-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Em2xHPM3RuyGcJ8Zor/fqQsRoEvc5+tCfyP40B5SEwr/0k28saoUYR5l3DicRHV1 G1BQjJpV/OBgYtBeeucFsg== 0000792723-95-000004.txt : 19950615 0000792723-95-000004.hdr.sgml : 19950615 ACCESSION NUMBER: 0000792723-95-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950214 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OCTEL COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000792723 STANDARD INDUSTRIAL CLASSIFICATION: 3661 IRS NUMBER: 770029449 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16588 FILM NUMBER: 95510635 BUSINESS ADDRESS: STREET 1: 890 TASMAN DR CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4083212000 10-Q 1 10Q DOCUMENT =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 1994, or Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________ Commission File Number 0-16588 OCTEL COMMUNICATIONS CORPORATION ___________________________________________________________________ (Exact name of registrant as specified in its charter) Delaware 77-0029449 ------------------------- ------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or Identification Number) organization) 1001 Murphy Ranch Road Milpitas, California 95035-7912 (Address of principal executive offices) Registrant's telephone number, including area code, is (408) 321- 2000 ____________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the registrant's Common Stock on January 31, 1995 was 23,488,355. ============================================================================== This document consists of 16 pages of which this is Page 1. OCTEL COMMUNICATIONS CORPORATION INDEX Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 1994 and June 30, 1994 3 Condensed Consolidated Statements of Income - three and six months ended December 31, 1994 and 1993 4 Condensed Consolidated Statements of Cash Flows - six months ended December 31, 1994 and 1993 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 4. Matters Submitted to Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 PART I. FINANCIAL INFORMATION Item 1. Financial Statements OCTEL COMMUNICATIONS CORPORATION Condensed Consolidated Balance Sheets (Dollars in thousands, except share data, unaudited) Dec. 31, June 30, 1994 1994 -------- -------- ASSETS Current assets: Cash and equivalents $ 13,264 $ 17,889 Short-term investments 29,882 68,463 Accounts receivable net of allowance for doubtful accounts of $3,016 at December 31, 1994 and $2,665 at June 30, 1994 94,079 90,013 Accounts receivable from related parties 2,745 2,159 Inventories 34,219 28,920 Prepaid expenses and other 16,745 13,865 -------- -------- Total current assets 190,934 221,309 Property, plant and equipment, net of accumulated depreciation and amortization of $71,484 at December 31, 1994 and $64,304 at June 30, 1994 112,260 95,076 Deposits and other assets 29,342 29,743 -------- -------- Total $332,536 $346,128 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade payables $ 13,008 $ 16,250 Accrued compensation and employee benefits 19,574 25,010 Income taxes payable 6,058 2,616 Accrued and other liabilities 44,121 44,660 -------- -------- Total current liabilities 82,761 88,536 Long-term obligations 782 1,400 Stockholders' equity: Preferred stock, $.001 par value - authorized, 5,000,000 shares; none outstanding -- -- Common stock, $.001 par value - authorized, 50,000,000 shares; outstanding: December 31, 1994, 23,421,319 shares, and June 30, 1994, 24,170,344 shares 173,685 174,356 Notes receivable from sale of stock (1,019) -- Retained earnings 78,065 82,736 Unrealized loss on marketable securities (net of deferred taxes of $349 at December 31, 1994 and $330 at June 30, 1994) (616) (540) Accumulated translation adjustments (1,122) (360) -------- -------- Total stockholders' equity 248,993 256,192 -------- -------- Total $332,536 $346,128 ======== ======== See notes to condensed consolidated financial statements. OCTEL COMMUNICATIONS CORPORATION Condensed Consolidated Statements of Income (In thousands, except per share amounts - unaudited) Three Months Ended Six Months Ended -------------------- ------------------- Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1994 1993 1994 1993 -------- -------- -------- -------- Net revenues: Systems $ 78,542 $ 73,330 $148,443 $139,632 Service and license 37,698 27,549 73,542 52,870 --------- -------- -------- -------- Total net revenues 116,240 100,879 221,985 192,502 Costs and expenses: Cost of systems 25,970 23,575 47,507 44,994 Cost of service 21,742 16,203 42,333 31,566 Research and development 18,018 13,951 35,556 27,688 Selling, general and administrative 38,136 36,388 74,717 71,130 Non-recurring charge for acquired in-process research and development -- -- 4,725 -- -------- -------- --------- -------- Total costs and expenses 103,866 90,117 204,838 175,378 -------- -------- --------- -------- Operating income 12,374 10,762 17,147 17,124 Interest and other income, net 685 626 1,526 1,474 -------- -------- --------- -------- Income before income taxes 13,059 11,388 18,673 18,598 Provision for income taxes 4,300 2,921 6,100 4,171 -------- -------- --------- -------- Net income $ 8,759 $ 8,467 $ 12,573 $ 14,427 ======== ======== ========= ======== Net income per common and equivalent share $ 0.36 $ 0.34 $ 0.51 $ 0.58 ======== ======== ========= ======== Weighted average number of common shares and equivalents used in computation 24,428 24,947 24,892 24,749 ======== ======== ========= ======== See notes to condensed consolidated financial statements. OCTEL COMMUNICATIONS CORPORATION Condensed Consolidated Statements of Cash Flows (Dollars in thousands - unaudited) Six Months Ended ---------------- Dec. 31, Dec. 31, 1994 1993 -------- -------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS: Cash flows from operating activities: Net income $ 12,573 $ 14,427 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,277 14,961 Amortization of premium on marketable securities 197 -- Deferred income taxes (1,986) (4,232) Deferred compensation -- 55 Purchased in-process research and development 4,725 -- Changes in assets and liabilities: Accounts receivable (4,699) (7,278) Inventories (5,167) (749) Prepaid expenses and other (1,866) (3,261) Trade payables (3,124) 1,517 Accrued compensation and employee benefits (5,303) (2,352) Accrued and other liabilities 2,315 648 -------- ------- Net cash provided by operating activities 12,942 13,736 Cash flows from financing activities: Sales of common stock, net 4,631 4,665 Repurchases of common stock (25,260) (5,748) Proceeds from sale of financial instruments - put warrants 1,144 -- Repayments of long-term obligations (653) (108) ------- ------ Net cash used by financing activities (20,138) (1,191) Cash flows from investing activities: Purchases of short-term investments (22,292) (80,914) Sales and maturities of short-term investments 60,571 92,284 Property, plant and equipment additions (27,756) (21,820) Changes in deposits and other assets (2,593) (10,779) Acquisition of intellectual and personal property (4,764) -- ------- ------- Net cash provided by (used for) investing activities 3,166 (21,229) ------- ------- Effect of exchange rate changes on cash (595) 139 ------- ------- Net decrease in cash and equivalents (4,625) (8,545) ------- ------- Cash and equivalents: Beginning of period 17,889 26,576 ------- ------- End of period $13,264 $ 18,031 ======= ======== See notes to condensed consolidated financial statements. OCTEL COMMUNICATIONS CORPORATION Notes to Condensed Consolidated Financial Statements (December 31, 1994 and 1993 - Unaudited) 1. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position as of December 31, 1994, the results of operations for the three and six months ended December 31, 1994 and 1993 and cash flows for the six months ended December 31, 1994 and 1993. The financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the Company's annual financial statements and notes. Certain fiscal 1994 costs previously reported as selling, general and administrative expenses have been reclassified to cost of service to conform to the fiscal 1995 presentation. 2. Short-term Investments At December 31, 1994 and June 30, 1994, all short-term investments were classified as "available-for-sale" and consisted of the following (in thousands): Unrealized Unrealized Accrued Estimated Cost Gains Losses Interest Fair Value At December 31, 1994: U.S. Government $ 6,077 $ -- $ (520) $ (83) $ 5,474 securities Municipal notes/bonds 24,787 53 (498) (348) 23,994 -------- ----- ------- ----- ------- $30,864 $ 53 $(1,018) $(431) $29,468 ======== ===== ======= ===== ======= At June 30, 1994: U.S. Government $ 9,803 $ 9 $ (455) $(103) $ 9,256 securities Municipal notes/bonds 60,598 17 (441) (891) 59,281 ------- ----- ------- ----- ------- $70,401 $ 26 $ (896) $(994) $68,537 ======= ===== ======= ===== ======= These securities were classified on the balance sheet as follows (in thousands): Dec. 31, 1994 June 30, 1994 ------------- ------------- Cash equivalents $ 17 $ 1,068 Short-term investments 29,882 68,463 ------- ------- $29,899 $69,531 ======= ======= OCTEL COMMUNICATIONS CORPORATION Notes to Condensed Consolidated Financial Statements (December 31, 1994 and 1993 - Unaudited) The cost and estimated fair value of available-for-sale debt securities by contractual maturity, consisted of the following (in thousands): December 31, 1994 June 30, 1994 ----------------- ------------------- Estimated Estimated Cost Fair Value Cost Fair Value ---- ---------- ---- ---------- Due in less than one year $ 17 $ 17 $30,991 $30,525 Due in one to three years 17,645 17,142 24,087 23,436 Due thereafter 13,202 12,309 15,323 14,576 ------- ------- ------- ------- $30,864 $29,468 $70,401 $68,537 ======= ======= ======= ======= For the three and six months ended December 31, 1994, the Company had $43,407,000 and $129,094,000 in proceeds from sales of available-for-sale investments, $263,000 and $324,000 of gross realized gains and $295,000 and $343,000 of gross realized losses on those sales and a change in net unrealized holding loss of $143,000 and $76,000, respectively, included as a separate component of stockholders' equity. 3. Inventories consist of (in thousands): Dec. 31, June 30, 1994 1994 -------- -------- Finished goods $ 9,912 $ 5,864 Work-in-process 11,741 12,248 Raw materials 12,566 10,808 -------- -------- Total inventories $ 34,219 $ 28,920 ======== ======== 4. Net income per common and equivalent share is computed using the weighted average number of common and dilutive common equivalent shares from stock options (using the treasury stock method) and shares subscribed under the Employee Stock Purchase Plan. 5. Line of credit and letters of credit Effective June 1994, the Company obtained a $30.0 million bank revolving line of credit which also allows the Company to obtain stand-by letters of credit. Borrowings under the line are unsecured and bear interest at either an adjusted LIBOR rate plus one and one-quarter percent or the greater of the Bank's base rate or the Federal Funds Effective Rate plus one half of one percent, at the Company's discretion upon borrowing the funds. Borrowings under the line are subject to certain financial covenants and restrictions on indebtedness, financial guarantees, business combinations and other related items. The Company was in compliance with these covenants and had no borrowings under this line as of December 31, 1994. The line expires in June 1996. OCTEL COMMUNICATIONS CORPORATION Notes to Condensed Consolidated Financial Statements (December 31, 1994 and 1993 - Unaudited) At December 31, 1994, the Company had $1.6 million of stand- by letters of credit outstanding. The letters of credit are primarily to guarantee payments for inventory purchases and facility lease payments. The majority of the letters of credit are denominated in Japanese yen and U.S. dollars and expire on various dates ranging from April 1995 through November 1995. 6. Interest and other income, net consists of the following (in thousands): Three Months Ended Six Months Ended ------------------ ---------------- Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1994 1993 1994 1993 -------- -------- -------- ------- Interest and investment income $370 $ 863 $1,121 $ 1,808 Gain (loss) on sale of short-term investments, net (32) (31) (19) 112 Foreign exchange gains (losses), net 401 (50) 548 (95) Other expense (54) (156) (124) (351) ---- ----- ------ ------ Total Interest and other income, net $685 $ 626 $1,526 $ 1,474 ==== ===== ====== ======= 7. Integration costs In connection with the VMX merger, the Company recorded integration costs in fiscal 1994 of $18.3 million related to costs associated with consolidating facilities and personnel. The balance in the related reserves of $9.9 million is included in Accrued and other liabilities on the balance sheet at December 31, 1994. 8. Acquired in-process research and development In August 1994, the Company purchased certain intellectual and personal property from another company for $5.1 million. Of the total purchase price, $4.7 million was allocated to in-process technology and $0.4 million was allocated to property and equipment. The in-process technology was expensed in the first quarter of fiscal 1995. OCTEL COMMUNICATIONS CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations NET REVENUES Total net revenues increased to $116.2 million in the second quarter of fiscal 1995, a 15 percent increase from net revenues of $100.9 million in the second quarter of fiscal 1994. In the first six months of fiscal 1995 net revenues increased to $222.0 million as compared to $192.5 million in the corresponding period of fiscal 1994, representing growth of 15 percent. Systems revenues in the second quarter of fiscal 1995 were $78.5 million, an increase of 7 percent from $73.3 million in the same quarter of fiscal 1994, and for the first six months of fiscal 1995 systems revenues were $148.4 million, an increase of 6 percent compared to $139.6 million in the first six months of fiscal 1994. The growth in systems revenues was attributable to the sale of systems to new and existing customers and the sale of upgrades, expansions and new features to existing customers in the Global Business Solutions ("GBS") sector (formerly referred to as "Customer Premise Equipment" sector). GBS revenues for both the second quarter and first six months of fiscal 1995 increased over the same periods in fiscal 1994 in the domestic market while international GBS revenues decreased in the second quarter of fiscal 1995 and remained flat in the first six months of fiscal 1995 compared to the same periods in fiscal 1994. Total Voice Information Service (VIS) revenues for the second quarter of fiscal 1995 decreased slightly from the second quarter of fiscal 1994 which was caused by a decrease in the domestic market, partially offset by an increase in the international market. Total VIS revenues in the first six months of fiscal 1995 increased slightly over the same period in fiscal 1994 due to an increase in sales to the international market, which was partially offset by decreases in the domestic market. Revenue in future quarters could be affected by the extent and timing of new orders from VIS providers and such orders are typically significant in size and, therefore, could impact the revenue volume and mix in any given quarter. Service and license revenues in the second quarter of fiscal 1995 increased to $37.7 million, a 37 percent increase from $27.5 million in the same quarter of fiscal 1994, and for the first six months of fiscal 1995 service and license revenues increased to $73.5 million, a 39 percent increase compared to $52.9 million in the first six months of fiscal 1994. In addition, service and license revenues continue to grow as a percentage of total net revenues and accounted for 32 percent and 33 percent of total net revenues for the second quarter and first six months of fiscal 1995, respectively, as compared to 27 percent for the second quarter and first six months of fiscal 1994. Service and license revenues grew in the second quarter and first six months of fiscal 1995 as compared to the same periods in the prior year as a result of the increase in Octel Network Services (ONS) revenues, as well as revenues from the Company's larger installed base of customers. OCTEL COMMUNICATIONS CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) COST OF SALES As a percentage of total net revenues, total cost of sales increased to 41 percent in the second quarter of fiscal 1995 compared to 39 percent in fiscal 1994 and remained flat at 40 percent in the first six months of fiscal 1995 compared to the same period in fiscal 1994. The majority of the increase in the second quarter of fiscal 1995 as compared to the same quarter in fiscal 1994 is a result of continued faster growth of service and license revenues, as a percentage of total net revenues, which have a higher cost of sales structure than system sales. Cost of systems sales were 33 and 32 percent of total net systems revenues in the second quarter and first six months of fiscal 1995, respectively. Cost of systems were 32 percent in the second quarter and first six months of fiscal 1994, respectively. The increases as a percentage of total net systems revenues in the second quarter of fiscal 1995 compared to the same period in the prior year were due to a change in product mix. Cost of service was 58 percent of net service and license revenues in the second quarter and first six months of fiscal 1995, respectively. Cost of service was 59 percent and 60 percent of net service and license revenues in the second quarter and first six months of fiscal 1994, respectively. The decreases in the second quarter and the first six months of fiscal 1995 compared to fiscal 1994 were primarily due to the increase in ONS revenue, which has a higher gross margin structure as a percentage of service and license revenue. On a quarter-to-quarter basis, the channel and product mix of sales can fluctuate significantly. Such fluctuations can have a positive or negative impact on operating margins. These fluctuations are difficult to predict. RESEARCH AND DEVELOPMENT Research and development expenses were $18.0 million in the second quarter of fiscal 1995, an increase of 29 percent over the $14.0 million expended in the second quarter of fiscal 1994. For the first six months of fiscal 1995 and 1994, research and development expenses were $35.6 million and $27.7 million, respectively, representing an increase of 28 percent in fiscal 1995. As a percentage of net revenues, research and development expenses were 16 percent in the second quarter and first six months of fiscal 1995 and 14 percent in the same periods of fiscal 1994. The increase in research and development expenses is due to the Company's increased spending on projects to meet customer commitments, the adaptation of existing products and technology for international markets, the continued commitment to development of new products and enhancements to existing products. The Company believes that additional research and development expenses will be required to maintain market position and expects that these expenses will increase in absolute terms and could increase as a percentage of total net revenues. OCTEL COMMUNICATIONS CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $38.1 million in the second quarter of fiscal 1995, a 5 percent increase over the second quarter of fiscal 1994 of $36.4 million. For the first six months of fiscal 1995, these expenses were $74.7 million, an increase of 5 percent over the $71.1 million expended in the same period of fiscal 1994. Selling, general and administrative expenses decreased as a percentage of total net revenues from 36 percent and 37 percent in the second quarter and first six months of fiscal 1994, respectively, to 33 percent and 34 percent in the corresponding periods of fiscal 1995. The increase in absolute dollars resulted from the Company's continuing efforts to develop and manage its organization, train new and existing personnel and the commitment of resources to support international opportunities, which were partially offset by the absence of costs related to the departure of the prior CEO which were incurred in the second quarter of fiscal 1994 and reduced occupancy costs due to the consolidation of certain office facilities in fiscal 1995. The Company believes that additional selling, general and administrative expenses will be required to maintain its competitive position, including expanded international sales activities, and expects that these expenses will increase in absolute terms and could increase as a percentage of net revenues. NON-RECURRING CHARGE FOR ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT In August 1994, the Company purchased certain intellectual property and fixed assets from another company for $5.1 million. Of the total purchase price, $4.7 million was allocated to in- process technology and $0.4 million was allocated to property and equipment. The in-process technology was expensed in the first quarter of fiscal 1995. INTEREST AND OTHER INCOME, NET Interest and other income, net, for the second quarter and first six months of fiscal 1995 of $0.7 million and $1.5 million, respectively, remained flat compared with the same periods of fiscal 1994; however, the factors affecting interest and other income, net, varied in several ways between the two quarters and the two six-month periods. Interest and investment income was lower due to lower cash and equivalent and short-term investment balances in fiscal 1995 compared to the same periods in the prior year. The Company had net foreign exchange gains in the first quarter and first six months of fiscal 1995 as compared to net losses in the same periods in fiscal 1994. In the first six months of fiscal 1995 there was a net loss on the sale of short- term investments as compared to a net gain in the same period last year. Other expense declined in the first quarter and six months of fiscal 1995 over the first quarter and six months of fiscal 1994. OCTEL COMMUNICATIONS CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) INCOME TAXES The Company's effective tax rate was 33 percent in the second quarter and first six months of fiscal 1995 as compared to 26 percent and 22 percent in the corresponding periods of fiscal 1994. The effective rate was lower in fiscal 1994 due to a combination of factors. First, various tax assets of VMX that had been fully reserved were recognized as a tax benefit. Additionally, the retroactive reinstatement of the federal research and development credit for the fiscal year ended June 30, 1993, had a favorable impact on the effective tax rate in fiscal 1994. FACTORS THAT MAY EFFECT FUTURE RESULTS OF OPERATIONS The Company believes that in the future its results of operations could be affected by factors such as market acceptance of new products and upgrades, growth in the worldwide voice processing market, competition, expansion of services by its VIS customers, the outcome of litigation and changes in general economic conditions in any of the countries in which the Company does business. The Company believes that the successful introduction of new and enhanced products and services will be essential for it to maintain its competitive position. The Company believes that its backlog on a quarterly basis will not generally be large enough to assure that the Company will meet its revenue targets for a particular quarter. Furthermore, a large percentage of any quarter's shipments have traditionally been booked in the last month of the quarter. Consequently, quarterly revenues and operating results will depend on the volume and timing of new orders received during a quarter, which is difficult to forecast. The integration of certain operations as a result of the merger with VMX, Inc. continues to require the dedication of management resources which may temporarily distract attention from the day- to-day business of the Company. The Company intends to reduce certain expenses by consolidating operations and eliminating duplicate facilities, employees, marketing programs and other expenses. There can be no assurance that Octel will be able to reduce certain expenses in this fashion, that there will not be high costs associated with such activities, that such reductions will not result in a decrease in revenues or that there will not be other material adverse effects of such activities. Although it believes there are opportunities to gain from synergies resulting from the VMX merger, the Company cannot determine the ultimate effect that new products and services and the integration of Octel and VMX will have on revenues, earnings or stock price. Due to the factors noted above, the Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Past financial performance should not be considered a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. Any shortfall in revenue or earnings from the levels anticipated by securities analysts could have an immediate and significant effect on the trading price of the Company's Common Stock in any given period. Additionally, the Company may not learn of such shortfalls until late in a fiscal quarter, which could result in an even more immediate and adverse effect on the trading price of the Company's Common Stock. Finally, the Company participates in a highly dynamic industry which often results in volatility of the Company's Common Stock price. OCTEL COMMUNICATIONS CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The Company has been and may in the future continue to be required to litigate enforcement of its intellectual property or commercial rights or to defend itself in litigation arising out of claims by third parties. Such litigation, even if the Company is ultimately victorious, can be extremely expensive and may have a material adverse effect on the Company's results of operations in any particular period. Litigation may also occupy management resources that would otherwise be available to address other aspects of the Company's business. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and equivalents and short-term investments in the first six months of fiscal 1995 decreased $43.2 million from June 30, 1994. The primary uses of cash during the first six months of fiscal 1995 were the investment in property, plant and equipment of $27.8 million, the repurchase of common stock for $25.3 million and the payment of $4.8 million for the August 1994 purchase of certain intellectual property and fixed assets. Cash flows from operations resulted in a net source of cash of $12.9 million in the first six months of fiscal 1995. As of December 31, 1994, the Company had invested $46.3 million in the purchase of land and the development of the Company's new corporate offices on that land. The Company now occupies those facilities. The Company expects to spend additional amounts during the remainder of fiscal 1995 in connection with the final phases of construction of the Company's new corporate offices. The Company also expects to purchase additional equipment and make certain leasehold improvements during the remainder of fiscal 1995. The Company anticipates that its property, plant and equipment investments will eventually result in reduced operating expenses, greater efficiencies and increased flexibility for the Company. In connection with the VMX merger, the Company recorded $18.3 million of integration costs in fiscal 1994. As of December 31, 1994, there was a balance of $9.9 million of expected future cash expenditures. The majority of this amount will be spent in the remainder of fiscal 1995. In addition to the integration costs recorded in fiscal 1994, the Company may incur additional merger-related integration costs, which will be charged to operations over the next several quarters. Such integration charges are expected to be in the form of cash expenditures estimated at approximately $3.3 million primarily for consolidating processes and computer systems of the merged Company and literature design for name change and other modifications to literature for the merged Company. In July 1994, the Company's Board of Directors approved the repurchase of up to 3.5 million shares of its Common Stock over a period of approximately two years. As of December 31, 1994, the Company had repurchased 1,165,600 shares of its Common Stock at an average per share price of $22. In August 1994, the Company purchased certain intellectual property and fixed assets from another company for $5.1 million. Of the total purchase price, $4.7 million was allocated to in- process technology and $0.4 million was allocated to property and equipment. As of December 31, 1994, $4.8 million in cash had been paid and another $.3 million will be paid during the remainder of fiscal 1995. OCTEL COMMUNICATIONS CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The Company anticipates that cash flow from operations and existing cash and equivalents and short-term investment balances, together with its existing bank line, will be adequate to meet the Company's cash requirements through the end of fiscal 1995. PART II OTHER INFORMATION Item 1. Legal Proceedings The Company and Northern Telecom were engaged in a jury trial versus Theis Research, Inc. ("Theis") in the Northern District of California during the first quarter of fiscal 1995. The trial centered on Theis' allegation that Octel and Northern Telecom were infringing three patents held by Theis. In October 1994, the jury returned a verdict finding, among other things, that Octel and Northern Telecom were correct in their claim that the three patents at issue were invalid. Post-trial motions are pending, and, if no settlement between the parties is reached, it is anticipated that Theis will appeal the verdict. OCTEL COMMUNICATIONS CORPORATION Item 4. Matters Submitted to Vote of Security Holders Octel Communications Corporation held its regular Annual Meeting of Stockholders on November 17, 1994. The following individuals were elected to serve on the Company's Board of Directors: Number of Number of affirmative votes votes withheld ----------------- -------------- Robert Cohn 21,156,028 214,957 Anson M. Beard, Jr. 21,145,854 225,131 Leo J. Chamberlain 21,143,302 227,683 Deborah A. Coleman 21,143,824 227,161 John Freidenrich 21,145,376 225,609 Robert C. Hawk 21,141,572 229,413 Nathaniel de Rothschild 21,142,174 228,811 Dag Tellefsen 21,141,823 229,162 The following matters were voted upon at the meeting: 1. Approval of proposal regarding the 1985 Incentive Stock Plan to limit the number of shares granted to any individual in any fiscal year. 2. Approval of proposal regarding the 1987 Employee Stock Purchase Plan to increase shares reserved 3. Approval of proposal regarding the 1988 Directors' Stock Option Plan to increase the number of shares reserved 4. Appointment of KPMG Peat Marwick LLP as independent auditors The votes of the stockholders on these proposals were as follows: Proposal Number of Number of Number of Number of Number affirmative votes negative votes abstentions broker non-votes -------- ----------------- -------------- ----------- ---------------- 1. 20,763,282 499,598 108,105 -- 2. 17,893,851 3,149,068 102,734 225,332 3. 16,811,222 4,209,630 124,801 225,332 4. 21,265,187 48,893 56,905 -- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - none (b) Report on Form 8-K No report on Form 8-K was filed by the Company during its fiscal quarter ended December 31, 1994. OCTEL COMMUNICATIONS CORPORATION SIGNATURES Pursuant to the requirements 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. OCTEL COMMUNICATIONS CORPORATION Dated: February 13, 1995 /s/ ROBERT COHN ---------------------------------- Robert Cohn, President and Chief Executive Officer /s/ HERZEL ASHKENAZI ---------------------------------- Herzel Ashkenazi, Controller (Chief Accounting Officer) EX-27 2 EX-27
5 3-MOS JUN-30-1995 DEC-31-1994 13264 29882 99840 (3016) 34219 190934 183744 (71484) 332536 82761 0 173685 0 0 75308 332536 78542 116240 25970 47712 55469 0 0 13059 4300 8759 0 0 0 8759 .36 .36
-----END PRIVACY-ENHANCED MESSAGE-----