$	13,438		$	1,737

Basic and diluted earnings per share attributable to common shareholders before cumulative effect of change in accounting principle (See Note 8)	$	0.17		$	0.04
Cumulative effect of change in accounting principle	$	—		$	(0.01	)

Basic and diluted earnings per share attributable to common shareholders	$	0.17		$	0.02

Weighted average shares outstanding, basic and diluted		57,740			53,315

See Notes to Condensed Consolidated Financial Statements

ASPECT COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands-unaudited)


	Three months ended March 31,
	2004			2003
Cash flows from operating activities:
Net income	$	15,574		$	3,276
Reconciliation of net income to cash provided by operating activities:
Depreciation		6,105			6,431
Amortization of intangible assets and deferred stock compensation		743			1,390
Loss on disposal of property		9			—
Loss on extinguishment of debt		—			17
Loss on short-term investment, net		267			—
Cumulative effect of change in accounting principle		—			777
Non-cash interest expense on debentures		—			1,804
Deferred taxes		—			14
Changes in operating assets and liabilities:
Accounts receivable, net		206			9,734
Inventories		507			(2,998	)
Other current assets and other assets		(732	)		(3,285	)
Accounts payable		1,658			203
Accrued compensation and related benefits		1,741			(377	)
Other accrued liabilities		(10,177	)		(9,835	)
Deferred revenues		13,078			11,408

Cash provided by operating activities		28,979			18,559

Cash flows from investing activities:
Purchase of investments		(61,054	)		(55,266	)
Proceeds from sales and maturities of investments		33,317			47,468
Property and equipment purchases		(3,827	)		(1,047	)

Cash used in investing activities		(31,564	)		(8,845	)

Cash flows from financing activities:
Proceeds from issuance of common stock, net		7,642			898
Proceeds from issuance of preferred stock, net		—			43,736
Payments on capital lease obligations		(33	)		(179	)
Proceeds from borrowings		40,000			—
Payments on borrowings		(40,979	)		(1,730	)
Payments on financing costs		(1,053	)		—
Payments on repurchase of convertible debentures		—			(5,612	)

Cash provided by financing activities		5,577			37,113

Effect of exchange rate changes on cash and cash equivalents		273			(132	)

Net increase in cash and cash equivalents		3,265			46,695

Cash and cash equivalents:
Beginning of period		75,653			66,051

End of period	$	78,918		$	112,746

Supplemental disclosure of cash flow information:
Cash paid for interest	$	643		$	764
Cash paid for income taxes	$	2,967		$	235
Supplemental schedule of non-cash investing and financing activities:
Accrued preferred stock dividend and amortization of redemption premium	$	1,779		$	1,274
Amortization of beneficial conversion feature	$	357		$	265
Beneficial conversion feature	$	—		$	17,583

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 three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s 2003 Annual Report on Form 10-K/A.

Note 2: Stock Based Compensation

As of March 31, 2004 the Company had four active stock option plans used as a part of employee compensation and one active employee stock purchase plan. 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).

SFAS No. 123


	Three months ended March 31,
	2004			2003
Net income attributable to common shareholders as reported	$	13,438		$	1,737
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards		(2,228	)		(2,234	)
Add back: Amortization of deferred stock compensation		—			118

Pro forma net income (loss) attributable to common shareholders	$	11,210		$	(379	)

Basic and diluted income per share:
As reported	$	0.17		$	0.02
Pro forma	$	0.14		$	(0.01	)

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,
	2004		2003
Raw materials	$	3,467	$	3,512
Work in progress		219		6
Finished goods		1,921		2,658

Total inventories	$	5,607	$	6,176

Note 4: Other Current Assets

Other current assets consist of (in thousands):


	March 31,		December 31,
	2004		2003
Prepaid expenses	$	14,999	$	10,749
Other receivables		2,471		2,278
Restricted cash		3,193		6,118

Total other current assets	$	20,663	$	19,145

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 depending on the nature of the product, geographic location of its sale and other factors. The Company accrues for estimated product warranty claims for certain customers based primarily on historical experience of actual warranty claims as well as current information on repair costs. Accrued warranty costs as of March 31, 2004 were immaterial. Most customers purchase extended warranty contracts, which are accounted for under FASB Technical Bulletin 90-1, Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.

The Company also indemnifies its customers against claims that its products infringe certain copyrights, patents or trademarks, or incorporate 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, 2004.

Note 6: Other Accrued Liabilities

Other accrued liabilities consist of (in thousands):


	March 31,		December 31,
	2004		2003
Accrued sales and use taxes	$	7,071	$	8,066
Accrued restructuring		7,281		7,193
Accrued income taxes		15,485		16,817
Other accrued liabilities		26,731		32,714

Total	$	56,568	$	64,790

Note 7: Comprehensive Income

Comprehensive income for the three months ended March 31 is calculated as follows (in thousands):


	Three months ended March 31,
	2004			2003
Net income attributable to common shareholders	$	13,438		$	1,737
Unrealized gain (loss) on investments, net		273			(22	)
Accumulated translation adjustments, net		(372	)		(131	)

Total comprehensive income	$	13,339		$	1,584

Note 8: Earnings Per Share

Basic earnings per common share (EPS) is generally calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding. However, due to the Company’s issuance of redeemable convertible preferred stock on January 21, 2003, which contains certain participation rights, EITF Topic

D-95, Effect of Participating Convertible Securities on the Computation of Basic Earnings, requires those securities to be included in the computation of basic EPS if the effect is dilutive. Furthermore, Topic D-95 requires that the dilutive effect to be included in basic EPS may be calculated using either the if-converted method or the two-class method. The Company has elected to use the two-class method in calculating basic EPS.

Basic earnings per share for the three months ended March 31, are calculated using the two-class method as follows (in thousands, except percentages and per share data):

Basic EPS — Two-Class Method


	Three months ended March 31,
	2004					2003
	Amount			EPS		Amount			EPS
Net income before cumulative effect of change in accounting principle	$	15,574				$	4,053
Preferred Stock dividend accretion and amortization		(2,136	)				(1,539	)

Net income attributable to common shareholders before cumulative effect of change in accounting principle		13,438					2,514
Amount allocable to common shareholders(1)		72.2	%				75.8	%

Rights to undistributed income before cumulative effect of change in accounting principle	$	9,702		$	0.17	$	1,905		$	0.04

Cumulative effect of change in accounting principle	$	—				$	(777	)
Amount allocable to common shareholders(1)		72.2	%				75.8	%

Rights to undistributed cumulative effect of change in Accounting principle	$	—		$	—	$	(589	)	$	(0.01	)

Net income attributable to common shareholders	$	13,438				$	1,737
Amount allocable to common shareholders(1)		72.2	%				75.8	%

Rights to undistributed income	$	9,702		$	0.17	$	1,316		$	0.02

Weighted average common shares outstanding		57,740					53,420
Weighted average shares of restricted common stock		—					(105	)

Basic weighted average common shares outstanding		57,740					53,315

(1) Weighted average common shares outstanding		57,740					53,315
Weighted average additional common shares assuming Conversion of Preferred Stock		22,222					17,037

Weighted average common equivalent shares assuming Conversion of Preferred Stock		79,962					70,352

Amount allocable to common shareholders		72.2	%				75.8	%

Diluted EPS


	Three months ended March 31,
	2004					2003
	Amount		EPS			Amount		EPS
Net income used to calculate diluted earnings per share	$	13,438				$	2,514
Preferred Stock dividend accretion and amortization		2,136					—

Net income before cumulative effect of change in accounting principle	$	15,574				$	2,514

Weighted average common shares outstanding		57,740					53,315
Dilutive effect of weighted average shares of restricted common stock		—					105
Dilutive effect of stock options		6,219					1,171
Dilutive effect of Preferred Stock assuming conversion		22,222					—

Diluted weighted average shares outstanding		86,181					54,591
Diluted earnings per share before cumulative effect of change in accounting principle			$	0.18				$	0.05

Cumulative effect of change in accounting principle			$	—				$	(0.01	)

Diluted earnings per share attributable to common Shareholders			$	0.18	*			$	0.04	*

•

Diluted earnings per share cannot be greater than basic earnings per share. Therefore, reported diluted earnings per share and basic earnings per share for the three months ended March 31 were the same. The diluted earnings per share calculation for the three months ended March 31, 2003 excluded shares issuable from the convertible subordinated debentures, as the inclusion of these shares would have been anti-dilutive. For purposes of this computation, the Company used $47.08, the conversion price of subordinated debentures as of August 2003, to determine the dilution effect of convertible subordinated debentures.

The Company had approximately 1 million and 8 million anti-dilutive stock options outstanding as of March 31, 2004 and 2003, respectively, that have been excluded from the diluted earnings per share calculations.

Note 9: Restructuring Charge

In fiscal years 2002 and 2001, the Company reduced its workforce by 22% and 28%, respectively, and consolidated selected facilities in its continuing effort to better optimize operations. As of March 31, 2004, the total restructuring accrual was $15 million, of which, $7 million was a short-term liability recorded in other accrued liabilities, and $8 million was a long-term liability. Components of the restructuring accrual were as follows (in thousands):


							Other
	Severance and			Consolidation of			Restructuring
	Outplacement			Facilities Costs			Costs			Total
Balance at January 1, 2002	$	2,157		$	27,507		$	101		$	29,765
2002 provisions		7,120			1,744			—			8,864
2002 adjustments		(534	)		14,074			—			13,540
2002 property write-downs		—			(1,744	)		—			(1,744	)
2002 payments		(7,459	)		(21,622	)		—			(29,081	)

Balance at December 31, 2002	$	1,284		$	19,959		$	101		$	21,344

2003 adjustments		(471	)		4,284			—			3,814
2003 payments		(813	)		(7,295	)		(101	)		(8,210	)


		Page Number
Part I:	Financial Information
Item 1:	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003		3
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2003		4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3:	Quantitative and Qualitative Disclosures About Market Risk		27
Item 4:	Controls and Procedures		27
Part II:	Other Information		28
Item 1:	Legal Proceedings		28
Item 6:	Exhibits and Reports on Form 8-K		28
Signature			30
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

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