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0001136261-07-000135.txt : 20070808
0001136261-07-000135.hdr.sgml : 20070808
20070807173813
ACCESSION NUMBER: 0001136261-07-000135
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 14
CONFORMED PERIOD OF REPORT: 20070630
FILED AS OF DATE: 20070808
DATE AS OF CHANGE: 20070807
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: TEKELEC
CENTRAL INDEX KEY: 0000790705
STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663]
IRS NUMBER: 952746131
STATE OF INCORPORATION: CA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-15135
FILM NUMBER: 071032786
BUSINESS ADDRESS:
STREET 1: 5200 PARAMOUNT PARKWAY
CITY: MORRISVILLE
STATE: NC
ZIP: 27560
BUSINESS PHONE: 919-460-5500
MAIL ADDRESS:
STREET 1: 5200 PARAMOUNT PARKWAY
CITY: MORRISVILLE
STATE: NC
ZIP: 27560
10-Q
1
form10q.htm
10-Q
Q2 2007 DOC
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-15135
![](logo.gif)
(Exact name of registrant as specified in its charter)
California
|
95-2746131
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification Number)
|
5200 Paramount Parkway
Morrisville, North Carolina 27560
(Address and zip code of principal executive offices)
(919) 460-5500
(Registrant's telephone number, including area code)
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 reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES x
NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨
NO x
As of July 30, 2007 there were 71,281,726 shares of the registrant's common stock, without par value, outstanding.
Note: PDF provided as a courtesy
TEKELEC
TABLE OF CONTENTS
FORM 10-Q
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
TEKELEC
Unaudited Condensed Consolidated Balance Sheets
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007
|
|
|
2006
|
ASSETS |
|
|
(Thousands, except share data) |
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
46,557 |
|
$ |
45,329 |
Short-term investments, at fair value |
|
|
418,227
|
|
|
379,045
|
Total cash, cash equivalents and short-term investments |
|
|
464,784 |
|
|
424,374 |
Accounts receivable, net |
|
|
89,513 |
|
|
133,050 |
Inventories |
|
|
25,322 |
|
|
25,739 |
Income tax receivable |
|
|
25,876 |
|
|
14,665 |
Deferred income taxes |
|
|
25,502 |
|
|
27,671 |
Deferred costs and prepaid commissions |
|
|
41,427 |
|
|
55,110 |
Prepaid expenses and other current assets |
|
|
11,279 |
|
|
26,133 |
Receivable from Genband |
|
|
505 |
|
|
- |
Assets of discontinued operations |
|
|
-
|
|
|
118,341
|
Total current assets |
|
|
684,208 |
|
|
825,083 |
Property and equipment, net |
|
|
32,942 |
|
|
36,398 |
Investments in privately-held companies |
|
|
18,553 |
|
|
7,322 |
Deferred income taxes, net |
|
|
75,251 |
|
|
51,496 |
Other assets |
|
|
2,380 |
|
|
2,539 |
Goodwill |
|
|
26,876 |
|
|
26,876 |
Intangible assets, net |
|
|
18,277
|
|
|
19,543
|
Total assets |
|
$ |
858,487
|
|
$ |
969,257
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Trade accounts payable |
|
$ |
26,706 |
|
$ |
27,316 |
Accrued expenses |
|
|
43,030 |
|
|
55,665 |
Accrued payroll and related expenses |
|
|
21,652 |
|
|
28,733 |
Current portion of deferred revenues |
|
|
148,661 |
|
|
189,994 |
Convertible debt |
|
|
125,000 |
|
|
- |
Liabilities associated with SSG |
|
|
5,330 |
|
|
- |
Liabilities of discontinued operations |
|
|
-
|
|
|
40,991
|
Total current liabilities |
|
|
370,379 |
|
|
342,699 |
Deferred income taxes |
|
|
1,381 |
|
|
1,481 |
Long-term portion of deferred revenues |
|
|
10,108 |
|
|
5,836 |
Long-term convertible debt |
|
|
- |
|
|
125,000 |
Other long-term liabilities |
|
|
8,691
|
|
|
-
|
Total liabilities |
|
|
390,559
|
|
|
475,016
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity: |
|
|
|
|
|
|
Common stock, without par value, 200,000,000 shares authorized; |
|
|
|
|
|
|
70,648,940 and 68,728,986 shares issued and outstanding, respectively |
|
|
353,969 |
|
|
322,620 |
Retained earnings |
|
|
113,476 |
|
|
171,722 |
Accumulated other comprehensive income (loss) |
|
|
483
|
|
|
(101)
|
Total shareholders' equity |
|
|
467,928
|
|
|
494,241
|
Total liabilities and shareholders' equity |
|
$ |
858,487
|
|
$ |
969,257
|
See notes to unaudited condensed consolidated financial statements.
2
TEKELEC
Unaudited Condensed Consolidated Statements of Operations
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Thousands, except per share data) |
Revenues |
|
$ |
109,984 |
|
$ |
119,098 |
|
$ |
218,777 |
|
$ |
183,950 |
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
46,774 |
|
|
37,763 |
|
|
98,676 |
|
|
70,022 |
Amortization of purchased technology |
|
|
592
|
|
|
587
|
|
|
1,179
|
|
|
1,174
|
Total cost of sales |
|
|
47,366
|
|
|
38,350
|
|
|
99,855
|
|
|
71,196
|
Gross profit |
|
|
62,618
|
|
|
80,748
|
|
|
118,922
|
|
|
112,754
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
24,064 |
|
|
19,104 |
|
|
46,271 |
|
|
37,102 |
Sales and marketing |
|
|
18,309 |
|
|
19,384 |
|
|
36,974 |
|
|
36,937 |
General and administrative |
|
|
14,762 |
|
|
16,039 |
|
|
27,794 |
|
|
30,119 |
Restructuring and other |
|
|
2,511 |
|
|
1,920 |
|
|
2,511 |
|
|
2,082 |
Amortization of intangible assets |
|
|
48
|
|
|
472
|
|
|
94
|
|
|
944
|
Total operating expenses |
|
|
59,694
|
|
|
56,919
|
|
|
113,644
|
|
|
107,184
|
Income from operations |
|
|
2,924 |
|
|
23,829 |
|
|
5,278 |
|
|
5,570 |
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
4,355 |
|
|
1,878 |
|
|
8,295 |
|
|
3,527 |
Interest expense |
|
|
(956) |
|
|
(859) |
|
|
(1,851) |
|
|
(1,781) |
Gain on sale of investments |
|
|
85 |
|
|
- |
|
|
223 |
|
|
1,793 |
Other income (expense), net |
|
|
(1,118)
|
|
|
217
|
|
|
(1,844)
|
|
|
(351)
|
Total other income, net |
|
|
2,366
|
|
|
1,236
|
|
|
4,823
|
|
|
3,188
|
Income from continuing operations before provision for |
|
|
|
|
|
|
|
|
|
|
|
|
income taxes |
|
|
5,290 |
|
|
25,065 |
|
|
10,101 |
|
|
8,758 |
Provision for income taxes |
|
|
1,517
|
|
|
9,374
|
|
|
3,328
|
|
|
3,333
|
Income from continuing operations |
|
|
3,773 |
|
|
15,691 |
|
|
6,773 |
|
|
5,425 |
Loss from discontinued operations, net of taxes |
|
|
(11,547)
|
|
|
(1,141)
|
|
|
(65,019)
|
|
|
(7,384)
|
Net income (loss) |
|
$ |
(7,774)
|
|
$ |
14,550
|
|
$ |
(58,246)
|
|
$ |
(1,959)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.05 |
|
$ |
0.23 |
|
$ |
0.10 |
|
$ |
0.08 |
Diluted |
|
|
0.05 |
|
|
0.22 |
|
|
0.10 |
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.17) |
|
$ |
(0.02) |
|
$ |
(0.94) |
|
$ |
(0.11) |
Diluted |
|
|
(0.16) |
|
|
(0.02) |
|
|
(0.92) |
|
|
(0.11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.11) |
|
$ |
0.22 |
|
$ |
(0.84) |
|
$ |
(0.03) |
Diluted |
|
|
(0.11) |
|
|
0.20 |
|
|
(0.82) |
|
|
(0.03) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
69,938 |
|
|
66,933 |
|
|
69,426 |
|
|
66,883 |
Diluted |
|
|
71,151 |
|
|
74,563 |
|
|
70,699 |
|
|
68,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
69,938 |
|
|
66,933 |
|
|
69,426 |
|
|
66,883 |
Diluted |
|
|
71,151 |
|
|
74,563 |
|
|
70,699 |
|
|
68,219 |
See notes to unaudited condensed consolidated financial statements.
3
TEKELEC
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Thousands) |
|
|
|
|
Net income (loss) |
|
$ |
(7,774) |
|
$ |
14,550 |
|
$ |
(58,246) |
|
$ |
(1,959) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
303 |
|
|
169 |
|
|
459 |
|
|
278 |
Net unrealized gain (loss) on available-for-sale securities, net of income taxes |
|
|
18
|
|
|
(179)
|
|
|
125
|
|
|
271
|
Comprehensive income (loss) |
|
$ |
(7,453)
|
|
$ |
14,540
|
|
$ |
(57,662)
|
|
$ |
(1,410)
|
See notes to unaudited condensed consolidated financial statements.
4
TEKELEC
Unaudited Condensed Consolidated Statements of Cash Flows
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Thousands) |
Cash flows from operating activities: |
|
|
|
|
|
|
Net loss |
|
$ |
(58,246) |
|
$ |
(1,959) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
Loss from discontinued operations |
|
|
65,019 |
|
|
7,384 |
Gain on sale of investments |
|
|
(223) |
|
|
(1,793) |
Provision for doubtful accounts and returns |
|
|
192 |
|
|
- |
Inventory write downs |
|
|
5,254 |
|
|
2,696 |
Depreciation |
|
|
7,707 |
|
|
6,017 |
Amortization of intangibles |
|
|
1,273 |
|
|
2,118 |
Amortization, other |
|
|
929 |
|
|
2,186 |
Deferred income taxes |
|
|
(2,113) |
|
|
(2,714) |
Stock-based compensation |
|
|
8,726 |
|
|
10,194 |
Excess tax benefits from stock-based compensation |
|
|
(2,912) |
|
|
(341) |
Changes in operating assets and liabilities, net of business disposal: |
|
|
|
|
|
|
Accounts receivable |
|
|
43,228 |
|
|
(18,958) |
Inventories |
|
|
(2,616) |
|
|
(11,053) |
Deferred costs |
|
|
13,683 |
|
|
(3,421) |
Prepaid expenses and other current assets |
|
|
14,589 |
|
|
(1,451) |
Trade accounts payable |
|
|
(535) |
|
|
(1,017) |
Income taxes receivable/payable |
|
|
11,525 |
|
|
(12,916) |
Accrued expenses |
|
|
(14,851) |
|
|
(518) |
Accrued payroll and related expenses |
|
|
(7,713) |
|
|
(407) |
Deferred revenues |
|
|
(37,003)
|
|
|
55,022
|
Total adjustments |
|
|
104,159
|
|
|
31,028
|
Net cash provided by operating activities - continuing operations |
|
|
45,913 |
|
|
29,069 |
Net cash used in operating activities - discontinued operations |
|
|
(16,571)
|
|
|
(9,148)
|
Net cash provided by operating activities |
|
|
29,342
|
|
|
19,921
|
Cash flows from investing activities: |
|
|
|
|
|
|
Proceeds from sales and maturities of investments |
|
|
332,918 |
|
|
383,480 |
Purchases of investments |
|
|
(372,016) |
|
|
(415,817) |
Purchases of property and equipment |
|
|
(10,087) |
|
|
(10,885) |
Change in other assets |
|
|
(224)
|
|
|
1,455
|
Net cash used in investing activities - continuing operations |
|
|
(49,409) |
|
|
(41,767) |
Net cash used in investing activities - discontinued operations |
|
|
(2,320)
|
|
|
(5,071)
|
Net cash used in investing activities |
|
|
(51,729)
|
|
|
(46,838)
|
Cash flows from financing activities: |
|
|
|
|
|
|
Payments on notes payable |
|
|
- |
|
|
(85) |
Proceeds from issuance of common stock |
|
|
20,234 |
|
|
3,904 |
Excess tax benefits from stock-based compensation |
|
|
2,912
|
|
|
341
|
Net cash provided by financing activities |
|
|
23,146
|
|
|
4,160
|
Effect of exchange rate changes on cash |
|
|
469
|
|
|
284
|
Net change in cash and cash equivalents |
|
|
1,228 |
|
|
(22,473) |
Cash and cash equivalents, beginning of period |
|
|
45,329
|
|
|
52,069
|
Cash and cash equivalents, end of period |
|
|
46,557 |
|
|
29,596 |
Less cash and cash equivalents of discontinued operations |
|
|
-
|
|
|
504
|
Cash and cash equivalents of continuing operations, end of period |
|
$ |
46,557
|
|
$ |
29,092
|
See notes to unaudited condensed consolidated financial statements.
5
TEKELEC
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 — Basis of Presentation and Changes in Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the
accounts of Tekelec and our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The
accompanying unaudited condensed consolidated financial statements have been prepared on substantially the same basis as the audited
consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006. Certain
information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted
accounting principles in the United States have been condensed or omitted pursuant to the instructions for Form 10-Q and Article 10 of
Regulation S-X.
In the opinion of management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of our consolidated financial
condition and consolidated results of operations. The results of operations for the current interim period are not necessarily indicative of results
for the current year.
We operate under a thirteen-week calendar quarter. For financial statement presentation purposes, the reporting periods are referred to as
ended on the last calendar day of the quarter. The accompanying condensed consolidated financial statements for the three and six months
ended June 30, 2007 and 2006 are for the thirteen and twenty six weeks ended June 29, 2007 and June 30, 2006, respectively.
The following unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial
statements for the year ended December 31, 2006 and the notes thereto in our Annual Report on Form 10-K for the year ended
December 31, 2006.
Accounting for Uncertain Tax Positions
In July 2006, the Financial Accounting Standards Board (the "FASB") issued FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial statements. This Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
Specifically, FIN 48 requires the recognition in financial statements of the impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. Additionally, FIN 48 provides guidance on (i) the derecognition of previously
recognized deferred tax items, (ii) financial statement classification of contingent tax liabilities, (iii) accounting for interest and penalties, and (iv)
accounting in interim periods related to uncertain tax positions, as well as requires expanded disclosures. FIN 48 is effective for fiscal years
beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to
opening retained earnings.
Effective January 1, 2007, we adopted the provisions of, and account for uncertain tax positions in accordance with, FIN 48. The cumulative
effect of the adoption of the recognition and measurement provisions of FIN 48 resulted in no impact to the January 1, 2007 balance of retained
earnings. Our policy for the classification of interest and penalties related to income tax exposures was not impacted as a result of the adoption
of FIN 48. We will continue to recognize interest and penalties as incurred as a component of "Provision for (benefit from) income taxes" in the
unaudited condensed consolidated statements of operations.
Restructuring and Related Expenses
Our severance policy includes officer and employee severance plans that are communicated to all employees and provide for
pre-defined severance benefits. We account for costs incurred under these severance plans, with the exception of obligations created under labor
laws such as the Workers' Adjustment and Retraining Notification Act (the "WARN Act"), in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 112 "Employers' Accounting for Postemployment Benefits" ("SFAS 112"). We account for obligations incurred under
the WARN Act and local labor laws in accordance with SFAS No. 88 "Employers' Accounting for Settlements and Curtailments of
6
Defined Benefit Pension Plans and for Terminations Benefits" ("SFAS 88"). Under SFAS 112 and SFAS 88, we record these obligations
when the obligations are estimable and probable.
We account for one-time termination benefits, contract termination costs and other related exit costs in accordance with SFAS No. 146
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred, as opposed to when management commits to an exit plan. SFAS 146 also
requires that (i) liabilities associated with exit and disposal activities be measured at fair value; (ii) one-time termination benefits be expensed at
the date the entity notifies the employee, unless the employee must provide future service, in which case the benefits are expensed ratably over
the future service period; (iii) liabilities related to an operating lease/contract be recorded at fair value and measured when the contract does not
have any future economic benefit to the entity (i.e., the entity ceases to utilize the rights conveyed by the contract); and (iv) all other costs
related to an exit disposal activity be expensed as incurred.
Restructuring liabilities are included in accrued expenses and liabilities associated with SSG and the related costs are reflected as operating
expenses or included in the loss from discontinued operations, net of taxes in the accompanying unaudited condensed consolidated financial
statements.
Recent Accounting Pronouncements
Fair Value Option. In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for Financial Assets and
Financial Liabilities" ("SFAS 159"). SFAS 159 permits entities to choose, at specified election dates, to measure eligible items at fair value
(the "Fair Value Option"). Unrealized gains and losses on items for which the Fair Value Option has been elected are reported in earnings. The
Fair Value Option is applied instrument by instrument (with certain exceptions), is irrevocable (unless a new election date occurs) and is applied
only to an entire instrument. The effect of the first remeasurement to fair value is reported as a cumulative-effect adjustment to the opening
balance of retained earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the
impact of adopting SFAS 159 on our financial statements.
Fair Value Measurement. In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements" ("SFAS
157"), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles ("GAAP"), and
expands disclosures about fair value measurements. This Statement applies to other accounting pronouncements that require or permit fair
value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement
attribute. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. We are currently evaluating the impact of adopting SFAS 157 on our financial statements.
Note 2 — Discontinued Operations
Disposition of SSG
On March 20, 2007, we entered into an agreement to sell our Switching Solutions Group business ("SSG") to GENBAND Inc.
("Genband"), for approximately $1.0 million in cash and a 19.99% interest in Genband's outstanding vested voting equity, after giving effect to
the issuance. Our SSG business consisted primarily of (a) Taqua, Inc., our then wholly owned subsidiary, (b) Santera Systems LLC, our then
wholly owned subsidiary, and (c) certain assets of the SSG business then owned directly by Tekelec as a result of the 2006 merger of our
former subsidiary, VocalData, Inc., into Tekelec.
The closing of the sale occurred on April 21, 2007 (the "Closing"). In connection with this transaction we recorded a pre-tax loss on sale of
$60.7 million and a pre-tax restructuring charge of $16.6 million during the six months ended June 30, 2007.
The common stock interest in Genband received at Closing was valued at $11.2 million in accordance with the principles established in the
AICPA Practice Aid — "Valuation of Privately Held Equity Issued as Compensation." This amount excludes the value of additional shares
(consisting of 25% of the total number of the Genband shares issued at Closing) that will be held in Escrow for one year from Closing to secure
potential indemnification claims of Genband arising during that period. We account for our equity interest using the cost method and this
investment is included under the caption "Investments in privately-held companies" in the accompanying unaudited condensed consolidated
balance sheet as of June 30, 2007.
7
We have incurred approximately $3.2 million of costs associated with the disposition of SSG, consisting of investment banking fees and
legal, accounting, and other professional fees. In connection with our disposal of SSG, we incurred $16.6 million of restructuring charges
consisting primarily of a provision for employee severance costs and the write-off of certain leasehold improvements and other assets
associated with the space formerly occupied by the SSG business. We expect to incur additional restructuring charges in the remainder of 2007
associated with our disposition of SSG, primarily consisting of certain lease exit costs that will be recognized when we fully vacate the facilities
previously utilized by SSG.
In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", as of the first quarter of 2007, we
began reporting the results of the SSG business as discontinued operations, and the assets and liabilities of the SSG business as held for sale,
for all periods presented in our filings. The results of the SSG operations were previously reported as the Switching Solutions Group reporting
segment.
The operating results of the SSG business through the date of disposition on April 21, 2007 classified as discontinued operations were as
follows (in thousands):
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Revenues |
|
$ |
6,700
|
|
$ |
30,770
|
|
$ |
27,682
|
|
$ |
60,022
|
Loss from discontinued operations before |
|
|
|
|
|
|
|
|
|
|
|
|
provision for income taxes |
|
$ |
(11,697) |
|
$ |
(16,395) |
|
$ |
(37,579) |
|
$ |
(31,003) |
Benefit from income taxes |
|
|
(4,613)
|
|
|
(5,632)
|
|
|
(14,303)
|
|
|
(11,044)
|
Loss from discontinued operations, net of income taxes |
|
|
(7,084) |
|
|
(10,763) |
|
|
(23,276) |
|
|
(19,959) |
Loss on sale of discontinued operations, net of taxes |
|
|
(4,463)
|
|
|
-
|
|
|
(41,743)
|
|
|
-
|
Loss from discontinued operations, net of taxes |
|
$ |
(11,547)
|
|
$ |
(10,763)
|
|
$ |
(65,019)
|
|
$ |
(19,959)
|
In connection with the disposition of SSG we incurred, for income tax purposes, a capital loss of $46.5 million resulting in a deferred tax
asset of approximately $16.3 million. As of June 30, 2007, we have recorded a partial valuation allowance of $9.1 million against this deferred
tax asset, as it is not more likely than not that we will realize the tax benefit of a portion of this loss.
The assets and liabilities of the SSG business classified as held for sale as of December 31, 2006 were as follows (in thousands):
Cash and cash equivalents |
|
$ |
122 |
Accounts receivable, net |
|
|
29,572 |
Inventories |
|
|
23,712 |
Income taxes receivable |
|
|
33 |
Deferred income taxes, net |
|
|
15,142 |
Prepaid expenses and other current assets |
|
|
13,078 |
Property and equipment, net |
|
|
16,875 |
Other assets |
|
|
983 |
Intangible assets, net |
|
|
4,819 |
Goodwill |
|
|
14,005
|
Assets of discontinued operations |
|
$ |
118,341
|
|
|
|
|
Trade accounts payable |
|
$ |
4,463 |
Accrued expenses, accrued payroll and related expenses |
|
|
10,204 |
Deferred revenues |
|
|
26,324
|
Liabilities of discontinued operations |
|
$ |
40,991
|
Included in the accompanying balance sheet as of June 30, 2007 are certain liabilities incurred in connection with the disposition of SSG
and certain liabilities of SSG retained by us. These liabilities are included under the caption "Liabilities associated with SSG" in the
accompanying balance sheet as of June 30, 2007 and consist primarily of (i) the remaining restructuring liability associated with employees
terminated at the time of disposition, (ii) certain
8
professional fees incurred by us in connection with the disposition of SSG, and (iii) certain
liabilities incurred prior to the disposition and retained by us in accordance with the terms of our agreement with Genband.
In connection with the disposition of SSG, we entered into a Transition Services Agreement ("TSA") with Genband, under which, for a
period of up to six months after closing of the SSG sale, we agreed to provide Genband with certain administrative support services, including
information technology, systems integration and connectivity support and other services in order to facilitate an orderly transition of the SSG
business to Genband. In addition, we entered into a sublease agreement under which we subleased to Genband approximately 38,000 square
feet of office space in Plano, Texas. As of June 30, 2007, we have an outstanding receivable from Genband of $505,000 related to these
arrangements.
Disposition of IEX
On April 27, 2006, we entered into a Stock Purchase Agreement pursuant to which we agreed to sell to NICE-Systems Ltd.
(or its subsidiary), all of the outstanding shares of capital stock of IEX Corporation (the "IEX Shares"), our then wholly owned subsidiary ("IEX").
We classified the IEX business as discontinued operations in the second quarter of 2006. The closing of the sale of the IEX Shares occurred on
July 6, 2006, resulting in total cash proceeds of approximately $201.5 million and a pre-tax gain of approximately $200.1 million ($177.5
million after tax) in the year ended December 31, 2006.
Financial results of IEX are reported separately as discontinued operations for all periods presented. Prior to the sale, results of IEX
operations were reported as the IEX Contact Center Group operating segment. Summarized results of operations for IEX for the three and six
months ended June 30, 2006 were as follows (in thousands):
|
|
|
Three |
|
|
Six |
|
|
|
Months |
|
|
Months |
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
June 30, 2006
|
Revenues |
|
$ |
22,751
|
|
$ |
36,113
|
Income from discontinued operations before |
|
|
|
|
|
|
provision for income taxes |
|
|
14,939 |
|
|
19,649 |
Provision for income taxes |
|
|
5,317
|
|
|
7,074
|
Income from discontinued operations, net of income taxes |
|
$ |
9,622
|
|
$ |
12,575
|
Note 3 — Restructuring Costs
2007 Restructurings
In June 2007, we initiated a restructuring of our operations (the "June 2007 Restructuring") in order to better align our
organizational structure with our anticipated future revenues and the anticipated administrative support needs of our business following the sale
of our SSG business unit. The June 2007 Restructuring involved the termination of 28 domestic and international full time positions, mostly in
our CSSG and NSG business units, as well as certain administrative support staff. In connection with this restructuring, we incurred $2.5 million
of restructuring costs, consisting primarily of employee severance and associated benefits costs, in the second quarter of 2007. These costs are
reflected in continuing operations in the accompanying unaudited condensed consolidated statements of operations. We may incur additional
restructuring charges in the remainder of 2007 as part of our effort to better align our cost structure with our current expectations for revenues
and orders.
The costs expected to be incurred and cumulative costs incurred related to the June 2007 Restructuring are as follows (in thousands):
|
|
|
Total Costs |
|
|
Cumulative Costs |
|
|
|
Expected to be |
|
|
Incurred through |
|
|
|
Incurred
|
|
|
June 30, 2007
|
Severance costs and related benefits |
|
$ |
2,511
|
|
$ |
2,511
|
Total restructuring charges |
|
$ |
2,511
|
|
$ |
2,511
|
9
In connection with our disposition of SSG and our related restructuring (the "SSG Restructuring"), we incurred $6.2 million and $16.6 million
of restructuring costs for the three and six months ended June 30, 2007, respectively. These costs consisted primarily of employee severance
and associated benefit costs and the write-off of certain leasehold improvements and other assets associated with the space formerly occupied
by the SSG business. These costs are reflected in discontinued operations in the accompanying unaudited condensed consolidated statements
of operations. The SSG Restructuring involved the termination of approximately 165 full time positions that directly or indirectly supported our
SSG business. We expect to incur additional restructuring charges in the remainder of 2007 associated with our disposition of SSG, primarily
consisting of certain lease exit costs that will be recognized when we fully vacate the facilities previously utilized by SSG.
The costs expected to be incurred and cumulative costs incurred related to the SSG Restructuring are as follows (in thousands):
|
|
|
Total Costs |
|
|
Cumulative Costs |
|
|
|
Expected to be |
|
|
Incurred through |
|
|
|
Incurred
|
|
|
June 30, 2007
|
Severance costs and retention bonuses |
|
$ |
10,813 |
|
$ |
10,813 |
Facilities consolidation |
|
|
8,119
|
|
|
5,825
|
Total restructuring charges |
|
$ |
18,932
|
|
$ |
16,638
|
2006 Restructuring
In 2006, we committed to a restructuring plan which involved the termination of 152 full time positions; the termination of
approximately 25 contractors; and the decision not to fill 22 open positions. The majority of the terminated employees worked directly for, or in
support of, our SSG business in Plano, Texas. In addition, we incurred charges in 2006 under a retention agreement, and severance benefits
under our 1993 Officer Severance Plan, in connection with the resignation of our California-based Senior Vice President, Corporate Affairs and
General Counsel effective December 31, 2006. The resignation was the result of the relocation of our corporate headquarters to North Carolina
from California.
In connection with the 2006 Restructuring, we recorded pre-tax restructuring charges of approximately $7.4 million during fiscal 2006. We
have not incurred any additional charges in 2007, and we do not expect to incur any additional costs related to the 2006 Restructuring in the
future. All remaining balances accrued in connection with the 2006 Restructuring are expected to be paid out in 2007.
Reconciliation of restructuring obligations
The following table provides detail on our restructuring activity and the remaining obligations as of June 30, 2007 (in
thousands):
|
|
|
Severance |
|
|
|
Costs and |
|
|
|
Retention |
|
|
|
Bonuses
|
Restructuring obligations, December 31, 2006 |
|
$ |
2,596 |
|
|
|
|
Restructuring and related expenses |
|
|
|
SSG Restructuring |
|
|
10,813 |
June 2007 Restructuring |
|
|
2,511 |
Cash payments |
|
|
(8,688)
|
Restructuring obligations, June 30, 2007 |
|
$ |
7,232
|
Restructuring obligations are included in "Accrued expenses" ($4.2 million) and "Liabilities associated with SSG" ($3.0 million) in the
accompanying unaudited condensed consolidated balance sheets. We anticipate settling substantially all of our remaining obligations relating to
each of the restructurings discussed above during 2007. However, this is based on our current best estimate, which could change materially if
actual activity differs from what
10
is currently expected. We will continue to review the status of our restructuring activities quarterly and, if
appropriate, record changes in our restructuring obligations in current operations or discontinued operations based on our most current
estimates.
Note 4 — Gain on Investments
In the first quarter of 2006, we received 642,610 shares of common stock of Lucent Technologies Inc. ("Lucent") that had
previously been held in escrow as security for indemnification claims in connection with the 2004 acquisition by Lucent of Telica. As a result of
the release of these shares from escrow, we recorded a $1.8 million gain upon distribution of these shares during the three months ended
March 31, 2006. We received these shares (in addition to the shares originally issued at the closing) in exchange for our investment in Telica. In
connection with the merger of Lucent and Alcatel in the fourth quarter of 2006, these 642,610 shares were converted to 125,437 shares of
Alcatel-Lucent.
In December 2006, we received 89,642 shares of Alcatel-Lucent that had previously been held in escrow as security for indemnification
claims in connection with Alcatel's 2004 acquisition of Spatial Communications Technologies ("Spatial"). We received these shares (in addition
to the Alcatel shares originally issued at the closing, of which 100,000 Alcatel-Lucent shares were still owned by us at December 31, 2006) in
exchange for the interest of Santera Systems LLC, our former subsidiary, in Spatial.
In the first quarter of 2007, we sold all of our remaining Alcatel-Lucent shares for proceeds of $4.7 million, resulting in a realized gain of
$138,000.
Note 5 — Financial Statement Details
Accounts Receivable, net
Accounts receivable, net consists of the following (in thousands):
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007
|
|
|
2006
|
Trade accounts receivable |
|
$ |
95,618 |
|
$ |
139,461 |
Less: Allowance for doubtful accounts and sales returns |
|
|
6,105
|
|
|
6,411
|
|
|
$ |
89,513
|
|
$ |
133,050
|
Inventories
Inventories consist of the following (in thousands):
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007
|
|
|
2006
|
Raw materials |
|
$ |
13,681 |
|
$ |
16,022 |
Work in process |
|
|
254 |
|
|
179 |
Finished goods |
|
|
11,387
|
|
|
9,538
|
Total inventory
|
|
$ |
25,322
|
|
$ |
25,739
|
11
Note 6 — Intangible Assets and Goodwill
Intangible Assets
Intangible assets as of June 30, 2007 and December 31, 2006, along with the weighted
average useful lives as of June 30, 2007, are as follows (in thousands, except years):
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007
|
|
|
2006
|
Purchased technology |
|
$ |
23,490 |
|
$ |
23,490 |
Customer relationships |
|
|
1,030 |
|
|
1,030 |
Non-compete contracts |
|
|
240
|
|
|
240
|
|
|
|
24,760 |
|
|
24,760 |
Less: accumulated amortization
|
|
|
(6,483)
|
|
|
(5,217)
|
Total intangible assets |
|
$ |
18,277
|
|
$ |
19,543
|
|
|
|
Weighted |
|
|
|
Average |
|
|
|
Life
|
|
|
|
(in years) |
Purchased technology |
|
|
10.0 |
Customer relationships |
|
|
10.0 |
Non-compete contracts |
|
|
3.0 |
The identifiable intangible assets are amortized over their estimated useful lives. The estimated future
intangibles amortization expense as of June 30, 2007 is as follows (in thousands):
For the Years Ending December 31,
|
|
|
|
|
|
|
2007 (remaining six months) |
|
|
|
|
$ |
1,266 |
2008 |
|
|
|
|
|
2,495 |
2009 |
|
|
|
|
|
2,452 |
2010 |
|
|
|
|
|
2,452 |
2011 |
|
|
|
|
|
2,452 |
Thereafter |
|
|
|
|
|
7,160
|
Total |
|
|
|
|
$ |
18,277
|
Goodwill
The carrying amount of goodwill as of June 30, 2007 is as follows (in thousands):
|
|
|
Network |
|
|
Communications |
|
|
|
|
|
|
Signaling |
|
|
Software |
|
|
|
|
|
|
Group
|
|
|
Solutions Group
|
|
|
Total
|
Balance at December 31, 2006 |
|
$ |
3,361 |
|
$ |
23,515 |
|
$ |
26,876 |
Additions |
|
|
-
|
|
|
-
|
|
|
-
|
Balance at June 30, 2007 |
|
$ |
3,361
|
|
$ |
23,515
|
|
$ |
26,876
|
As required by SFAS 142, we do not amortize our goodwill balances, but instead test our goodwill for impairment annually on October
1st and more frequently upon the occurrence of any events that may indicate impairment.
12
Note 7 — Financial Instruments
We use derivative instruments, primarily foreign currency forward contracts, to manage our exposure to market risks such as foreign
exchange risks. As we do not designate our foreign exchange forward contracts as accounting hedges, we adjust these instruments to fair value
through operations. We do not hold or issue financial instruments for speculative or trading purposes.
We monitor our exposure to foreign currency fluctuations on a monthly basis. We enter into multiple forward contracts throughout a given
month to match and mitigate our changing exposure to foreign currency fluctuations. Our exposure to foreign currency fluctuations is principally
due to receivables generated from sales denominated in foreign currencies. Our exposure fluctuates as we generate new sales in foreign
currencies and as existing receivables related to sales in foreign currencies are collected. Our foreign currency forward contracts generally have
terms of one month or less and typically end on the last fiscal day of any given month. We then immediately enter into new foreign currency
forward contracts.
As of June 30, 2007, we had one foreign currency contract to sell 11.1 million Euros. As of December 31, 2006, we had four foreign
currency contracts: one to sell 640,000 Australian Dollars, one to sell 25 million Euros, one to sell 19.2 million Brazilian Reais and one to sell 1.5
million Canadian Dollars. For the six months ended June 30, 2007 and 2006, our net losses from foreign currency forward contracts were
approximately $2.1 million and $2.3 million, respectively. These losses were generally offset by the remeasurement gains on the underlying
receivables. We plan to continue to use foreign currency forward contracts to manage foreign currency exchange risks in the future.
Note 8 — Income Taxes
As part of the process of preparing our unaudited condensed consolidated financial statements, we are required to estimate our
full-year income and the related income tax expense in each jurisdiction in which we operate. Changes in the geographical mix or estimated level of
annual pretax income can impact our effective tax rate or income taxes as a percentage of pretax income (the "Effective Rate"). This process
involves estimating our current tax liabilities in each jurisdiction in which we operate, including the impact, if any, of additional taxes resulting
from tax examinations, as well as making judgments regarding the recoverability of deferred tax assets.
Tax liabilities can involve complex issues and may require an extended period to resolve. To the extent recovery of deferred tax assets is
not more likely than not based on our estimate of future taxable income in each jurisdiction, a valuation allowance is established. While we have
considered future taxable income and the existence of prudent and feasible tax planning strategies in assessing our valuation allowance, in the
event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, we would charge to
income an adjustment to the valuation allowance in the period such determination was made.
Our U.S. Federal income tax returns for 2002, 2004, and 2005 have been selected for examination by the Internal Revenue Service ("IRS").
While the final resolution of the IRS's pending examination is uncertain, we believe we have made adequate provision in the accompanying
unaudited condensed consolidated financial statements for any adjustments that the IRS may propose with respect to the U.S. Federal income
tax returns. Based on currently available information, management believes that the ultimate outcome will not have a material adverse effect on
our financial position, cash flows or results of operations. We may receive an assessment related to the audit of our U.S. income tax returns that
exceeds amounts provided for by us. In the event of such an assessment, there exists the possibility of a material adverse impact on our results
of operations for the period in which the matter is ultimately resolved or an unfavorable outcome is more likely than not to occur.
Note 9 — Uncertain Tax Positions
On January 1, 2007, we adopted the provisions of FIN 48. As a result of the adoption of FIN 48, we did not record an adjustment to the
balance of retained earnings as of January 1, 2007. As of January 1, 2007 and June 30, 2007, the total amount of unrecognized income tax
benefits was $12.1 million and $13.5 million (including interest and penalties), respectively. A change in estimate relating to any of these
unrecognized tax benefits could have a material impact on the Company's effective tax rate.
We recognize interest and penalties related to uncertain tax positions in the provision for (benefit from) income taxes. As of January 1,
2007, the total amount of interest and penalties related to the liability for uncertain tax positions was $2.1 million. During the six months ended
June 30, 2007, we accrued an additional $0.6 million of interest expense in provision (benefit) for income taxes.
13
During the next twelve months, we expect certain events to occur that may require us to recognize previously unrecognized income tax
benefits. These events include (1) the expiration of the statute of limitations related to our 2003 income tax filings, and (2) the expected
settlement of the IRS examinations of our 2002, 2004, and 2005 tax years (as discussed in Note 8 above). The range of previously
unrecognized benefits that would be recognized if both of these events occur cannot be reasonably estimated at this time, but may have a
material impact on our consolidated effective tax rate.
As mentioned in Note 8, our 2002, 2004, and 2005 Federal income tax returns are currently under examination by the IRS. In addition to
these years, our 2003 tax year remains open to examination by the IRS. Certain tax return filings outside of the United States remain open to
examination by foreign tax authorities, but these filings, and the resulting tax liabilities, are not material to our consolidated financial
statements.
Note 10 — Commitments and Contingencies
Indemnities, Commitments and Guarantees
In the normal course of our business, we make certain indemnities, commitments and guarantees under which we may be
required to make payments in relation to certain transactions. These indemnities, commitments and guarantees include, among others,
intellectual property, gross negligence and willful misconduct indemnities to our customers in connection with the sale of our products and
services and licensing of our technology, indemnities for liabilities associated with the infringement of other parties' technology based upon our
products, services and technology, guarantees of timely performance of our obligations, indemnities related to the reliability of our equipment,
and indemnities to our directors and officers to the maximum extent permitted by law. The duration of these indemnities, commitments and
guarantees varies, and, in certain cases, is indefinite. Many of these indemnities, commitments and guarantees do not provide for any limitation
of the maximum potential future payments that we could be obligated to make. We have not recorded a liability for these indemnities,
commitments or guarantees in the accompanying unaudited condensed consolidated balance sheets because future payment is not
probable.
Litigation
From time to time, various claims and litigation are asserted or commenced against us arising from or related to contractual
matters, intellectual property matters, product warranties and personnel and employment disputes. As to such claims and litigation, we can give
no assurance that we will prevail. However, we currently do not believe that the ultimate outcome of any pending matters will have a material
adverse effect on our consolidated financial position, results of operations or cash flows.
Note 11 — Stock-Based Compensation
Stock-Based Awards Activity
The following table summarizes option and stock appreciation rights ("SARs") activity for the six months ending June 30, 2007
(shares and dollars in thousands):
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
Number
|
|
|
Price
|
|
|
Life (years)
|
|
|
Value
|
Outstanding at December 31, 2006 |
|
18,125 |
|
$ |
16.86 |
|
|
|
|
|
|
Options and SARs granted |
|
306 |
|
$ |
14.62 |
|
|
|
|
|
|
Options exercised |
|
(1,678) |
|
$ |
11.16 |
|
|
|
|
|
|
Options cancelled/forfeited/expired |
|
(2,786)
|
|
$ |
17.73 |
|
|
|
|
|
|
Outstanding at June 30, 2007 |
|
13,967
|
|
$ |
17.33
|
|
|
2.66
|
|
$ |
11,827
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at June 30, 2007 (1)
|
|
13,408
|
|
$ |
17.43
|
|
|
2.56
|
|
$ |
11,279
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2007 |
|
11,384
|
|
$ |
17.86
|
|
|
2.14
|
|
$ |
9,332
|
(1)
Options expected to vest are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding
options.
14
The following table summarizes information about stock options and SARs outstanding and exercisable at June 30, 2007 (shares in
thousands):
|
|
Options and SARs Outstanding
|
|
Options / SARs Exercisable
|
|
|
|
|
|
Wgtd. Avg. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Wgtd. Avg. |
|
|
|
|
Wgtd. Avg. |
|
|
|
|
|
Contractual |
|
|
Exercise |
|
|
|
|
Exercise |
|
Range of Exercise Price
|
|
Number
|
|
Life (years)
|
|
|
Price
|
|
Number
|
|
|
Price
|
|
$ 3.11 to $ 11.96 |
|
2,495 |
|
3.94 |
|
$ |
10.62 |
|
1,549 |
|
$ |
9.80 |
|
12.15 to 13.71 |
|
1,519 |
|
1.59 |
|
|
12.88 |
|
1,341 |
|
|
12.80 |
|
14.36 to 16.73 |
|
1,594 |
|
2.18 |
|
|
15.81 |
|
1,213 |
|
|
16.00 |
|
16.74 to 17.38 |
|
1,459 |
|
2.93 |
|
|
17.28 |
|
1,000 |
|
|
17.26 |
|
17.79 to 18.31 |
|
1,404 |
|
2.55 |
|
|
17.92 |
|
1,019 |
|
|
17.96 |
|
18.75 to 18.76 |
|
341 |
|
2.33 |
|
|
18.76 |
|
279 |
|
|
18.76 |
|
18.80 to 18.80 |
|
1,567 |
|
1.99 |
|
|
18.80 |
|
1,402 |
|
|
18.80 |
|
19.21 to 20.88 |
|
1,447 |
|
2.94 |
|
|
19.59 |
|
1,441 |
|
|
19.59 |
|
20.88 to 25.31 |
|
1,772 |
|
2.45 |
|
|
24.34 |
|
1,772 |
|
|
24.34 |
|
25.38 to 2,739.21 |
|
369
|
|
2.86 |
|
|
35.41 |
|
368
|
|
|
35.41 |
|
Total |
|
13,967
|
|
2.66 |
|
$ |
17.33 |
|
11,384
|
|
$ |
17.86 |
|
Primarily as a result of the disposition of SSG, in July 2007 approximately 2.2 million options were cancelled and approximately 0.6
million options were exercised, resulting in approximately 11.2 million options outstanding as of August 1, 2007.
The following table summarizes Restricted Stock Unit ("RSU") activity for the six months ended June 30, 2007 (shares in
thousands):
|
|
|
|
|
Weighted |
|
|
|
|
|
Average |
|
|
|
|
|
Grant Date |
|
|
Number
|
|
|
Fair Value
|
Outstanding at December 31, 2006 |
|
972 |
|
$ |
13.49 |
Awarded |
|
605 |
|
|
13.81 |
Released |
|
(113) |
|
|
14.72 |
Forfeited |
|
(129)
|
|
|
12.19 |
Outstanding at June 30, 2007 |
|
1,335
|
|
$ |
13.66
|
Stock-Based Compensation Expense
Effective January 1, 2006, we account for our employee stock-based compensation plans using the fair value method,
as prescribed by Statement of Financial Accounting Standards No. 123 (revised 2004) "Share-Based Payment" ("SFAS 123R"). Accordingly, we
estimate the grant date fair value of our stock-based awards and amortize this fair value to compensation expense over the requisite service
period or vesting term. To estimate the fair value of our stock option awards and employee stock purchase plan shares we currently use the
Black-Scholes option-pricing model. The determination of the fair value of stock-based payment awards on the date of grant using an
option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables
include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free
interest rate and expected dividends. Due to the inherent limitations of option-valuation models available today, including future events that are
unpredictable and the estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by our
employees may vary significantly from the amounts expensed in our financial statements. For restricted stock or restricted stock unit awards, we
measure the grant date fair value based upon the market price of our common stock on the date of the grant and amortize this fair value to
compensation expense over the requisite service period or vesting term.
15
Prior to the second quarter of 2007, our stock-based awards have been service-based only. In May 2007, we awarded our President and
Chief Executive Officer 100,000 RSUs that also contain performance-based criteria. The quantity of the RSUs eligible for vesting is based on
our attainment of specific performance goals set by the Board of Directors, and the RSUs are subject to a vesting period of four years with
vesting criteria based on continued employment. To the extent that we believe it is probable that the performance goals will be achieved, the
expense associated with this grant will be accrued according to the vesting schedule of the award beginning in the period when achievement is
considered probable. We will reassess the probability of the performances conditions being achieved at each reporting period and will adjust the
accrual for subsequent changes in the estimated or actual outcome.
SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from initial estimates. Stock-based compensation expense was recorded net of estimated forfeitures for the six months ended June 30,
2007 and 2006 such that expense was recorded only for those stock-based awards that are expected to vest.
Total stock-based compensation recognized in our unaudited condensed consolidated statements of operations for the three months ended
June 30, 2007 and 2006 is as follows (in thousands):
|
|
|
Option and |
|
|
|
|
|
|
|
|
|
SAR Grants |
|
|
|
|
|
|
|
|
|
and Stock |
|
|
|
|
|
|
|
|
|
Purchase |
|
|
|
|
|
|
Income Statement Classifications |
|
|
Rights
|
|
|
RSUs
|
|
|
Total
|
Three months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
$ |
353 |
|
$ |
51 |
|
$ |
404 |
Research and development |
|
|
655 |
|
|
48 |
|
|
703 |
Sales and marketing |
|
|
614 |
|
|
179 |
|
|
793 |
General and administrative |
|
|
1,011
|
|
|
1,079
|
|
|
2,090
|
Total continuing operations |
|
|
2,633 |
|
|
1,357 |
|
|
3,990 |
Discontinued operations |
|
|
(77)
|
|
|
(233)
|
|
|
(310)
|
Total |
|
$ |
2,556
|
|
$ |
1,124
|
|
$ |
3,680
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
$ |
587 |
|
$ |
- |
|
$ |
587 |
Research and development |
|
|
1,104 |
|
|
- |
|
|
1,104 |
Sales and marketing |
|
|
1,244 |
|
|
- |
|
|
1,244 |
General and administrative |
|
|
1,070
|
|
|
425
|
|
|
1,495
|
Total continuing operations |
|
|
4,005 |
|
|
425 |
|
|
4,430 |
Discontinued operations |
|
|
3,584
|
|
|
-
|
|
|
3,584
|
Total |
|
$ |
7,589
|
|
$ |
425
|
|
$ |
8,014
|
16
Total stock-based compensation recognized in our unaudited condensed consolidated statements of operations for
the six months ended June 30, 2007 and 2006 is as follows (in thousands):
|
|
|
Option and |
|
|
|
|
|
|
|
|
|
SAR Grants |
|
|
|
|
|
|
|
|
|
and Stock |
|
|
|
|
|
|
|
|
|
Purchase |
|
|
|
|
|
|
Income Statement Classifications |
|
|
Rights
|
|
|
RSUs
|
|
|
Total
|
Six months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
$ |
830 |
|
$ |
93 |
|
$ |
923 |
Research and development |
|
|
1,648 |
|
|
69 |
|
|
1,717 |
Sales and marketing |
|
|
1,520 |
|
|
290 |
|
|
1,810 |
General and administrative |
|
|
2,627
|
|
|
1,649
|
|
|
4,276
|
Total continuing operations |
|
|
6,625 |
|
|
2,101 |
|
|
8,726 |
Discontinued operations |
|
|
2,763
|
|
|
(159)
|
|
|
2,604
|
Total |
|
$ |
9,388
|
|
$ |
1,942
|
|
$ |
11,330
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
$ |
1,293 |
|
$ |
- |
|
$ |
1,293 |
Research and development |
|
|
2,611 |
|
|
- |
|
|
2,611 |
Sales and marketing |
|
|
2,759 |
|
|
- |
|
|
2,759 |
General and administrative |
|
|
2,761
|
|
|
770
|
|
|
3,531
|
Total continuing operations |
|
|
9,424 |
|
|
770 |
|
|
10,194 |
Discontinued operations |
|
|
7,699
|
|
|
-
|
|
|
7,699
|
Total |
|
$ |
17,123
|
|
$ |
770
|
|
$ |
17,893
|
Note 12 — Operating Segment Information
We are organized into two major operating groups: the Network Signaling Group and the
Communications Software Solutions Group. As discussed in Note 2, on April 21, 2007 we sold our SSG business, which was previously
reported as our SSG operating segment; and on July 6, 2006 we sold our IEX business, which was previously reported as our IEX operating
segment. Prior period segment information below has been adjusted to conform to our current organization.
Network Signaling Group. Our Network Signaling Group products help direct and control
voice and data communications. They enable carriers to establish, control and terminate calls. They also enable carriers to offer intelligent
services, which include any services other than the call or data transmission itself. Examples of such services include products such as voice
messaging, text messaging, toll free calls (e.g., "800" calls), prepaid calling cards, and number portability.
Communications Software Solutions Group. Our Communications Software Solutions Group
is focused on providing network-related intelligence products and services to telecommunications operators. These products and services
enable operators to monitor their service and network performance by accessing and analyzing critical business data such as call volumes,
subscriber behavior and traffic types and volumes. As part of our communications software portfolio, we offer call management, revenue
assurance, monitoring, network optimization, quality of service and marketing intelligence applications. In addition, as more network providers
transition from circuit to packet technology, we offer products and services that enable operators to monitor their service and network
performance during the transition, helping to speed up the implementation of packet networks, while lowering the transition risk.
Transfers between operating groups are made at prices reflecting market conditions. The allocation
of revenues from external customers by geographical area is determined by the destination of the sale.
17
Revenues and income (loss) from operations for each of our operating segments are as follows (in thousands):
|
|
|
Revenues |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Network Signaling Group |
|
$ |
92,451 |
|
$ |
96,796 |
|
$ |
183,747 |
|
$ |
152,034 |
Communications Software Solutions Group |
|
|
17,533 |
|
|
22,791 |
|
|
35,030 |
|
|
32,468 |
Intercompany Eliminations |
|
|
-
|
|
|
(489)
|
|
|
-
|
|
|
(552)
|
Total net revenues |
|
$ |
109,984
|
|
$ |
119,098
|
|
$ |
218,777
|
|
$ |
183,950
|
|
|
|
Income (Loss) from Operations |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Network Signaling Group |
|
$ |
25,541 |
|
$ |
44,972 |
|
$ |
48,907 |
|
$ |
50,432 |
Communications Software Solutions Group |
|
|
(5,688) |
|
|
3,579 |
|
|
(13,935) |
|
|
(506) |
Unallocated expense related to Switching Solutions Group(1)
|
|
|
- |
|
|
(3,610) |
|
|
- |
|
|
(7,591) |
General Corporate(2)
|
|
|
(16,929)
|
|
|
(21,112)
|
|
|
(29,694)
|
|
|
(36,765)
|
Total income from operations(3)
|
|
$ |
2,924
|
|
$ |
23,829
|
|
$ |
5,278
|
|
$ |
5,570
|
|
|
|
(1) |
|
Prior to the disposition of our SSG business, we allocated certain sales, marketing and customer service overhead costs to
each reporting unit based on orders. Due to actual costs eliminated as a result of the SSG sale being lower than the costs we had allocated to
SSG, certain costs previously associated with the SSG business during 2006 were retained by us. Accordingly, these costs were not eliminated
with the disposition of SSG and are reported as part of continuing operations. |
(2) |
|
General Corporate includes acquisition-related charges and amortization of $0.6 million and $1.1 million for the three
months ended June 30, 2007 and 2006, respectively, and $1.3 million and $2.1 million for the six months ended June 30, 2007 and 2006,
respectively, as well as other corporate expenses not specifically allocated to operating segments or specifically used by operating segment
management to evaluate segment performance.
|
(3) |
|
Income from operations has been reduced by $4.0 million and $4.4 million for the three months ended June 30, 2007 and
2006, respectively, and $8.7 million and $10.2 million for the six months ended June 30, 2007 and 2006 respectively, of stock-based
compensation. The following table reflects the stock-based compensation expense from continuing operations included above (in
thousands): |
|
|
|
|
|
|
Stock-Based Compensation |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Network Signaling Group |
|
$ |
1,544 |
|
$ |
2,022 |
|
$ |
3,447 |
|
$ |
4,993 |
Communications Software Solutions Group |
|
|
611 |
|
|
696 |
|
|
1,485 |
|
|
1,446 |
Unallocated expense related to Switching Solutions Group(1)
|
|
|
- |
|
|
255 |
|
|
- |
|
|
590 |
General Corporate |
|
|
1,835
|
|
|
1,457
|
|
|
3,794
|
|
|
3,165
|
Total stock-based compensation |
|
$ |
3,990
|
|
$ |
4,430
|
|
$ |
8,726
|
|
$ |
10,194
|
(1) |
|
Included in this line is stock-based compensation expense previously allocated to the SSG business which we sold in the
second quarter of 2007. This expense was not eliminated with the disposition of SSG and is reported as part of continuing
operations. |
18
Enterprise-Wide Disclosures
The following table sets forth, for the periods indicated, revenues from external customers
by principal product line (in thousands):
|
|
|
Revenues from External Customers |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Network Signaling Group |
|
$ |
92,451 |
|
$ |
96,796 |
|
$ |
183,747 |
|
$ |
152,034 |
Communications Software Solutions Group |
|
|
17,533
|
|
|
22,302
|
|
|
35,030
|
|
|
31,916
|
Total net revenues |
|
$ |
109,984
|
|
$ |
119,098
|
|
$ |
218,777
|
|
$ |
183,950
|
We conduct business in a number of foreign countries and are organized into three
geographic regions. The three regions are: (1) North America, comprised of the United States and Canada, (2) "EAAA," comprised of
Europe and the Middle East, Asia Pacific (including China and India), Africa and Australia and (3) "CALA," comprised of the Caribbean and Latin
America, including Mexico. The following table sets forth, for the periods indicated, revenues from external customers by geographic territory (in
thousands):
|
|
|
Revenues from External Customers |
|
|
|
By Geographic Region |
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
North America(1)
|
|
$ |
31,878 |
|
$ |
72,041 |
|
$ |
90,518 |
|
$ |
123,652 |
EAAA |
|
|
44,307 |
|
|
23,155 |
|
|
65,743 |
|
|
28,644 |
CALA |
|
|
33,799
|
|
|
23,902
|
|
|
62,516
|
|
|
31,654
|
Total revenues from external customers |
|
$ |
109,984
|
|
$ |
119,098
|
|
$ |
218,777
|
|
$ |
183,950
|
|
|
|
(1) |
|
North America includes revenues in the United States of $29,798 and $67,002 for the three months ended June 30, 2007
and 2006, respectively, and $81,885 and $113,838 for the six months ended June 30, 2007 and 2006, respectively. |
The following table sets forth, for the periods indicated, our long-lived assets including net property and equipment, investment in a
privately held company and other assets by geographic region (in thousands):
|
|
|
Long-Lived Assets |
|
|
|
By Geographic Region |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007
|
|
|
2006
|
United States
|
|
$ |
49,970 |
|
$ |
43,016 |
Other |
|
|
3,905
|
|
|
3,243
|
Total long-lived assets |
|
$ |
53,875
|
|
$ |
46,259
|
For the three months ended June 30, 2007, sales to Telecom Italia Mobile represented 10% of our revenues. For the three months ended
June 30, 2006, sales to the merged AT&T entities (comprised of AT&T, Cingular, SBC Communications, Inc. and others),
Sprint/Nextel, and Telecom Americas represented 21%, 11%, and 11%, respectively, of our revenues. Sales to the merged AT&T entities
were generated primarily by our NSG business unit, and sales to Sprint/Nextel and Telecom Americas were generated by both the NSG and
CSSG business units.
For the six months ended June 30, 2007 and 2006, sales to the merged AT&T entities accounted for 13% and 19% of our revenues,
respectively, and were primarily generated by our NSG business unit.
19
Note 13 — Earnings Per Share - Continuing Operations
The following table provides a reconciliation of the numerators and denominators of the basic
and diluted earnings from continuing operations per share computations for the three and six months ended June 30, 2007 and 2006 (in
thousands, except per share amounts):
|
|
|
Income |
|
|
|
|
|
|
|
|
from |
|
|
|
|
|
|
|
|
Continuing |
|
|
|
|
|
|
|
|
Operations |
|
Shares |
|
|
Per-Share |
|
|
|
(Numerator)
|
|
(Denominator)
|
|
|
Amount
|
For the Three Months Ended June 30, 2007: |
|
|
|
|
|
|
|
|
Basic income from continuing operations per share |
|
$ |
3,773 |
|
69,938 |
|
$ |
0.05 |
Effect of Dilutive Securities |
|
|
- |
|
1,213 |
|
|
|
Effect of "if-converted" method applied to Convertible Notes |
|
|
-
|
|
-
|
|
|
|
Diluted income from continuing operations per share |
|
$ |
3,773
|
|
71,151
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2006: |
|
|
|
|
|
|
|
|
Basic income from continuing operations per share |
|
$ |
15,691 |
|
66,933 |
|
$ |
0.23 |
Effect of Dilutive Securities |
|
|
- |
|
1,269 |
|
|
|
Effect of "if-converted" method applied to Convertible Notes |
|
|
581
|
|
6,361
|
|
|
|
Diluted income from continuing operations per share |
|
$ |
16,272
|
|
74,563
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2007: |
|
|
|
|
|
|
|
|
Basic income from continuing operations per share |
|
$ |
6,773 |
|
69,426 |
|
$ |
0.10 |
Effect of Dilutive Securities |
|
|
- |
|
1,273 |
|
|
|
Effect of "if-converted" method applied to Convertible Notes |
|
|
-
|
|
-
|
|
|
|
Diluted income from continuing operations per share |
|
$ |
6,773
|
|
70,699
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2006: |
|
|
|
|
|
|
|
|
Basic income from continuing operations per share |
|
$ |
5,425 |
|
66,883 |
|
$ |
0.08 |
Effect of Dilutive Securities |
|
|
- |
|
1,336 |
|
|
|
Effect of "if-converted" method applied to Convertible Notes |
|
|
-
|
|
-
|
|
|
|
Diluted income from continuing operations per share |
|
$ |
5,425
|
|
68,219
|
|
$ |
0.08 |
The computation of diluted earnings from continuing operations per share excludes unexercised stock
options, restricted stock units ("RSUs"), and potential shares issuable upon conversion of our senior subordinated convertible notes that are
anti-dilutive. The following common stock equivalents were excluded from the earnings from continuing operations per share computation, as
their inclusion would have been anti-dilutive (in thousands):
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
2006
|
|
|
2007
|
|
2006
|
Weighted average number of stock options and SARs excluded |
|
|
|
|
|
|
|
|
|
|
due to the exercise price exceeding the average fair value of our |
|
|
|
|
|
|
|
|
|
|
common stock during the period |
|
|
11,486 |
|
17,464 |
|
|
12,364 |
|
17,749 |
Shares issuable upon conversion of our long-term convertible debt |
|
|
6,361
|
|
-
|
|
|
6,361
|
|
6,361
|
Total common stock equivalents excluded from diluted net |
|
|
|
|
|
|
|
|
|
|
income from continuing operations per share computation |
|
|
17,847
|
|
17,464
|
|
|
18,725
|
|
24,110
|
There were no transactions subsequent to June 30, 2007, which, had they occurred prior to July 1, 2007,
would have changed materially the number of shares in the basic or diluted earnings from continuing operations per share computations.
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is designed to provide a better understanding of our unaudited
condensed consolidated financial statements, including a brief discussion of our business and products, key factors that impacted our
performance, and a summary of our operating results. The following discussion should be read in conjunction with the unaudited condensed
consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q, and the Consolidated
Financial Statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained
in our Annual Report on Form 10-K for the year ended December 31, 2006. Historical results and percentage relationships among any
amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.
Overview of Our Business and Products
We are a global provider of telecommunications network systems and software applications, which we design, develop, manufacture,
market, sell and support. Our applications include high performance, network-centric, mission critical applications for signaling and session
control; and complementary applications that enable service providers to better measure, manage, and monetize the communication services
they provide. Our network applications enable our customers to optimize their network efficiency and performance and to provide basic and
enhanced voice and data services to their subscribers. Our customers include traditional landline telecommunications carriers, mobile
communications operators, emerging competitive service providers and cable television service providers that offer communication services.
We derive our revenues primarily from the sale or license of telecommunications network systems and software applications and related
professional services, such as installation, training, and customer support, including customer post-warranty service contracts and our
TekelecCare extended warranty offering. Payment terms for contracts with our customers are negotiated with each customer and are based on
a variety of factors, including the customer's credit standing and our history with the customer. As we continue to expand internationally, we
expect that our payment terms may lengthen, a higher percentage of our billing terms may be tied to the achievement of milestones and a
greater number of our customers may require performance/bid bonds.
Our corporate headquarters are located in Morrisville, North Carolina, with research and development facilities and sales offices located
throughout the world. We sell our products and services in three geographic regions: North America, comprised of the United States and
Canada; "EAAA," comprised of Europe and the Middle East, Asia Pacific (including India and China), Africa and Australia; and "CALA,"
comprised of the Caribbean and Latin America, including Mexico.
Operating Segments
We are organized into two operating groups: the Network Signaling Group and the Communications Software Solutions Group. As
discussed in Note 2 to our accompanying unaudited condensed consolidated financial statements, on April 21, 2007 we sold our SSG business,
which was previously reported as the SSG operating segment; and on July 6, 2006 we sold our IEX business, which was previously reported as
the IEX Contact Center Group operating segment. Prior period segment information below has been adjusted to conform to our current
organization.
Network Signaling Group or NSG. Our NSG products enable service providers to establish, control and terminate voice and data
communications "calls" or "sessions." They also enable service providers to offer intelligent services, which include any services other than the
call or data transmission itself, such as voice messaging, toll free calls (e.g., "800" calls), prepaid calling cards, text messaging and number
portability (i.e., the ability to take a phone number to another carrier).
Communications Software Solutions Group or CSSG. Our CSSG business unit leverages our NSG installed customer base, and its
product portfolio complements the functionality of the NSG product portfolio. CSSG network and business applications help service providers
measure, manage and monetize the communications traffic that traverses their networks. Specifically, these applications help enhance the
reliability and security of our customers' networks, reduce the time to troubleshoot problems, enable real-time management of service quality,
and help detect and correct revenue leaks due to fraud, incorrect billings, and errors in recordkeeping. These products also help service
providers deploy new services more cost effectively and improve their return on the investment in existing and
21
new services across both legacy and next generation telecommunications networks. We provide comprehensive real-time network and
business applications measurement capability for traditional and IP networks, as well as hybrid networks.
Discontinued Operations
As further discussed in Note 2 to our accompanying unaudited condensed consolidated financial statements, during the second quarter
of 2007 we sold our SSG business to Genband, and during the third quarter of 2006 we sold our IEX business to NICE Systems Ltd. These
businesses are classified as discontinued operations and their financial results are reported separately as discontinued operations for all periods
presented.
The following table represents the financial results of the SSG and IEX businesses included in discontinued operations (in thousands):
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Revenues |
|
$ |
6,700
|
|
$ |
53,521
|
|
$ |
27,682
|
|
$ |
96,135
|
Loss from discontinued operations before |
|
|
|
|
|
|
|
|
|
|
|
|
provision for income taxes |
|
$ |
(11,697) |
|
$ |
(1,456) |
|
$ |
(37,579) |
|
$ |
(11,354) |
Benefit from income taxes |
|
|
(4,613)
|
|
|
(315)
|
|
|
(14,303)
|
|
|
(3,970)
|
Loss from discontinued operations, net of income taxes |
|
|
(7,084) |
|
|
(1,141) |
|
|
(23,276) |
|
|
(7,384) |
Loss on sale of discontinued operations, net of taxes |
|
|
(4,463)
|
|
|
-
|
|
|
(41,743)
|
|
|
-
|
Loss from discontinued operations, net of taxes |
|
$ |
(11,547)
|
|
$ |
(1,141)
|
|
$ |
(65,019)
|
|
$ |
(7,384)
|
Internal Controls and Corporate Governance
We consider our internal control over financial reporting a high priority and continually review all aspects and make improvements in
our internal control. Our executive management is committed to ensuring that our internal control over financial reporting is complete, effective
and appropriately documented. In the course of our evaluation of our internal control, we seek to identify material errors or control problems and
to confirm that the appropriate corrective actions, including process improvements, are being undertaken. We also seek to deal with any control
matters in this evaluation, and in each case if a problem is identified, we consider what revision, improvement or correction to make in
accordance with our ongoing procedures. Our continued objective is to maintain our internal control as a set of dynamic systems that change
(including improvements and corrections) as conditions warrant.
In addition to striving to maintain an effective system of internal control over financial reporting, we follow high professional standards in
measuring and reporting our financial performance. Specifically, we have adopted a code of conduct for all of our employees and directors that
requires a high level of professionalism and ethical behavior. We believe that our accounting policies are prudent and provide a clear view of our
financial performance. We utilize our internal audit function to help ensure that we follow these accounting policies and maintain our internal
control. Further, our Disclosure Committee, composed primarily of senior financial and legal personnel, helps ensure the completeness and
accuracy of the reporting of our financial results and our other disclosures. In performing its duties, the Disclosure Committee consults with and
obtains relevant information from operations, customer service and sales personnel, including an internal certification process that solicits
responses from these functional areas. Prior to the release of our financial results, key members of our management review our operating
results and significant accounting policies and estimates with our Audit Committee, which consists solely of independent members of our Board
of Directors.
Operating Environment and Key Factors Impacting our 2007 Results
Today, most service providers operate both circuit switched networks and packet networks. Currently, the majority of networks which
carry voice communications rely on TDM circuit switching technology, and, until recently, packet switching has been used almost exclusively for
data communications. Managing multiple distinct networks in the future is not expected to be a viable economic alternative for service providers.
While circuit switching has offered reliable and high quality voice communications, packet switching is inherently more efficient and cost
effective. As a result, service providers are beginning to migrate toward a single IP network architecture, or converged network, to serve as the
foundation for their enhanced voice, video and data service offerings.
22
Convergence has a wide variety of meanings within the telecommunications industry. The term convergence encompasses: (a) the
convergence of circuit and packet-based technologies to support voice services (voice transported over IP and SS7 signaling transported over
IP); (b) the convergence of mobile networks and fixed networks and the associated flexibility of accessing networks utilizing a variety of
subscriber devices; (c) the convergence of widely utilized information technologies with proprietary legacy telecommunications technologies;
and (d) the convergence of basic voice and data services and enhanced multimedia services.
In the last several years, the IP Multimedia Subsystem architecture, or IMS, has emerged as an architecture well suited for converged IP
networking. Variations of the IMS architecture have been and are being adopted by various standard-setting bodies within the wireless, wireline
and cable industries. Very much like the SS7-based intelligent networking architecture employed by circuit switched networks, IMS includes a
three-layer architecture: a media transport layer, a signaling and session control layer and an applications layer. However, instead of employing
the SS7 protocol for signaling, IMS uses a newer signaling protocol, Session Initiation Protocol, or SIP. SIP's advantages include its ability to
manage multimedia services (voice, video and data) in an IP network, making them accessible from a wide variety of devices, such as mobile
phones, personal computers, ordinary phones and personal digital assistants, or so called "smart phones."
The transition to a converged network poses a challenge for service providers: when and how can they cost effectively transition from
existing networking technology to the converged network, without disrupting existing services and without abandoning current and recent
investments in existing networks. We believe this transition process will evolve through three phases: the current state, the transition state and
the future state.
- We believe the current state includes basic voice and data services signaled with SS7 and transported over TDM-based networks.
- We believe the transition state will offer basic and enhanced voice and data services signaled with SS7, but transported over IP-based
networks. Examples of network applications many service providers are evaluating and deploying include voice services transported over IP, or
VoIP, and SS7 signaling transported over IP, or SIGTRAN.
- We believe the future state will be based upon the emerging industry consensus for IMS architectures providing enhanced multimedia
service (voice, video and data) signaled with SIP and transported over an IP-based, converged network.
While this trend is global in nature, there remain considerable differences by geography in the Public Switched Telephone Networks
("PSTN"), Public Land Mobile Networks ("PLMN") and Internet maturity, as well as in the economic opportunities that service providers are
attempting to capitalize upon. These differences generally affect the decision as to when and how service providers adopt newer technologies
and commence their transition to a converged network. As a result, we expect adoption of, and thus demand for the networking technologies, to
vary from market to market, and current state, transitional state and future state networks to overlap for a considerable period of time. We
believe that there will likely be instances of all three network states, or hybrid networks, concurrently owned and operated by a single service
provider, especially the larger providers who own networks in several markets. For example, service providers operating current state networks
in emerging markets will need to interoperate with service providers operating transitional networks and converged networks in maturing
markets. Finally, service providers must be able to measure performance, manage the quality and availability of service and monetize the newer
services in and across current, transition and future state networks.
While the transition to IMS may be occurring slower than we originally anticipated, we believe our products and services provide our
customers with the key components to successfully migrate to IMS. Specifically, we believe our expertise in network signaling, coupled with our
increasing abilities to provide our customers expanded products and services geared for a next-generation network environment, positions us
well to pursue the opportunities that the migration to IMS presents.
Also impacting our results in 2007 has been the recent wide-spread consolidation among service providers, as they attempt to take
advantage of increased economies of scale or position themselves to offer both wireline and wireless services at reduced costs. We believe the
uncertainty generated by the recent consolidation among service providers, particularly in North America, and slower than anticipated adoption
of our new transition products are both factors that may have contributed to the shortfall of orders from our customers during the first half of
2007. In addition, CSSG orders were lower than anticipated worldwide due to competitive pressures and slower than expected new product
introductions, including the delay of the general availability of a new release ("IAS 2.0") of our Integrated Applications Software ("IAS"). Despite
orders being lower than expected in the first half of 2007, we currently expect stronger orders in the second half particularly in the fourth
quarter.
23
Summary of Operating Results and Key Financial Metrics
The following is a brief summary of our performance relative to certain key financial metrics for our
continuing operations (i.e., excluding SSG and IEX) as of and for the three and six months ended June 30, 2007 compared to the three and six
months ended June 30, 2006 (in thousands, except earnings per share and days sales outstanding, or DSO):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Statement of operations statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
109,984 |
|
$ |
119,098 |
|
$ |
218,777 |
|
$ |
183,950 |
Orders |
|
$ |
84,671 |
|
$ |
81,801 |
|
$ |
163,877 |
|
$ |
168,240 |
Backlog |
|
$ |
334,701 |
|
$ |
421,158 |
|
$ |
334,701 |
|
$ |
421,158 |
Operating income |
|
$ |
2,924 |
|
$ |
23,829 |
|
$ |
5,278 |
|
$ |
5,570 |
Diluted earnings per share |
|
$ |
0.05 |
|
$ |
0.22 |
|
$ |
0.10 |
|
$ |
0.08 |
Cash flows from operations |
|
$ |
21,706 |
|
$ |
3,628 |
|
$ |
45,913 |
|
$ |
29,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
Balance sheet statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and investments |
|
|
|
|
|
|
|
$ |
464,784 |
|
$ |
424,374 |
Accounts receivable, net |
|
|
|
|
|
|
|
$ |
89,513 |
|
$ |
133,050 |
Days sales outstanding (DSO) |
|
|
|
|
|
|
|
|
56 |
|
|
60 |
Deferred revenue |
|
|
|
|
|
|
|
$ |
158,769 |
|
$ |
195,830 |
Working capital |
|
|
|
|
|
|
|
$ |
313,829 |
|
$ |
482,384 |
Shareholders' equity |
|
|
|
|
|
|
|
$ |
467,928 |
|
$ |
494,241 |
Revenues decreased by 8% to $110.0 million in the second quarter of 2007 from $119.1 million in the second quarter of
2006. The decrease in quarterly revenues is primarily due to a decrease in North American revenues, which were impacted by a continuing
consolidation among large service providers. The decrease in the North American region was partially offset by growth in revenues in the EAAA
and CALA regions, which was primarily driven by our success in increasing our market share in these regions. On a year-to-date basis, our
revenues increased by 19% to $218.8 million for the six months ended June 30, 2007, compared to $184.0 million for the corresponding period
in 2006. This growth was primarily in international markets as a result of our increasing market share in these regions, along with our ability in
2007 to complete several large projects that were in backlog. Further, our year-to-date 2006 revenues did not include several large first quarter
orders, as these orders were awaiting the delivery of a new software release that was completed during the third quarter of 2006.
Orders increased by 4% to $84.7 million in the second quarter of 2007 from $81.8 million in the second quarter of 2006, but
declined on a year-to-date basis by 3%, from $168.2 million in the second quarter of 2006 to $163.9 million in the second quarter of 2007. We
believe the uncertainty generated by the recent consolidation among service providers, particularly in North America, and slower than
anticipated adoption of our new transition products, are both factors that may have contributed to the shortfall of expected orders from our
customers during the first half of 2007. In addition, CSSG orders were lower than anticipated worldwide due to competitive pressures and slower
than expected new product introductions, including the delay of the general availability of IAS 2.0. Despite orders being lower than expected in
the first half of 2007, we currently expect stronger orders in the second half of 2007, particularly in the fourth quarter. Further, we currently
believe that orders for the full year 2007 will be comparable to, or slightly below, orders in 2006, resulting in a book-to-bill ratio of less than one
for the full year of 2007.
Backlog has declined by $86.5 million from June 30, 2006 to June 30, 2007, principally due to (i) the year-over-year decline in
orders over the respective trailing six-to-nine month periods and (ii) a renewed focus on converting backlog to revenue as quickly as possible,
including the adoption of new compensation policies and new procedures, while ensuring we meet all customer deliverables.
Operating Income from Continuing Operations decreased from $23.8 million in the second quarter of 2006 to $2.9 million in the
second quarter of 2007. The decrease is primarily due to a lower gross profit margin, resulting from the shift in the revenue mix from domestic to
international markets where our sales typically carry lower margins than sales domestically. Other factors contributing to the decrease in the
operating income are an overall decrease in
24
the revenue as discussed above, as well as increases in our operating expenses, particularly in
research and development. We continue to evaluate our operating expense structure and have taken action in the second quarter, as discussed
further below, to better align our operating structure with our current revenues and orders. We will continue to look for further opportunities to
reduce our cost structure in line with our current expectations regarding revenues and orders.
Diluted Earnings per Share from continuing operations for the second quarter of 2007 were also negatively impacted by the
operating income reduction and the decreases in revenue and gross margin for the reasons discussed above.
Operating Cash Flow from continuing operations increased to $45.9 million in the first half of 2007 from $29.1 million in the first
half of 2006, primarily as a result of continued improved collections of accounts receivable and the receipt in 2007of an income tax refund of
approximately $9 million. Partially offsetting these higher in-flows in 2007 was a higher conversion rate of deferred revenue into revenue during
the first half of 2007 versus the first half of 2006 for the reasons discussed below.
Cash, Cash Equivalents and Short-Term Investments increased during the six months ended June 30, 2007 by $40.4 million
due primarily to (i) the improvements in operating cash flows discussed above, and (ii) proceeds from the issuance of common
stock under our equity compensation plans of $20.2 million, partially offset by capital expenditures of $10.1 million.
Accounts Receivable decreased by $43.5 million during the six months ended June 30, 2007 to $89.5 million. This decrease
was attributable in part to significant cash collections in the first two quarters of 2007. Our first half of 2007 collections were favorably impacted
by the seasonality of our billings, as the fourth quarter of each year is typically our highest quarter of billings. This provides us with a larger base
on which to collect in the first half of each year. Also contributing to the decline in accounts receivable during the first half of 2007 is a decline in
billings during the first half of 2007 compared with the second half of 2006, due primarily to the decline in orders discussed above.
Days Sales Outstanding ("DSO") have decreased to 56 days as of June 30, 2007 from 60 days as of December 31, 2006, primarily
due to reductions in accounts receivable for the reasons discussed above. Upon the achievement of certain milestones as defined in our
customer contracts, we invoice our customers for deliverables according to the terms of the contract, which often results in the recognition of a
receivable prior to the recognition of revenue. As a result, a corresponding amount of deferred revenue is recorded related to the billing. For
purposes of calculating DSO, amounts included in deferred revenue related to accounts receivable are netted against such accounts receivable.
Deferred Revenue decreased by $37.1 million, or 19%, from $195.8 million as of December 31, 2006 to
$158.8 million as of June 30, 2007, due primarily to (i) the decline in our orders and the resulting billings during the trailing six- to
nine-month periods for the reasons discussed above, and (ii) continued improvements in delivering all elements contained in our customer contracts
in a more expeditious manner.
Working Capital decreased by 35% from $482.4 million as of December 31, 2006 to $313.8 million as of June 30,
2007, primarily due to (i) the reclassification of our Convertible Debt of $125.0 million from long-term to current liabilities because the
Convertible Debt matures in June 2008, and (ii) recognizing the loss on the disposition of SSG's assets held for sale of $41.7 million (net of tax),
partially offset by a net increase in cash, cash equivalents and short-term investments due to reasons discussed above.
Shareholders' Equity decreased by $26.3 million in the six months ended June 30, 2007 from $494.2 million as of
December 31, 2006 to $467.9 million as of June 30, 2007, due primarily to a net loss from discontinued operations of ($65.0)
million, partially offset by (i) proceeds from the issuance of shares resulting from employee stock option exercises and our employee stock
purchase plan of $20.2 million and (ii) increases in shareholders' equity resulting from stock-based compensation of $11.3 million,
including approximately $2.6 million of stock-based compensation expense attributable to discontinued operations.
Results of Operations
Because the software component of our products is more than incidental to their overall functionality, we recognize revenue under the
residual method prescribed by SOP 97-2. As a result, under arrangements with multiple product deliverables, we defer revenue recognition
related to partial shipments until all products under the arrangement are shipped and title and risk of loss have passed to the customer.
25
As a result of following the residual method, the majority of our revenue in any given quarter is derived from our existing backlog of orders.
While the timing of revenue recognition from receipt of an order varies from days to multiple years, on average we believe that our orders turn to
revenue within six to twelve months, depending on the product line, geographic region and the size of the order, along with whether the order is
from a new or existing customer. As a result, our near term revenue growth depends significantly on our existing backlog. Our long-term growth
is more dependent on growth in orders, or more specifically, our ability to achieve a positive book-to-bill ratio.
Prior to the second quarter of 2006, the focus of our sales, order management and contracting processes and related personnel had been
on obtaining large sales orders that, in most cases, included multiple product and/or software deliverables, which we normally delivered over
multiple quarters. NSG customers, in particular, placed large orders and we historically focused on customer satisfaction by making partial
shipments to meet our customers' requirements. Title and risk of loss passed to the customer prior to the recognition of revenue. In addition, the
compensation structure under which our sales force operated was designed to support and promote the pursuit of large orders without regard to
the timing of revenue recognition under the residual method dictated by these orders.
Throughout 2006 and early 2007, we evaluated our sales and order processes, and related sales compensation plans, in order to determine
how to best align these business processes and plans with our current revenue recognition policies. As a result of our evaluation, we have
implemented several new policies and procedures, including a new sales compensation plan. Despite these policy and process improvements,
the timing of revenue recognition may continue to vary significantly from quarter to quarter depending on the shipment arrangements and other
terms of the orders.
Inasmuch as a majority of the costs incurred within our customer service organization are fixed and do not necessarily fluctuate directly with
revenues recognized, a decline in revenues is likely to result in a decrease in our gross margins. In addition, because a significant portion of our
operating expenses, such as research and development expenses, sales and marketing expenses, and general and administrative expenses, is
fixed and does not fluctuate proportionally with revenue recognized, the amount of such operating expenses as a percentage of revenues may
vary significantly from period to period.
Revenues
Revenues declined by 8% from $119.1 million in the second quarter of 2006 to $110.0 million in the second quarter of 2007 due
primarily to lower revenues in North America, partially offset by an increase in international revenues as discussed below. On a year-to-date
basis, our revenues increased by 19% to $218.8 million for the six months ended June 30, 2007, compared to $184.0 million for the
corresponding period in 2006. The growth was primarily driven by increases in revenues in international markets for the reasons discussed
below. In addition, in 2007 we continued to focus on delivering all the required elements of an arrangement in a more expeditious manner,
which resulted in a higher conversion rate of existing backlog to revenue. As discussed further below, in 2007 we continued to grow our
revenues across the majority of our product lines, with NSG and CSSG growing 21% and 10%, respectively, on a year-over-year basis.
26
Revenues by Geographical Region
The following table sets forth revenues from the three geographic regions in which we generate sales of our products: North
America; Europe, the Middle East, Asia Pacific (including India and China), Africa and Australia ("EAAA"); and the Caribbean and Latin America,
including Mexico ("CALA") (dollars in thousands):
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Change |
|
|
|
2007
|
|
|
2006
|
|
|
2006 to 2007
|
North America |
|
$ |
31,878 |
|
$ |
72,041 |
|
$ |
(40,163) |
|
|
(56) |
% |
EAAA |
|
|
44,307 |
|
|
23,155 |
|
|
21,152 |
|
|
91 |
% |
CALA |
|
|
33,799
|
|
|
23,902
|
|
|
9,897
|
|
|
41 |
% |
Total revenues |
|
$ |
109,984
|
|
$ |
119,098
|
|
$ |
(9,114)
|
|
|
(8) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Change |
|
|
|
2007
|
|
|
2006
|
|
|
2006 to 2007
|
North America |
|
$ |
90,518 |
|
$ |
123,652 |
|
$ |
(33,134) |
|
|
(27) |
% |
EAAA |
|
|
65,743 |
|
|
28,644 |
|
|
37,099 |
|
|
130 |
% |
CALA |
|
|
62,516
|
|
|
31,654
|
|
|
30,862
|
|
|
97 |
% |
Total revenues |
|
$ |
218,777
|
|
$ |
183,950
|
|
$ |
34,827
|
|
|
19 |
% |
As the above table indicates, our revenues declined on a year-over-year basis by 8% during the second quarter of 2007 from the same
period in 2006, primarily due to declines in North American revenues, partially offset by increases in revenues in our international regions. Our
North American revenues decreased due primarily to the decline in orders for the reasons discussed previously. Our revenues in the EAAA and
CALA regions increased in the second quarter of 2007 as compared to the second quarter of 2006, primarily due to the strength of our Eagle
ISS upgrades and extensions revenues and Eagle ISS initial systems revenues.
For the first half of 2007 as compared to the same period in 2006, our revenues increased by 19% due primarily to increases in the EAAA
and CALA regions of 130% and 97%, respectively. This increase was primarily due to continued expansion of our product footprint into new
customers, along with our additional revenues from extension orders on systems within our installed base in these regions. Offsetting the
increases in international revenues was a decline in North American revenues which have been impacted by market conditions as discussed
above.
27
Revenues by Business Unit
We currently operate in two distinct operating segments: NSG and CSSG. In order to provide a better understanding of the
year-over-year changes and the underlying trends in our revenues, we have provided a discussion of revenues from each of our operating segments.
Revenues from each of our operating segments for the three and six months ended June 30, 2007 and 2006 are as follows (in thousands,
except percentages):
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Change |
|
|
|
2007
|
|
|
2006
|
|
|
2006 to 2007
|
Network Signaling |
|
$ |
92,451 |
|
$ |
96,796 |
|
$ |
(4,345) |
|
|
(4) |
% |
% of total revenues |
|
|
84 |
% |
|
81 |
% |
|
|
|
|
|
|
Communications Software Solutions |
|
$ |
17,533 |
|
$ |
22,302 |
|
$ |
(4,769) |
|
|
(21) |
% |
% of total revenues |
|
|
16 |
% |
|
19 |
% |
|
|
|
|
|
|
Total revenues |
|
$ |
109,984
|
|
$ |
119,098
|
|
$ |
(9,114) |
|
|
(8) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Change |
|
|
|
2007
|
|
|
2006
|
|
|
2006 to 2007
|
Network Signaling |
|
$ |
183,747 |
|
$ |
152,034 |
|
$ |
31,713 |
|
|
21 |
% |
% of total revenues |
|
|
84 |
% |
|
83 |
% |
|
|
|
|
|
|
Communications Software Solutions |
|
$ |
35,030 |
|
$ |
31,916 |
|
$ |
3,114 |
|
|
10 |
% |
% of total revenues |
|
|
16 |
% |
|
17 |
% |
|
|
|
|
|
|
Total revenues |
|
$ |
218,777
|
|
$ |
183,950
|
|
$ |
34,827 |
|
|
19 |
% |
Network Signaling Group
NSG revenues for the three months ended June 30, 2007 and 2006 were comprised of the following products and services (in
thousands, except percentages):
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Change |
|
|
|
2007
|
|
|
2006
|
|
|
2006 to 2007
|
Eagle ISS initial systems |
|
$ |
10,723 |
|
$ |
21,363 |
|
$ |
(10,640) |
|
|
(50) |
% |
Eagle ISS upgrades and extensions |
|
|
50,507 |
|
|
51,167 |
|
|
(660) |
|
|
(1) |
% |
Number portability products |
|
|
3,565 |
|
|
8,459 |
|
|
(4,894) |
|
|
(58) |
% |
Customer extended warranty services |
|
|
12,057 |
|
|
9,656 |
|
|
2,401 |
|
|
25 |
% |
Professional services and other |
|
|
15,599
|
|
|
6,151
|
|
|
9,448
|
|
|
154 |
% |
Total NSG revenues |
|
$ |
92,451
|
|
$ |
96,796
|
|
$ |
(4,345)
|
|
|
(4) |
% |
Our NSG revenues decreased by 4% in the second quarter of 2007 compared with the second quarter of 2006 due primarily to
decreased revenues associated with our Eagle ISS initial systems and number portability products. These decreases are primarily the result of
lower North American revenues from these products, partially offset by higher international revenues from these same products. While our
number portability revenues decreased in the second quarter of 2007, we expect that these revenues may increase in the second half of 2007
as more countries mandate number portability. Offsetting these decreases was an increase in professional services and other revenues due to
the overall shift in our revenues towards international markets where we continue to acquire new customers. These new international customers
require a greater amount of installation and other professional services at the initial stages of their deployment and operation of our
products.
Domestically, we derive the majority of NSG's revenues from wireless operators, as wireless networks generate significantly more
signaling traffic than wireline networks and, as a result, require significantly more signaling infrastructure. Signaling traffic on our wireless
customers' networks in recent years has increased significantly due to several factors, including growth in the number of subscribers, the
number of calls made per
28
subscriber, roaming, and the use of additional features, such as text messaging. These factors have required that the wireless operators
expand their network capacity, leading to demand for our signaling products.
Internationally, in addition to depending on the factors affecting our domestic sales growth described above, NSG's product revenue
growth depends on our ability to successfully penetrate new international markets, which often involves displacing an incumbent signaling
vendor and our ongoing ability to meet the signaling requirements of the newly acquired customers. As indicated previously, we have
experienced significant growth in our international revenues and as much of this growth is derived from sales of initial systems, we believe that
we are building a base for future revenues from our higher margin extension and number portability products.
NSG revenues for the six months ended June 30, 2007 and 2006 were comprised of the following product lines (in thousands, except
percentages):
|
|
|
For the Six Months Ended |
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Change |
|
|
|
2007
|
|
|
2006
|
|
|
2006 to 2007
|
Eagle ISS initial systems |
|
$ |
22,099 |
|
$ |
34,918 |
|
$ |
(12,819) |
|
|
(37) |
% |
Eagle ISS upgrades and extensions |
|
|
94,640 |
|
|
76,616 |
|
|
18,024 |
|
|
24 |
% |
Number portability products |
|
|
13,365 |
|
|
10,149 |
|
|
3,216 |
|
|
32 |
% |
Customer extended warranty services |
|
|
26,554 |
|
|
17,731 |
|
|
8,823 |
|
|
50 |
% |
Professional services and other |
|
|
27,089
|
|
|
12,620
|
|
|
14,469
|
|
|
115 |
% |
Total NSG revenues |
|
$ |
183,747
|
|
$ |
152,034
|
|
$ |
31,713
|
|
|
21 |
% |
Our NSG revenues increased 21% in the first half of 2007 compared with the first half of 2006 due primarily to increases in Eagle ISS
upgrades and extension revenues, particularly in the EAAA and CALA regions, as we are beginning to see our customers provide follow-on
extension orders. Also favorably impacting revenues on a year-over-year basis is an increase in extended warranty revenues as a result of
successfully converting newer customers and systems from standard to extended warranties. Finally, the increase in professional services and
other revenues is primarily due to a larger portion of revenues associated with our new international customers who require a greater amount of
installation and other professional services during their initial deployment and operation of our products. Offsetting these increases is a decline
in Eagle ISS initial systems revenues, particularly in the North American region, primarily due to the fact that for the first six months of 2006
initial systems revenues were unusually large as a result of the completion of several large orders that had been delayed until the order shipped
complete. Prior to 2006, we had not structured our order fulfillment process to ensure all orders had been delivered complete, thereby allowing
revenue recognition under the residual method of accounting.
Communications Software Solutions Group
CSSG revenues for the three and six months ended June 30, 2007 and 2006 were principally derived from our IAS and related
transitional products from the Sentinel product line. In the three months ended June 30, 2007, revenues from sales of our IAS products
decreased by 21% compared to the three months ended June 30, 2006 primarily due to (i) a delay in the completion of several large customer
orders, and (ii) the delay in general availability of IAS 2.0 from the second quarter of 2007 to the second half of 2007. For the first half of 2007,
CSSG revenues increased by 10% compared to the six months ended June 30, 2006, primarily as a result of continued success in selling these
solutions into our existing NSG customer base.
Deferred Revenues, Orders and Backlog
As previously discussed, in situations where we sell multiple products or sell a combination of integrated products and
services that we cannot separate into multiple elements, we defer revenue recognition until all product shipments are complete and until
services essential to the functionality of the product are fulfilled, due to the fact that we follow the residual method of accounting as prescribed
by SOP 97-2. Deferred revenue as of June 30, 2007 decreased by $37.0 million, or 19%, from $195.8 million as of December 31,
2006 to $158.8 million as of June 30, 2007. As of June 30, 2007, we had a backlog of orders totaling $334.7 million, down from $389.6
million as of December 31, 2006.
Backlog has decreased from December 31, 2006 primarily due to our continued focus on implementing improved
29
project management and
new business practices to convert our backlog to revenue in a more expeditious and systematic manner, coupled with lower than expected
order intake in the first half of 2007. On a sequential basis, orders in the second quarter of 2007 have increased by $5.5 million, or 7% over the
first quarter of 2007. On a year-over-year basis, orders in the second quarter of 2007 increased by $2.9 million, or 4%, to $84.7 million from
$81.8 million in the second quarter of 2006. The year-over-year increase in 2007 was driven primarily by 96% growth in orders coming from the
EAAA region, primarily as a result of our winning new orders as service providers migrate from their legacy signaling platforms. This growth,
however, was almost fully offset by the orders shortfall in the North America and CALA regions in both the NSG and CSSG business units.
Based on a current review of our existing sales pipeline, as well as our expectations regarding the overall consolidation and developments in the
telecommunications industry, we believe that our 2007 orders will be comparable to or slightly below our 2006 orders.
We believe that our future revenue growth depends in large part upon a number of factors affecting the demand for our signaling and
communications software solutions products. As previously discussed, in situations where we (i) sell multiple products or (ii) sell a
combination of integrated products and services that we cannot separate into multiple elements, we are not able to recognize revenue until all of
the products are shipped complete. Where the services are essential to the functionality of the product, no revenue can be recognized until the
services are completely delivered due to the fact that we follow the residual method of accounting as prescribed by SOP 97-2. As a result, our
revenue may vary significantly from period to period. Specifically, no revenue related to a sales arrangement may be recognized until all
products in the sales arrangement are delivered, regardless of whether the undelivered product represents an insignificant portion of the
arrangement fee.
We establish our expenditure levels based on our expectations as to future sales orders and shipments and the timing of when these orders
will turn to revenue. Should these sales orders and shipments and the related timing of revenue recognition fall below our expectations, then
such shortfall would cause expenses to be disproportionately high in relation to revenues. Therefore, a drop in near-term demand or the inability
to ship an order in its entirety could significantly affect revenues and margins, causing a disproportionate reduction in profits or even resulting in
losses for any given quarter or year.
Cost of Sales
In order to better understand our cost structure, we analyze and present our costs and expenses in the categories discussed
below:
Cost of goods sold
Cost of goods sold includes (i) materials, labor, and overhead costs incurred internally and paid to contract manufacturers to produce
our products, (ii) personnel and other implementation costs incurred to install our products and (iii) customer service costs to
provide continuing support to our customers under our warranty offerings. Cost of goods sold in dollars and as a percentage of revenues for the
three and six months ended June 30, 2007 and 2006 were as follows (in thousands, except percentages):
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Change |
|
|
|
2007
|
|
|
2006
|
|
|
2006 to 2007
|
Cost of good sold |
|
$ |
46,774 |
|
$ |
37,763 |
|
$ |
9,011 |
|
|
24 |
% |
Revenues |
|
|
109,984 |
|
|
119,098 |
|
|
(9,114) |
|
|
(8) |
% |
Cost of good sold as a percentage of revenues |
|
|
43 |
% |
|
32 |
% |
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Change |
|
|
|
2007
|
|
|
2006
|
|
|
2006 to 2007
|
Cost of good sold |
|
$ |
98,676 |
|
$ |
70,022 |
|
$ |
28,654 |
|
|
41 |
% |
Revenues |
|
|
218,777 |
|
|
183,950 |
|
|
34,827 |
|
|
19 |
% |
Cost of good sold as a percentage of revenues |
|
|
45 |
% |
|
38 |
% |
|
|
|
|
|
|
Cost of goods sold increased by 24% and 41% in the three and six months ended June 30, 2007 as compared to the same periods in 2006
due primarily to a shift in our revenue mix from our higher margin North American region to our lower margin international markets. Specifically,
international revenues were 73% and 63% of total revenues in
30
the three and six months ended June 30, 2007, respectively, compared to 44%
and 38% of total revenues for the same periods in 2006. Our costs to deliver internationally are higher as a result of longer installation times,
higher costs for shipping and importing and increased travel for our North America based customer service team.
During late 2005 and early 2006, we determined that we had three contracts in which our costs to deliver would exceed the related
revenues under the terms of these contracts and, accordingly, we accrued the loss at the time of this determination. As a result, we expected
the margin to be at or near 0% on these contracts once they were completed and the associated revenue was recognized. In addition to these
"loss" contracts, we had entered into an additional contract at a very low margin in late 2003. We entered into each of these contracts in
anticipation of future extension business with the customer and in order to expand our product footprint in new geographical areas. During the
three and six months ended June 30, 2007 we completed three of these four contracts, representing (i) revenues of $7.3 million and $17.1
million, respectively, and (ii) a gross margin of $3.7 million and $5.2 million, respectively. We performed better than we had anticipated in
completing these contracts, resulting in the gross margins being higher than originally anticipated. As a result of recognizing these lower margin
contracts in these periods, cost of goods sold as a percentage of revenues increased compared to the same periods in 2006. As of June 30,
2007, we have one contract remaining with total revenues of $1.9 million that we have determined to be a loss contract, and we currently expect
to complete this project in late 2007 or early 2008.
As we continue to expand our international presence, our cost of goods sold as a percentage of revenues may fluctuate as the result of our
decision to develop new sales channels and customer relationships in these new markets, and also due to price competition. Sales of "initial"
systems in international markets typically carry lower margins than both sales domestically and sales of extensions, and to the extent our sales
internationally increase at a rate greater than sales within North America, cost of goods sold as a percentage of revenues is also likely to
increase. In addition, changes in the following factors may also affect margins: product mix; competition; customer discounts; supply and
demand conditions in the electronic components industry; internal and outsourced manufacturing capabilities and efficiencies; foreign currency
fluctuations; pricing pressure as we expand internationally; and general economic conditions.
Amortization of Purchased Technology
We consider amortization of purchased technology to be part of general corporate expenses and therefore do not allocate the
amortization of purchased technology to individual operating segments. Amortization of purchased technology for the six months ended June
30, 2007 and 2006 was as follows (in thousands):
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Amortization of purchased technology related to: |
|
|
|
|
|
|
|
|
|
|
|
|
iptelorg |
|
$ |
110 |
|
$ |
105 |
|
$ |
215 |
|
$ |
210 |
Steleus |
|
|
482
|
|
|
482
|
|
|
964
|
|
|
964
|
Total |
|
$ |
592
|
|
$ |
587
|
|
$ |
1,179
|
|
$ |
1,174
|
31
Research and Development Expenses
Research and development expenses include costs associated with the development of new
products, enhancements of existing products and quality assurance activities. These costs consist primarily of employee salaries and benefits,
occupancy costs, outsourced development costs and the cost of development equipment and supplies. The following sets forth our research
and development expenses in dollars and as a percentage of revenues for the three and six months ended June 30, 2007 and 2006 (in
thousands, except percentages):
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Change |
|
|
|
2007
|
|
|
2006
|
|
|
2006 to 2007
|
Research and development |
|
$ |
24,064 |
|
$ |
19,104 |
|
$ |
4,960 |
|
|
26 |
% |
Percentage of revenues |
|
|
22 |
% |
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Change |
|
|
|
2007
|
|
|
2006
|
|
|
2006 to 2007
|
Research and development |
|
$ |
46,271 |
|
$ |
37,102 |
|
$ |
9,169 |
|
|
25 |
% |
Percentage of revenues |
|
|
21 |
% |
|
20 |
% |
|
|
|
|
|
|
The following is a summary of the year-over-year fluctuations in our research and development expenses during the three and six
months ended June 30, 2007 as compared to the three and six months ended June 30, 2006 (in thousands):
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 to 2007
|
|
|
2006 to 2007
|
Increase (decrease) in: |
|
|
|
|
|
|
Salaries and benefits |
|
$ |
459 |
|
$ |
977 |
Incentive compensation |
|
|
449 |
|
|
957 |
Stock-based compensation |
|
|
(401) |
|
|
(899) |
Consulting and professional services |
|
|
2,490 |
|
|
4,432 |
Facilities and depreciation |
|
|
1,525 |
|
|
2,836 |
Other |
|
|
438
|
|
|
866
|
Total |
|
$ |
4,960
|
|
$ |
9,169
|
We have made and intend to continue to make substantial investments in product and technology development, and we believe that
our future success depends in a large part upon our ability to continue to enhance existing products and to develop or acquire new products that
maintain our technological competitiveness. The increase in consulting and professional services reflects our continued outsourcing efforts for
new product development and upgrade of existing technologies as we continue to seek global relationships aimed at more cost effective product
development. The increase in salaries and benefits and incentive compensation included in research and development expenses also reflects
increased investment in key internal resources. Additionally, facilities and depreciation costs included in research and development expenses
increased in 2007 due primarily to the expansion of space within our corporate headquarters dedicated to research and development activities,
along with additional depreciation related to equipment acquired to support our research and development efforts.
32
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of costs associated with our sales force and marketing personnel, including (i)
salaries, commissions and related costs, (ii) outside contract personnel costs, (iii) facilities costs and (iv) travel and other costs. The following
table sets forth our sales and marketing expenses in dollars and as a percentage of revenues for the three and six months ended June 30, 2007
and 2006 (in thousands, except percentages):
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Change |
|
|
|
2007
|
|
|
2006
|
|
|
2006 to 2007
|
Sales and marketing expenses |
|
$ |
18,309 |
|
$ |
19,384 |
|
$ |
(1,075) |
|
|
(6) |
% |
Percentage of revenues |
|
|
17 |
% |
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Change |
|
|
|
2007
|
|
|
2006
|
|
|
2006 to 2007
|
Sales and marketing expenses |
|
$ |
36,974 |
|
$ |
36,937 |
|
$ |
37 |
|
|
- |
% |
Percentage of revenues |
|
|
17 |
% |
|
20 |
% |
|
|
|
|
|
|
The following is a summary of the year-over-year fluctuation in our sales and marketing expenses during the three and six months
ended June 30, 2007 as compared to the three and six months ended June 30, 2006 (in thousands):
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 to 2007
|
|
|
2006 to 2007
|
Increase (decrease) in: |
|
|
|
|
|
|
Salaries and benefits |
|
$ |
(37) |
|
$ |
(218) |
Sales commissions |
|
|
404 |
|
|
1,713 |
Incentive compensation |
|
|
(173) |
|
|
462 |
Stock-based compensation |
|
|
(451) |
|
|
(948) |
Travel |
|
|
(2) |
|
|
(351) |
Other |
|
|
(816)
|
|
|
(621)
|
Total |
|
$ |
(1,075)
|
|
$ |
37
|
The decrease in sales and marketing expenses in the second quarter of 2007 compared to the second quarter of 2006 was primarily
attributable to decreases in incentive and stock-based compensation, as well as other expenses (consisting mostly of marketing, consulting
services and facilities expenses), primarily due to reductions in sales and marketing personnel and reductions in marketing communications
expenses. Partially offsetting the decreases due to sales and marketing personnel reductions was an increase in commission expense due to
certain orders earning higher commission rates.
While total sales and marketing expense was comparable during the first half of 2007 and 2006, commission expense increased by $1.7
million primarily due to the increase in revenues in 2007 as compared to 2006 and to certain 2007 orders earning higher commission rates.
Partially offsetting the higher commissions expense were lower employee related expenses (salaries and benefits, stock-based compensation,
travel and other expense) primarily as a result of our reorganizing our sales and marketing organization to better align our cost structure with
current expectations regarding our 2007 continuing operations.
General and Administrative Expenses
General and administrative expenses are composed primarily of costs associated with our executive and administrative personnel
(e.g., legal, business development, finance, information technology and human resources personnel) and consist of (i) salaries and
related compensation costs, (ii) consulting and other professional services (e.g., litigation and other outside counsel fees, audit fees and costs
associated with compliance with the Sarbanes-Oxley Act of 2002), (iii) facilities and insurance costs, and (iv) travel and other costs.
The following table sets forth
33
our general and administrative expenses in dollars and as a percentage of revenues for the three and six months
ended June 30, 2007 and 2006 (in thousands, except percentages):
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Change |
|
|
|
2007
|
|
|
2006
|
|
|
2006 to 2007
|
General and administrative expenses |
|
$ |
14,762 |
|
$ |
16,039 |
|
$ |
(1,277) |
|
|
(8) |
% |
Percentage of revenues |
|
|
13 |
% |
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Change |
|
|
|
2007
|
|
|
2006
|
|
|
2006 to 2007
|
General and administrative expenses |
|
$ |
27,794 |
|
$ |
30,119 |
|
$ |
(2,325) |
|
|
(8) |
% |
Percentage of revenues |
|
|
13 |
% |
|
16 |
% |
|
|
|
|
|
|
The following is a summary of the year-over-year fluctuation in our general and administrative expenses during the three and six months
ended June 30, 2007 as compared to the three and six months ended June 30, 2006 (in thousands):
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 to 2007
|
|
|
2006 to 2007
|
Increase (decrease) in: |
|
|
|
|
|
|
Salaries and benefits |
|
$ |
(555) |
|
$ |
68 |
Incentive compensation |
|
|
(920) |
|
|
(89) |
Stock-based compensation |
|
|
596 |
|
|
746 |
Consulting and professional services |
|
|
843 |
|
|
(133) |
Facilities and depreciation |
|
|
(770) |
|
|
(2,133) |
Other |
|
|
(471)
|
|
|
(784)
|
Total |
|
$ |
(1,277)
|
|
$ |
(2,325)
|
The decrease in general and administrative expenses on a year-over-year basis during the second quarter of 2007 was primarily driven by
a decrease in salaries and benefits and incentive compensation primarily as a result of our reducing the number of general and administration
personnel to better align our cost structure with our expectations regarding our 2007 ongoing operations. The decrease in other expenses is
primarily due to lower 2007 employee related expenses such as travel, recruiting, relocation and communications expense as part of our efforts
to align our cost structure as mentioned above. Facilities and depreciation costs declined as a result of the reduction in personnel and outside
contractors, coupled with the consolidation of our general and administrative personnel into reduced space. Partially offsetting these decreases
was an increase in consulting services, primarily related to information technology as we continue to invest in our technology infrastructure, and
an increase in stock-based compensation associated with additional grants of equity to employees.
General and administrative costs decreased on a year-over-year basis during the six months ended June 30, 2007 primarily as a result of
the reduction in facilities and depreciation expense discussed above. Additionally, included in general and administrative expenses during the
first quarter of 2007 were approximately $1.9 million of one-time expense reductions related to (i) reimbursement of $0.9 million of legal fees
incurred during 2006 in connection with a dispute over a previously leased facility (included in "consulting and professional services" in the
above table), (ii) reimbursement of $0.5 million of certain taxes previously recorded in 2006 (included in "other" in the above table), and (iii)
certain other one-time cost reductions estimated at $0.5 million (included in "facilities and depreciation" in the above table). We intend to
continue to focus on improving the efficiency of our operations by examining the way in which we operate in order to identify opportunities for
cost reductions. Partially offsetting these decreases was an increase in stock-based compensation associated with additional grants of equity to
employees.
34
Amortization of Intangible Assets
As a result of our acquisitions, we have recorded various intangible assets including
trademarks, customer relationships and non-compete agreements. Amortization of intangible assets related to our acquisitions is as follows (in
thousands):
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
iptelorg |
|
$ |
22 |
|
$ |
35 |
|
$ |
42 |
|
$ |
70 |
Steleus |
|
|
26
|
|
|
437
|
|
|
52
|
|
|
874
|
Total |
|
$ |
48
|
|
$ |
472
|
|
$ |
94
|
|
$ |
944
|
The year-over-year decrease in amortization expense is due principally to certain intangible assets associated with our acquisition of
Steleus becoming fully amortized in 2006.
Restructuring and Other Costs
In June 2007, we initiated a restructuring of our operations (the "June 2007 Restructuring") in order to better align our organization
structure with our anticipated future revenues and the anticipated administrative support needs of our business following the sale of our SSG
business. The June 2007 Restructuring involved termination of 28 domestic and international full-time positions, mostly in our CSSG and NSG
businesses, as well as administrative support staff. In connection with this restructuring, we incurred $2.5 million of restructuring costs,
consisting mostly of employee severance and associated benefits costs, in the second quarter of 2007. These costs are reflected in continuing
operations in the accompanying unaudited condensed consolidated statements of operations. We expect to realize approximately $3.5 to $4.0
million in annual savings as a result of the June 2007 Restructuring.
In connection with the disposition of our SSG business and related restructuring (the "SSG Restructuring") discussed in Note 2 to the
accompanying unaudited condensed consolidated financial statements, we incurred $16.6 million of restructuring costs, consisting primarily of
employee severance and associated benefit costs in the first half of 2007. The SSG Restructuring involved the termination of approximately 165
full-time positions that directly or indirectly supported our SSG business unit. These costs are reflected in discontinued operations in the
accompanying unaudited condensed consolidated statements of operations. We expect to incur additional restructuring charges of
approximately $2.3 million in the remainder of 2007 associated with our disposition of SSG, primarily consisting of certain lease exit costs
resulting from our fully vacating the facilities previously utilized by SSG. These lease termination costs will be recognized when we fully exit the
facility, which is currently anticipated in the third quarter of 2007.
35
Other Income and Expense
For the three and six months ended June 30, 2007 and 2006, other income and expenses were
as follows (in thousands, except percentages):
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Change |
|
|
|
2007
|
|
|
2006
|
|
|
2006 to 2007
|
Interest income |
|
$ |
4,355 |
|
$ |
1,878 |
|
$ |
2,477 |
|
|
132% |
Interest expense |
|
|
(956) |
|
|
(859) |
|
|
(97) |
|
|
11% |
Gain on sale of investments |
|
|
85 |
|
|
- |
|
|
85 |
|
|
100% |
Other, net |
|
|
(1,118)
|
|
|
217
|
|
|
(1,335)
|
|
|
- -615% |
Other income (expense), net |
|
$ |
2,366
|
|
$ |
1,236
|
|
$ |
1,130
|
|
|
91% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Change |
|
|
|
2007
|
|
|
2006
|
|
|
2006 to 2007
|
Interest income |
|
$ |
8,295 |
|
$ |
3,527 |
|
$ |
4,768 |
|
|
135% |
Interest expense |
|
|
(1,851) |
|
|
(1,781) |
|
|
(70) |
|
|
4% |
Gain on sale of investments |
|
|
223 |
|
|
1,793 |
|
|
(1,570) |
|
|
- -88% |
Other, net |
|
|
(1,844)
|
|
|
(351)
|
|
|
(1,493)
|
|
|
425% |
Other income (expense), net |
|
$ |
4,823
|
|
$ |
3,188
|
|
$ |
1,635
|
|
|
51% |
Interest Income and Expense. Interest income increased during the three and six months ended June 30, 2007 compared to the
three and six months ended June 30, 2006 due to higher average cash and short-term investment balances (resulting from the proceeds of
$201.5 million received from the sale of IEX and increased cash flow from operations) and higher interest rates in 2007 compared to the first
half of 2006.
Gain (loss) on Investments. The decrease in gain on investments during the first half of 2007 compared to the first half of 2006
is due to a one-time gain on the release of escrowed Alcatel-Lucent shares in the first quarter of 2006.
Other, net. Other, net for the three and six months ended June 30, 2007 and 2006 consists primarily of foreign currency exchange
losses, net of gains, and forward points on foreign currency forward contracts used to hedge our exposure to foreign currency risks and
translation adjustments from consolidating our international subsidiaries. In the first half of 2007 the Brazilian Real strengthened against the
U.S. dollar, which unfavorably impacted the remeasurement of our Brazilian subsidiary, resulting in an increase in non-cash foreign currency
losses for both the three and six month periods ended June 30, 2007 compared to the same periods in 2006. As we expand our international
business further, we will continue to enter into a greater number of transactions denominated in currencies other than the U.S. Dollar and will
therefore be exposed to greater risk related to foreign currency fluctuation and translation adjustments. We continue to explore ways to minimize
our exposure in this area.
Provision for Income Taxes
The income tax provision on continuing operations for the three months ended June 30, 2007 and 2006 was approximately
$1.5 million and $9.4 million, respectively. The effective tax rates on continuing operations for the three months ended June 30, 2007 and 2006
were 29% and 37%, respectively. The effective tax rate for the quarter ended June 30, 2007 differs from the statutory rate of 35% and from the
effective tax rate for the quarter ended June 30, 2006 primarily due to increases in the tax benefits recognized related to tax-exempt interest
generated from our investment portfolio.
The income tax provision on continuing operations was approximately $3.3 million for both the six months ended June 30, 2007 and
2006. The effective tax rates on continuing operations for the six months ended June 30, 2007 and 2006 were 33% and 38%, respectively. The
effective tax rate decreased on a year-over-year basis primarily due to increases in the tax benefits recognized related to tax-exempt interest
generated from our investment portfolio.
36
Primarily as the result of the disposition of SSG, a significant number of options expired unexercised during the first half of 2007, resulting in
a significant reduction in our "pool of windfall tax benefits" under SFAS 123R "Share-Based Payment" ("SFAS 123R"). Specifically, our pool of
windfall tax benefits has decreased to approximately $1.0 million as of the end of July 2007. To the extent that we fully utilize this pool, future
cancellations or exercises that result in a tax deduction that is less than the expense recognized under SFAS 123R will negatively impact our
future effective tax rate and increase its volatility.
On January 1, 2007, we adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes," an interpretation of FASB Statement No. 109, "Accounting for Income Taxes" ("FIN 48"). As a result of the
adoption of FIN 48, we did not record an adjustment to the balance of retained earnings as of January 1, 2007. As of January 1 and June 30,
2007, the total amount of unrecognized income tax benefits was $12.1 million and $13.5 million, (including interest and penalties), respectively.
A change in estimate relating to any of these unrecognized tax benefits could have a material impact on our effective tax rate.
Liquidity and Capital Resources
Overview
We derive our internal liquidity and capital resources primarily from our cash flows from operations and from our working capital.
Our working capital decreased by 35% from $482.4 million as of December 31, 2006 to $313.8 million as of June 30, 2007,
primarily due to (i) the reclassification of our Convertible Debt of $125.0 million, which matures in June 2008, from long-term to current liabilities,
and (ii) recognizing the loss on the disposition of SSG's assets held for sale of $41.7 million (net of tax), partially offset by a net increase in cash,
cash equivalents and short-term investments. With our working capital position, we believe that we have the flexibility to continue to invest in
further development of our technology and, when necessary or appropriate, make selective acquisitions to continue to strengthen our product
portfolio.
The principal components of our working capital are liquid assets such as cash and cash equivalents, short-term investments and
accounts receivable, reduced by trade accounts payable, accrued expenses, accrued payroll and related expenses and the current portion of
deferred revenues.
Our cash, cash equivalents and short-term investments were $464.8 million and $424.4 million as of June 30, 2007 and
December 31, 2006, respectively. In addition, as of June 30, 2007, we had a $30.0 million line of credit collateralized by a pledged
investment account held with an intermediary financial institution. As of June 30, 2007, there were no outstanding borrowings under this facility;
however, we had utilized approximately $0.8 million of the facility to secure letters of credit.
As of June 30, 2007, our short-term investments generally had investment grade ratings and any such investments that were in an
unrealized loss position at June 30, 2007 were in such position solely due to interest rate changes, sector credit rating changes or
company-specific rating changes. As we intend and believe that we have the ability to hold such investments for a period of time that will be sufficient for
anticipated recovery in market value, we currently expect to receive the full principal or recover our cost basis on these securities. When
evaluating our investments for possible impairment, we review factors such as the length of time and extent to which fair value has been below
our cost basis, the financial condition of the investee, and our ability and intent to hold the investment until maturity, if a debt security, or for a
period of time which may be sufficient for anticipated recovery in market value. The declines in our securities are considered to be temporary in
nature and, accordingly, we do not believe these securities are impaired as of June 30, 2007.
In addition to our normal operating cash requirements as discussed above, we expect to repay our $125.0 million Convertible Debt in June
2008 from our working capital, if the debt is not converted to common stock at the option of the holder prior to such repayment.
We believe our current working capital and anticipated cash flows from operations will be adequate to meet our cash needs for our daily
operations and capital expenditures for at least the next 12 months. Our liquidity, however, could be negatively impacted if revenues
decrease due to (i) a decline in demand for our products or a reduction of capital expenditures by our customers as a result of a downturn in the
global economy, (ii) potential future investment decisions by us, (iii) settlements or judgments in future potential litigation, and (iv) other factors.
We did not repurchase any of our common stock during the six months ended June 30, 2007.
37
Cash Flows
As discussed above, one of the primary sources of our liquidity is our ability to generate positive cash flows from operations. The
following is a discussion of our primary sources and uses of cash in our operating, investing and financing activities:
Cash Flows from Operating Activities
Net cash provided by operating activities of continuing operations was $45.9 million and $29.1 million for the six months ended June 30,
2007 and 2006, respectively. Our cash flows from continuing operations were primarily derived from (i) our earnings from
ongoing operations prior to non-cash expenses such as depreciation, amortization, bad debt, write-downs of inventory and non-cash impairment
charges; (ii) the tax benefit related to the exercise of employee stock options, which reduces our cash outlay for income tax expense; and
(iii) changes in our working capital, which are primarily composed of changes in accounts receivable, inventories, deferred revenue and
associated deferred costs, accounts payable, accrued expenses and accrued payroll and related expenses.
We currently anticipate that we will generate positive cash flow from continuing operations for 2007. Our ability to meet this expectation
depends on our ability to achieve positive earnings. Our ability to generate future cash flows from operations could be negatively impacted by a
decrease in demand for our products, which are subject to technological changes and increasing competition, or a reduction of capital
expenditures by our customers as a result of a downturn in the global economy. Accordingly, our quarterly cash flows from operations may
fluctuate significantly.
Cash Flows from Investing Activities
Net cash used in investing activities of continuing operations was $49.4 million and $41.8 million for the six months ended June
30, 2007 and 2006, respectively. Our investing activities cash flow primarily relates to purchases and sales of investments and purchases of
property and equipment. For the six months ended June 30, 2007, we invested $39.1 million in short-term investments (net of proceeds from
sales) compared to $32.3 million during the six months ended June 30, 2006. The primary source of the funds used in both the six months
ended June 30, 2007 and 2006 was from our cash flows from operations. Our investment in new property and equipment and technology
amounted to $10.1 million and $10.9 million during the six months ended June 30, 2007 and 2006, respectively.
We continue to closely monitor our capital expenditures, while making strategic investments in the development of our existing products and
the replacement of certain older computer and information technology infrastructure to meet the needs of our workforce. We expect our total
capital expenditures to be between $26.0 million and $28.0 million for 2007.
Cash Flows from Financing Activities
Net cash provided by financing activities was $23.1 million and $4.2 million for the six months ended June 30, 2007 and
2006, respectively. For the six months ended June 30, 2007 and 2006, our financing activities consisted primarily of proceeds of
$23.1 million and $4.2 million, respectively, from the issuance of common stock pursuant to the exercise of employee stock options and
our employee stock purchase plan, including the excess tax benefit on those exercises.
Critical Accounting Estimates
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes — an interpretation
of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's
financial statements. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. Specifically, FIN 48 requires the recognition in financial
statements of the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the
position. Additionally, FIN 48 provides guidance on the derecognition of previously recognized deferred tax items, classification, accounting for
interest and penalties, and accounting in interim periods related to uncertain tax positions, as well as, requires expanded disclosures. FIN 48 is
effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as
an adjustment to opening retained earnings.
38
The cumulative effect of the adoption of the recognition and measurement provisions of FIN 48 resulted in no impact to the January 1, 2007
balance of retained earnings. Our policy for the classification of interest and penalties related to income tax exposures was not impacted as a
result of the adoption of FIN 48, and we will continue to recognize interest and penalties as incurred as a component of "Provision for (benefit
from) income taxes" in our unaudited condensed consolidated statements of operations.
Recent Accounting Pronouncements
Fair Value Option. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets
and Financial Liabilities" ("SFAS 159"). SFAS 159 permits entities to choose, at specified election dates, to measure eligible items at fair value
(the "Fair Value Option"). Unrealized gains and losses on items for which the Fair Value Option has been elected are reported in earnings. The
Fair Value Option is applied instrument by instrument (with certain exceptions), is irrevocable (unless a new election date occurs) and is applied
only to an entire instrument. The effect of the first remeasurement to fair value is reported as a cumulative-effect adjustment to the opening
balance of Retained earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the
impact of adopting SFAS 159 on our financial statements.
Fair Value Measurement. In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 "Fair Value Measurements" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles ("GAAP"), and expands disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact of adopting SFAS 157
on our financial statements.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995
The statements that are not historical facts contained in this Management's Discussion and Analysis of Financial Condition and Results
of Operations and other sections of this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Words such as "may," "will," "intend," "should," "could," "would," "expect," "plan," "anticipate," "believe,"
"estimate," "project," "predict," "potential," and variations of these words and similar expressions are sometimes used to identify forward-looking
statements. These statements reflect the current belief, expectations, estimates, forecasts or intent of our management and are subject to and
involve certain risks and uncertainties. There can be no assurance that our actual future performance will meet management's expectations. As
discussed in our Annual Report on Form 10-K for the year ended December 31, 2006 (the "2006 Form 10-K") and our other filings with
the SEC, our future operating results are difficult to predict and subject to significant fluctuations. Factors that may cause future results to differ
materially from management's current expectations include, among others:
- the risk that we will not realize all the benefits of our restructuring activities and/or the cost savings contemplated as a result of our sale of
the SSG Business;
- the timely development and introduction of new products and services, our product mix and the geographic mix of our revenues and the
associated impact on gross margins and operating expenses;
- market acceptance of our new products and technologies, carrier deployment of intelligent network services, and the ability of our
customers to obtain financing;
- the risk that continued service provider consolidation will require additional review of capital expenditures and lengthen our customers'
procurement cycles;
- uncertainties related to the timing of revenue recognition due to the increasing percentage of international and new customers in our
backlog;
- the risk that our financial results for the full year 2007 will not meet our expectations;
- overall telecommunications spending, changes in general economic conditions and unexpected changes in economic, social, or political
conditions in the countries in which we operate;
- the timing of significant orders and shipments, the timing of revenue recognition under the residual method of accounting, and the lengthy
sales cycles for our product;
- the timing of the convergence of voice and data networks;
- the success or failure of our strategic alliances or acquisitions;
- the impact on our earnings as a result of a devaluation of the Genband common stock and changes in estimated restructuring costs;
39
- litigation or regulatory matters and the costs and expenses associated therewith;
- the ability of carriers to utilize excess capacity of signaling infrastructure and related products in their networks, the capital spending
patterns of customers, and our dependence on wireless customers for a significant percentage and growth of our revenues; and
- the level and timing of research and development expenditures and sales, marketing and compensation expenses, regulatory changes,
compliance with industry standards and certifications and other risks described in our 2006 Form 10-K and in our other SEC filings.
Many of these risks and uncertainties are outside of our control and are difficult for us to forecast or mitigate. Actual results may differ
materially from those expressed or implied in such forward-looking statements. We do not assume any responsibility for updating or revising
these forward-looking statements. Undue emphasis or reliance should not be placed on any forward-looking statements contained herein or
made elsewhere by or on behalf of us.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk, see Item 7A, "Quantitative and Qualitative Disclosures About
Market Risk," included in our 2006 Form10-K. Our exposures to market risk have not changed materially since December 31, 2006.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on our management's evaluation (with the participation of our Chief Executive Officer and Chief Financial Officer), as of the
end of the quarter covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), are effective to
ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the three months ended June 30, 2007 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls
and procedures or our internal control over financial reporting are or will be capable of preventing or detecting all errors and all fraud. Any
control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's
objectives will be met. The design of a control system must reflect the fact that there are resource constraints and the benefits of controls must
be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the
company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions.
40
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, various claims and litigation are asserted or commenced against us arising from or related to contractual
matters, intellectual property matters, product warranties and personnel and employment disputes. As to such claims and litigation, we can give
no assurance that we will prevail. However, we currently do not believe that the ultimate outcome of any pending matters will have a material
adverse effect on our consolidated financial position, results of operations or cash flows.
Item 1A. Risk Factors
There have been no material changes from the risk factors as previously disclosed in Item 1A of Part I of our 2006 Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On May 18, 2007, we held our 2007 Annual Meeting of Shareholders (the "Annual Meeting").
(b) At the Annual Meeting, the following persons were elected as directors of Tekelec. The numbers of votes cast for each director and the
number of votes withheld for each director are listed opposite each director's name.
|
|
Votes Cast for |
|
Votes |
Name of Director
|
|
Director
|
|
Withheld
|
Robert V. Adams |
|
58,031,669 |
|
5,325,459 |
Daniel L. Brenner |
|
58,017,305 |
|
5,339,823 |
Mark A. Floyd |
|
58,348,144 |
|
5,008,984 |
Martin A. Kaplan |
|
49,775,689 |
|
13,581,439 |
Franco Plastina |
|
58,803,887 |
|
4,553,241 |
Michael P. Ressner |
|
59,697,408 |
|
3,659,720 |
(c) At the Annual Meeting, the shareholders ratified the appointment of PricewaterhouseCoopers LLP as Tekelec's
independent registered public accounting firm for the year ending December 31, 2007. The votes with respect to ratification of the appointment
were cast as follows:
For |
58,761,446
|
|
Against |
4,497,880
|
|
Abstain |
97,802
|
41
Item 6. Exhibits
Exhibit No. |
|
Description |
|
|
|
3.1
|
|
Amended and Restated Bylaws of Tekelec, as amended(1) |
|
|
|
10.1 |
|
Amendment No. 1, dated as of April 21, 2007, to Acquisition Agreement dated as of March 20, 2007
between the Company and GENBAND Inc.(2) |
|
|
|
10.2 |
|
Severance Agreement effective April 21, 2007 between the Company and Jay F. Whitehurst(3) |
|
|
|
10.3 |
|
Employment Agreement effective March 21, 2007 between the Company and Stuart H. Kupinsky(4) |
|
|
|
10.4 |
|
2007 Executive Officer Bonus Plan(5) |
|
|
|
10.5 |
|
2007 Officer Severance Plan(6) |
|
|
|
10.6 |
|
Restricted Stock Unit Award Agreement dated May 7, 2007 between the Company and Franco
Plastina(7) PDF as a courtesy |
|
|
|
10.7 |
|
Employment Agreement effective May 21, 2007 between the Company and MaryKay
Wells(7) PDF as a courtesy |
|
|
|
31.1 |
|
Certification of Chief Executive Officer of Tekelec pursuant to Rule 13a-14(a) under the Exchange Act, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (7)
PDF as a courtesy |
|
|
|
31.2 |
|
Certification of Chief Financial Officer of Tekelec pursuant to Rule 13a-14(a) under the Exchange Act, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (7)
PDF as a courtesy |
|
|
|
32.1 |
|
Certifications of Chief Executive Officer and Chief Financial Officer of Tekelec pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (7)
PDF as a courtesy |
_____________________________________________________________________________________________
|
|
|
|
|
(1)
|
|
Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K (File No. 0-15135)
dated June 5, 2007, as filed with the Commission on June 7, 2007.
|
(2) |
|
Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 0-15135)
dated April 21, 2007, as filed with the Commission on April 26, 2007. |
(3) |
|
Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (File
No. 0-15135) for the quarter ended March 31, 2007, as filed with the Commission on May 9, 2007. |
(4) |
|
Incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q (File
No. 0-15135) for the quarter ended March 31, 2007, as filed with the Commission on May 9, 2007. |
(5) |
|
Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 0-15135)
dated May 18, 2007, as filed with the Commission on May 24, 2007.
|
(6) |
|
Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 0-15135)
dated May 18, 2007, as filed with the Commission on May 24, 2007.
|
(7) |
|
Filed herewith.
|
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
TEKELEC |
Date: August 8, 2007 |
|
/s/ FRANCO PLASTINA |
|
|
Franco Plastina |
|
|
President and Chief Executive Officer |
|
|
|
Date: August 8, 2007 |
|
/s/ WILLIAM H. EVERETT |
|
|
William H. Everett |
|
|
Executive Vice President and Chief Financial
Officer |
|
|
|
Date: August 8, 2007 |
|
/s/ GREGORY S. RUSH |
|
|
Gregory S. Rush |
|
|
Vice President, Corporate Controller and Chief
Accounting Officer |
43
EXHIBIT INDEX
Exhibit No. |
|
Description |
|
|
|
10.6 |
|
Restricted Stock Unit Award Agreement dated May 7, 2007 between the Company and Franco
Plastina |
|
|
|
10.7 |
|
Employment Agreement effective May 21, 2007 between the Company and MaryKay Wells |
|
|
|
31.1 |
|
Certification of Chief Executive Officer of Tekelec pursuant to Rule 13a-14(a) under the Exchange Act, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2 |
|
Certification of Chief Financial Officer of Tekelec pursuant to Rule 13a-14(a) under the Exchange Act, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1 |
|
Certifications of Chief Executive Officer and Chief Financial Officer of Tekelec pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
44
10-Q
3
form10-q.pdf
10-Q
begin 644 form10-q.pdf
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