-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GzIIPYWXC6Ai7rl8O7SgGgrvztGfOOmT2YzWxz1DO8LtQXdF6fN0EtYvfkpy6lLp YMSDVaPk6KQIkDi+vt6Gqg== 0000891618-96-000473.txt : 19960621 0000891618-96-000473.hdr.sgml : 19960621 ACCESSION NUMBER: 0000891618-96-000473 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 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: 96565191 BUSINESS ADDRESS: STREET 1: 890 TASMAN DR CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4083212000 10-Q 1 FORM 10-Q (OCTEL COMMUNICATIONS CORPORATION) 1 - - -------------------------------------------------------------------------------- FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange - - --- Act of 1934 For the quarterly period ended March 31, 1996, 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 April 30, 1996 was 50,758,668. (See Note 4 to notes to condensed consolidated financial statements.) - - -------------------------------------------------------------------------------- This document consists of 19 pages of which this is Page 1. 2 OCTEL COMMUNICATIONS CORPORATION INDEX REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996
Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - March 31, 1996 and June 30, 1995.................................... 3 Condensed Consolidated Statements of Operations - three and nine months ended March 31, 1996 and 1995.......................... 4 Condensed Consolidated Statements of Cash Flows - nine months ended March 31, 1996 and 1995.......................... 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................................ 17 Item 6. Exhibits and Reports on Form 8-K................. 18 SIGNATURES .......................................................... 19
-2- 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OCTEL COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA - UNAUDITED)
March 31, June 30, 1996 1995 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 28,933 $ 24,521 Short-term investments 22,653 28,054 Accounts receivable net of allowance for doubtful accounts of $3,593 at March 31, 1996 and $2,938 at June 30, 1995 133,985 110,679 Accounts receivable from related parties -- 6,270 Inventories 57,317 31,151 Prepaid expenses and other 18,860 15,448 --------- --------- Total current assets 261,748 216,123 Property, plant and equipment, net of accumulated depreciation and amortization of $81,635 at March 31, 1996 and $76,974 at June 30, 1995 132,578 128,753 Deposits and other assets 22,958 23,400 --------- --------- Total $ 417,284 $ 368,276 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade payables $ 21,722 $ 21,157 Accrued compensation and employee benefits 28,880 28,188 Income taxes payable 2,985 7,921 Accrued and other liabilities 37,206 35,465 --------- --------- Total current liabilities 90,793 92,731 Long-term obligations 325 602 Stockholders' equity: Preferred stock, $.001 par value - authorized, 5.0 million shares; none outstanding -- -- Common stock, $.001 par value - Mar. 31, 1996 - authorized, 100.0 million shares; outstanding, 50.1 million shares, June 30, 1995 - authorized, 50.0 million shares; outstanding, 47.7 million shares (Note 4) 214,098 183,193 Notes receivable from employees (4,500) (1,347) Retained earnings 117,999 96,039 Treasury stock at cost: 0.2 million shares at June 30, 1995 -- (2,347) Other (1,431) (595) --------- --------- Total stockholders' equity 326,166 274,943 --------- --------- Total $ 417,284 $ 368,276 ========= =========
See notes to condensed consolidated financial statements. -3- 4 OCTEL COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
Three Months Ended Nine Months Ended --------------------- --------------------- March 31, March 31, March 31, March 31, 1996 1995 1996 1995 -------- -------- -------- -------- NET REVENUES: Systems $ 93,752 $ 74,653 $259,408 $223,096 Services and license 46,097 40,389 130,868 113,931 -------- -------- -------- -------- Total net revenues 139,849 115,042 390,276 337,027 COSTS AND EXPENSES: Cost of systems 29,276 25,981 79,761 73,488 Cost of services 28,953 23,391 82,267 65,713 Research and development 19,208 18,313 56,521 53,438 Selling, general and administrative 43,936 38,197 125,692 112,347 Non-recurring charge for acquired in-process research and development -- -- -- 4,725 Integration costs -- 1,252 -- 2,261 -------- -------- -------- -------- Total costs and expenses 121,373 107,134 344,241 311,972 -------- -------- -------- -------- Operating income 18,476 7,908 46,035 25,055 Interest and other income, net 670 683 1,742 2,209 -------- -------- -------- -------- Income before income taxes 19,146 8,591 47,777 27,264 Provision for income taxes 6,900 2,500 17,200 8,600 -------- -------- -------- -------- NET INCOME $ 12,246 $ 6,091 $ 30,577 $ 18,664 ======== ======== ======== ======== NET INCOME PER COMMON AND EQUIVALENT SHARE (Note 4) $ 0.23 $ 0.12 $ 0.58 $ 0.38 ======== ======== ======== ======== Weighted average number of common shares and equivalents used in computation (Note 4) 53,514 49,458 53,012 49,648 ======== ======== ======== ========
See notes to condensed consolidated financial statements. -4- 5 OCTEL COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS - UNAUDITED)
Nine Months Ended ---------------------- March 31, March 31, 1996 1995 -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 30,577 $ 18,664 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 25,040 23,164 Amortization of premium on marketable securities 43 195 Deferred income taxes 5,183 (504) Non-recurring charge for acquired in-process research and development -- 4,725 Changes in working capital: Accounts receivable (17,014) (4,237) Inventories (23,390) (4,607) Prepaid expenses and other (5,622) (2,552) Trade payables 552 2,126 Accrued compensation and employee benefits 504 (3,402) Income taxes payable and accrued and other liabilities 5,104 (755) -------- -------- Net cash provided by operating activities 20,977 32,817 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Sales of common stock, net 20,166 5,953 Repurchases of common stock (8,903) (25,320) Proceeds from payment of employees' notes receivable 50 -- Proceeds from sale of financial instruments - put warrants 1,762 1,408 Repayments of long-term obligations (271) (741) -------- -------- Net cash provided by/(used for) financing activities 12,804 (18,700) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments (24,182) (29,967) Sales and maturities of short-term investments 29,595 65,979 Property, plant and equipment additions (26,445) (42,196) Changes in deposits and other assets (7,977) (1,885) Acquisition of intellectual and personal property -- (5,054) -------- -------- Net cash used for investing activities (29,009) (13,123) -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (360) (493) -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 4,412 501 -------- -------- CASH AND CASH EQUIVALENTS: Beginning of period 24,521 17,889 -------- -------- End of period $ 28,933 $ 18,390 ======== ========
See notes to condensed consolidated financial statements. -5- 6 OCTEL COMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (MARCH 31, 1996 AND 1995 - 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 of the Company as of March 31, 1996, the results of operations for the three and nine months ended March 31, 1996 and 1995 and cash flows for the nine months ended March 31, 1996 and 1995. 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 related notes. Certain fiscal 1995 costs previously reported as research and development expenses have been reclassified to selling, general and administrative expenses to conform to the fiscal 1996 presentation. 2. Short-term investments At March 31, 1996 and June 30, 1995, all cash equivalents and 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 March 31, 1996: U.S. Government securities $11,448 $ 2 $(159) $ (70) $11,221 Municipal notes/bonds 24,481 44 (12) (250) 24,263 ------- ----- ----- -------- ------- $35,929 $ 46 $(171) $ (320) $35,484 ======= ===== ===== ======== ======= At June 30, 1995: U.S. Government securities $12,117 $ -- $(180) $ (82) $11,855 Municipal notes/bonds 22,200 41 (41) (376) 21,824 ------- ----- ----- -------- ------- $34,317 $ 41 $(221) $ (458) $33,679 ======= ===== ===== ======== =======
These securities were classified on the balance sheet as follows (in thousands):
March 31, 1996 June 30, 1995 -------------- ------------- Cash equivalents $13,151 $ 6,083 Short-term investments 22,653 28,054 ------- ------- $35,804 $34,137 ======= =======
The cost and estimated fair value of available-for-sale debt securities by contractual maturity, consisted of the following (in thousands): -6- 7 OCTEL COMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (MARCH 31, 1996 AND 1995 - UNAUDITED)
March 31, 1996 June 30, 1995 ---------------------- ---------------------- Estimated Estimated Cost Fair Value Cost Fair Value ---- ---------- ---- ---------- Due in less than one year $23,478 $23,325 $15,573 $15,457 Due in one to three years 5,627 5,543 14,778 14,476 Due thereafter 6,824 6,616 3,966 3,746 ------- ------- ------- ------- $35,929 $35,484 $34,317 $33,679 ======= ======= ======= =======
For the three and nine months ended March 31, 1996, the Company had $54.0 million and $149.8 million in proceeds from sales of available-for-sale investments, respectively. Gross realized gains and gross realized losses on those sales were not material. For the three and nine months ended March 31, 1995, the Company had $25.7 million and $154.8 million in proceeds from sales of available-for-sale investments, respectively. Gross realized gains and gross realized losses on those sales were not material. 3. Inventories consist of (in thousands):
March 31, June 30, 1996 1995 --------- -------- Finished goods $ 8,649 $ 5,009 Work-in-process 14,981 8,586 Raw materials 33,687 17,556 ------- ------- Total $57,317 $31,151 ======= =======
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. On March 25, 1996, the Company's Board of Directors authorized a two-for-one stock split effected in the form of a 100% stock dividend distributed on May 10, 1996 to stockholders of record on April 5, 1996. All references to number of shares (except authorized shares) and per share amounts have been restated. 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 London interbank offering rate ("LIBOR") 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 -7- 8 OCTEL COMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (MARCH 31, 1996 AND 1995 - UNAUDITED) related items. The Company was in compliance with these covenants and had no borrowings under this line as of March 31, 1996. The Company expects to renew its existing line which expires in June 1996. On March 31, 1996, the Company had $1.2 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, Pounds Sterling and French Francs and expire on various dates through December 25, 1999. 6. Lease commitment On July 6, 1995, the Company entered into a one-year operating lease for a parcel of undeveloped land adjacent to its current campus in Milpitas, California on which additional offices may be constructed over the next three years. This lease provides for monthly payments which vary based on the LIBOR and requires the Company to maintain certain financial covenants similar to its credit facilities. In addition, this lease provides the Company with the option at the end of the lease term of either renewing the lease, acquiring the property at its original cost or arranging for the property to be acquired. The Company is contingently liable to the lessor for a maximum of $9.9 million. 7. Interest and other income, net consists of the following (in thousands):
Three Months Ended Nine Months Ended ------------------ ----------------- March 31, March 31, March 31, March 31, 1996 1995 1996 1995 ----- ----- ------- ------- Interest and investment income $ 512 $ 682 $ 1,781 $ 1,803 Loss on sale of short-term investments, net -- -- (7) (19) Foreign exchange gains, net 262 116 87 664 Other income (expense), net (104) (115) (119) (239) ----- ----- ------- ------- Total $ 670 $ 683 $ 1,742 $ 2,209 ===== ===== ======= =======
8. 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 $0.4 million is included in Accrued and other liabilities on the balance sheet at March 31, 1996. Additional expenses of approximately $2.3 million were incurred during the first nine months of fiscal 1995, relating primarily to literature design for name change and other modifications to literature for the merged Company and the consolidation of processes and computer systems of the merged Company. Additional integration costs of approximately $0.7 million were incurred during the first quarter of fiscal 1996 as the consolidation of the two companies was substantially completed. These costs were entirely offset by excess integration reserves which were identified and reversed during the first quarter. No additional integration costs were incurred since the first quarter of fiscal 1996. -8- 9 OCTEL COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NET REVENUES The Company derives revenues from the sale of systems, performance of services and generation of license fees from its three strategic business units, Global Business Solutions ("GBS"), Voice Information Services ("VIS") and Services (comprised of Octel Network Services and OcteLink). GBS consists of system sales, services and maintenance contracts to corporations and institutions including universities and governments. VIS consists of system sales and maintenance contracts to service providers like telephone companies and wireless providers. Total net revenues for GBS for the third quarter of fiscal 1996 were $64.3 million compared to $63.9 million in the same period last year. For the first nine months of fiscal 1996, total net GBS revenues decreased from $200.5 million in fiscal 1995 to $193.9 million in fiscal 1996. Total net revenues for VIS increased from $35.2 million in the third quarter of fiscal 1995 to $57.9 million in the third quarter of fiscal 1996. For the first nine months of the year, total net VIS revenues increased from $91.6 million in fiscal 1995 to $144.4 million in fiscal 1996. Services sector revenue, which is primarily related to Octel Network Services ("ONS"), was $17.6 million for the third quarter of fiscal 1996 compared to $16.0 million in the third quarter of fiscal 1995. For the first nine months of fiscal 1996, ONS revenue increased to $51.9 million from $44.9 million in the same period last year. Systems revenues consist of software, hardware, upgrades and expansions sold to corporations and other institutions, including telephone and cellular companies. Service revenues, as presented below, include a range of voice processing and network management services provided by ONS to customers in the GBS and VIS markets as well as the residential market through a Regional Bell Operating Company. Services and license revenues also include service contracts, applications development, spares sales and hardware repair and maintenance provided by the GBS and VIS business units.
Three Months Ended Nine Months Ended ----------------------------------- ---------------------------------- March 31, March 31, Increase/ March 31, March 31, Increase/ 1996 1995 (Decrease) 1996 1995 (Decrease) --------- --------- --------- --------- --------- --------- (Dollars in millions) Systems $ 93.7 $ 74.6 26% $259.4 $223.1 16% Services and license 46.1 40.4 14% 130.9 113.9 15% ------ ------ ------ ------ Total net revenues $139.8 $115.0 22% $390.3 $337.0 16% ====== ====== ====== ====== Percentage of Total Net Revenues Systems 67% 65% 2% 66% 66% -- Services and license 33% 35% (2)% 34% 34% --
Systems The growth in systems revenues for the third quarter of fiscal 1996 over the third quarter of fiscal 1995 was attributable to revenue increases in the VIS business, offset by a slight decrease in the systems portion of the GBS business. The VIS increase was due primarily to an increase in -9- 10 OCTEL COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) international sales (primarily in Europe, Canada and Asia-Pacific), and, to a lesser extent, an increase in domestic sales. For the GBS business, higher domestic sales were more than offset by lower international sales. The GBS domestic increase was positively affected by increases in revenues by the Company's PC division and Rhetorex subsidiary. However, these increases were partially offset by a decrease in new system sales volume. The lower international GBS revenue resulted primarily from decreases in Europe and Canada, partially offset by an increase in the Asia-Pacific market. Lower than expected Overture 250 sales, which replaced the Aspen family, contributed to the decrease in domestic GBS system sales. Although the Company is committed to improving the results of GBS system sales, there can be no assurance that such improvements will not be slower to materialize than expected, or that such improvements will occur. The systems revenue increase in the first nine months of fiscal 1996 is due primarily to increased VIS systems revenues attributable to the sale of systems expansions and software upgrades, partially offset by a decrease in GBS systems revenues. VIS revenues were higher for both domestic and international markets for the first nine months of fiscal 1996 compared to the same period for fiscal 1995 whereas GBS experienced decreases in each of these markets for the same period. Revenue in future quarters could be affected by the extent and timing of new orders from VIS providers. Such orders are typically significant in size and, therefore, either a single order or a small number of orders can have a significant impact on the amount and source of revenue in any given quarter. Services and license Services and license revenues grew in the third quarter and first nine months of fiscal 1996 as compared to the same periods in the prior year primarily as a result of the Company's larger installed base of customers. Additionally, ONS revenues increased, reflecting both subscriber growth and increased usage. The Company is continuing to focus resources on increasing revenue from its services and license business and anticipates that services and license revenue as a percentage of net revenues will continue to fluctuate based on system sales. COST OF SALES
Three Months Ended Nine Months Ended ----------------------------------- ---------------------------------- March 31, March 31, Increase/ March 31, March 31, Increase/ 1996 1995 (Decrease) 1996 1995 (Decrease) --------- --------- --------- --------- --------- --------- (Dollars in millions) Cost of systems $ 29.3 $ 26.0 13% $ 79.8 $ 73.5 9% Cost of services 28.9 23.4 24% 82.2 65.7 25% ------ ------ ------ ------ Total cost of sales $ 58.2 $ 49.4 18% $162.0 $139.2 16% ====== ====== ====== ====== Percentage of Net Revenues Cost of systems 31% 35% (4%) 31% 33% (2%) Cost of services 63% 58% 5% 63% 58% 5% Total cost of sales 42% 43% (1%) 42% 41% 1%
-10- 11 OCTEL COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Total cost of sales, as a percentage of total net revenues, decreased for the third quarter and increased for the first nine months of fiscal 1996 as compared to the same periods in fiscal 1995. The changes are due primarily to a reduction in cost of systems offset by increases in cost of services. Systems The decreases in cost of systems as a percentage of total systems revenues in the third quarter and first nine months of fiscal 1996 compared to the same periods in the prior year were due primarily to product mix changes. VIS revenues, which generally carry lower cost of sales as a percentage of total net revenues than GBS revenues, increased as a percentage of total systems revenues from the third quarter and first nine months of fiscal 1995 compared to the same periods of fiscal 1996. Services and license The increase in cost of services as a percentage of total services and license revenues in the third quarter and first nine months of fiscal 1996 compared to the same periods of fiscal 1995 was due primarily to higher employee-related costs associated with service contracts and hardware repair and maintenance activities. ONS cost of services as a percentage of total services and license revenues also increased, but to a lesser extent, from the third quarter and first nine months of fiscal 1995 to the same periods of fiscal 1996. ONS cost of services for the third quarter of fiscal 1996 was affected by upfront costs incurred to build an infrastructure to serve new customers. The change for the first nine months of fiscal 1996 compared to the same period of fiscal 1995 was partially affected by the inclusion of revenue for a significant one-time customer conversion to ONS services which had little associated cost of services in fiscal 1995. 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
Three Months Ended Nine Months Ended ----------------------------------- ---------------------------------- March 31, March 31, Increase/ March 31, March 31, Increase/ 1996 1995 (Decrease) 1996 1995 (Decrease) --------- --------- --------- --------- --------- --------- (Dollars in millions) Expenses $19.2 $18.3 5% $56.5 $53.4 6% Percentage of revenues 14% 16% (2%) 14% 16% (2%)
The increase in absolute dollars spent on research and development for both the third quarter and first nine months of fiscal 1996 is primarily due to the Company's increased spending on employee-related costs for new product development, including OcteLink. In addition, in the third quarter of fiscal 1995, the Company incurred a one-time charge of approximately $1.2 million related to a cancelled contract for software development. There were no such charges during fiscal -11- 12 OCTEL COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 1996. Because of the Company's commitment to the development and implementation of technology and products that help maintain market share and position Octel for industry leadership, the Company believes that continued investments in research and development expenses are likely to increase in absolute terms and, depending on revenue in any given period, could increase as a percentage of total net revenues. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Three Months Ended Nine Months Ended ----------------------------------- ---------------------------------- March 31, March 31, Increase/ March 31, March 31, Increase/ 1996 1995 (Decrease) 1996 1995 (Decrease) --------- --------- --------- --------- --------- --------- (Dollars in millions) Expenses $ 43.9 $ 38.2 15% $ 125.7 $ 112.3 12% Percentage of revenues 31% 33% (2%) 32% 33% (1%)
The increase for both the third quarter and first nine months of fiscal 1996 in selling, general and administrative expenses in absolute dollars resulted primarily from payroll-related expenses for employees hired to support the growth of the Company's services business and international operations. 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, depending on revenue in any given period, could increase as a percentage of net revenues. Additionally, the Company is currently involved in litigation that may cause an increase in legal expenses in the future. (See Item 1 "Legal Proceedings" in Part II.) 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. INTEGRATION COSTS In connection with the VMX merger in fiscal 1994, the Company recorded additional integration costs of $2.3 million in the first nine months of fiscal 1995. The integration costs related primarily to literature design for name change and other modifications to literature for the merged company and the consolidation of processes and computer systems of the merged company. Additional integration costs of approximately $0.7 million were incurred during the first quarter of fiscal 1996 as the consolidation of the two companies was substantially completed. These costs were entirely offset by excess integration reserves which were identified and reversed during the first quarter of fiscal 1996. No additional integration costs were incurred since the first quarter of fiscal 1996. -12- 13 OCTEL COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INTEREST AND OTHER INCOME, NET Interest and other income, net for the third quarter of fiscal 1996 decreased slightly compared to the third quarter of fiscal 1995. For the first nine months of fiscal 1996, interest and other income, net decreased $0.5 million from the same period of fiscal 1995. Interest and investment income for the third quarter of fiscal 1996 decreased compared to the third quarter of fiscal 1995 primarily due to lower average cash and investment balances. This decrease was partially offset by an increase in net foreign exchange gains during the comparable periods. The decrease for the first nine months of fiscal 1996 compared to the same period of fiscal 1995 was due primarily to a decrease in net foreign exchange gains. INCOME TAXES The Company's effective tax rate was 36 percent in the third quarter and first nine months of fiscal 1996, respectively, as compared to 29 percent and 32 percent in the corresponding periods of fiscal 1995. The effective rate was higher in fiscal 1996 due to the expiration of the U.S. federal research and development credit and the smaller impact that certain tax benefits have on the effective tax rate. The Company expects its effective tax rate for fiscal 1996 to decrease slightly if the proposed legislation which extends the research and development tax credit is enacted prior to the end of the fiscal year. FACTORS THAT MAY EFFECT FUTURE RESULTS OF OPERATIONS Various paragraphs of this Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations) contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements as a result of the factors set forth below and elsewhere in this document. 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 or improve its competitive position. The Company's 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. In July 1995, the Company introduced OcteLink - a global "messaging post office" that could eventually allow the interconnection of virtually any voice messaging system with networking -13- 14 OCTEL COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) capability, regardless of protocol, system size or geographic location. Revenues from OcteLink commenced during the second quarter of fiscal 1996 but have not been material to-date and are not expected to be material for the fiscal year. The Company has incurred additional research and development and selling, general and administrative expenditures to launch OcteLink and expects to incur additional costs in future quarters. Although the Company believes OcteLink is a viable global messaging network, there is currently no reliable data regarding the demand for such services. Furthermore, demand for a global messaging network may be slow to materialize, may not materialize or competitors may successfully introduce alternative solutions to OcteLink that achieve better market acceptance. The Company introduced the Overture Family of message servers in July 1995. The Overture 250, which replaced the Aspen family, is a mid-level system within the GBS product line designed for medium-sized businesses and large branch offices. To date, sales of the Overture 250 have been slightly below management expectations. Additionally, the Company has issued credits under its trade-in program, which extends through the end of fiscal 1996, to replace installed systems with the Overture 250. These trade-in costs could negatively affect gross margins. The Company is currently engaged in various new projects and product development which are necessary to help maintain market share and Octel's leadership position in the industry. Two of the more significant projects are "unified messaging" products for voice, fax and electronic mail messaging and the Company's next-generation client/server architecture for its Sierra platform, Intelligent Messaging Architecture ("IMA"). Unified messaging essentially unites voice, fax and e-mail together in a client/server architecture that uses standard PC and LAN technology. This integration brings together several discrete technologies into a single mailbox that provides user access from a telephone or a PC. In May 1995, Octel announced the first component of its unified messaging technology that will be available on Microsoft Exchange, a LAN-based, enterprise-wide messaging architecture. Current expectations are for revenue to commence in fiscal 1997. IMA was originally scheduled for first-phase release during the latter part of the fourth quarter of fiscal 1996; however, shipment of this product has been delayed until the beginning of the third quarter of fiscal 1997 in order to allow for the release of a more feature-rich product. The successful introduction of these and other new products is dependent on a number of factors, some of which are beyond the Company's control, including product acceptance in the marketplace, introduction of competitive products by existing or new competitors, changes in technology, price competition and other factors. Any delay in introducing new products or failure of such products to achieve substantial market share could significantly reduce future expected revenues and/or result in the need for additional expenses to bring the product to market. Furthermore, there can be no assurance that the Company will be successful in introducing new products or that such products will generate significant revenues or profits. During the latter half of fiscal 1995, the Company adopted a new, capacity-based pricing approach for its largest GBS system, the XC-1000. This pricing approach was also adopted for the Overture and Sierra systems during fiscal 1996. This approach allows customers to purchase systems with only part of the equipment's capacity enabled and then have additional capacity enabled in the future upon payment of additional fees. The Company has adopted contract accounting (based upon percentage-of-completion) to recognize revenue in connection with capacity on demand transactions when firm commitments to purchase additional capacity exist. Under this method, revenues are recognized as a function of the capacity provided to the customer -14- 15 OCTEL COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) and costs are recognized proportionally to revenue recognized. Costs in excess of billings are deferred in the Balance Sheet. The adoption of contract accounting did not have a material impact on results for the third quarter or first nine months of fiscal 1996. The Company believes that delays in expected revenue in fiscal 1996 have occurred as a result of renegotiating contracts with certain customers and distributors to accommodate this pricing approach. While the Company believes that this approach will make it more competitive, difficulties in implementing this approach, delays or adverse results due to renegotiation of sales and distribution agreements to accommodate capacity-based pricing or the failure to generate additional sales could have an adverse effect on the Company's results of operations. Due to the factors noted above and elsewhere in Management's Discussion and Analysis of financial condition and results of operations, the Company's future earnings and Common 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 adverse 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. The Company's Common Stock and technology stocks in general have been at or near historic highs in recent weeks and there can be no assurance that such valuations will continue or increase. Finally, the Company participates in a highly dynamic industry which often results in volatility of the Company's Common Stock price. 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 cash equivalents and short-term investments in the first nine months of fiscal 1996 decreased $1.0 million from June 30, 1995. Cash flows from operations resulted in a net source of cash of $21.0 million in the first nine months of fiscal 1996 and $32.8 million in the first nine months of fiscal 1995. The decrease from the prior year was due primarily to increases in inventory and accounts receivable offset by higher net income and the timing of payment of certain liabilities. The increase in inventory resulted primarily from the Company's preparation for fourth quarter sales, which have historically been higher than other preceding quarters, a change in vendors during the second quarter of fiscal 1996 and continued product transitions. The Company is taking action to reduce inventory to a more acceptable level over the next six months. In the event that fourth quarter sales do not meet planned levels, inventory will be higher than target levels which could potentially result in excess inventory. The primary sources of cash during the first nine months of fiscal 1996 resulted from net income of $30.6 million, which included $25.0 million of non-cash expenses for depreciation and -15- 16 OCTEL COMMUNICATIONS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) amortization, and cash provided by the sale of Common Stock, resulting from the exercise of stock options, of $20.2 million. The primary uses of cash during the first nine months of fiscal 1996 were investment in property, plant and equipment of $26.4 million, increases in inventory of $23.4 million and the repurchase of Common Stock for $7.1 million, net of put warrant proceeds of $1.8 million. The Company expects to purchase additional equipment and make certain leasehold improvements during the remainder of fiscal 1996. The Company anticipates that its property, plant and equipment investments will result in greater efficiencies and increased flexibility for the Company. On March 25, 1996, the Company's Board of Directors authorized a two-for-one stock split effected in the form of a 100% stock dividend distributed on May 10, 1996 to stockholders of record on April 5, 1996. In July 1994, the Company's Board of Directors approved the repurchase of up to 3.5 million shares (pre-split) of its Common Stock over a period of approximately two years. As of March 31, 1996, the Company had repurchased approximately 3.2 million shares (post-split) of its Common Stock under this program at an average per share price of approximately $11 (post-split), including the impact of put warrant proceeds. The Company expects to continue to repurchase its Common Stock under this program. Effective July 6, 1995, the Company entered into a one-year operating lease agreement to lease undeveloped land on which additional offices may be constructed adjacent to the existing corporate offices over the next three years under a similar leasing arrangement. Under the terms of the operating lease, the Company is contingently liable for up to $9.9 million. Cash payments under the operating lease totaled $0.5 million during the first nine months of fiscal 1996. In connection with the VMX merger, the Company recorded $18.3 million of integration reserves in fiscal 1994. Expenditures charged against the reserve totaled approximately $4.1 million for the first six months of fiscal 1996 as the consolidation of the Company's manufacturing facilities was completed. The balance of the integration reserves was $0.4 million at March 31, 1996. The Company anticipates that cash flows from operations, its existing cash and cash equivalents balance, its short-term investment balance and its existing $30 million bank revolving line of credit (which expires in June 1996 but is expected to be renewed), will be adequate to meet the Company's cash requirements through the end of fiscal 1997. -16- 17 OCTEL COMMUNICATIONS CORPORATION PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Theis Research, Inc. In April 1992, the Company filed suit, in California, against Theis Research, Inc. ("Theis") for declaratory judgment that the Company's products do not infringe three patents of Theis and that those patents are invalid. In November 1992, Theis filed a counterclaim against the Company alleging infringement of seven of Theis' patents. Subsequently, Theis dismissed with prejudice the claims as to all but four of the patents, and its claims as to one of the remaining four patents were dismissed on summary judgment. During the first quarter of fiscal 1995, the Company engaged in a jury trial regarding infringement of the three remaining patents and the defense of patent invalidity. In October 1994, the jury returned a verdict finding, among other things, that Octel was correct in its claim that the three patents at issue were invalid. The Court entered judgment on the jury verdict in January 1996, declaring Octel a "prevailing party" entitled to recover its substantial costs in connection with the lawsuit. It is anticipated that Theis will appeal the verdict. Gilbarco Inc. In January 1994, Gilbarco Inc. ("Gilbarco") filed suit in the U.S. District Court for the District of Colorado against the Company and one of the Company's telephone company customers, U.S. West, alleging infringement of a Gilbarco patent and seeking unspecified damages. The Company filed an answer to the complaint denying any infringement of the patent and raising several affirmative defenses, including an assertion that the patent is invalid and unenforceable. In September 1994, the claims asserted against the Company were transferred to the U.S. District Court for the Northern District of California and those claims asserted against U.S. West were stayed and administratively closed pending the outcome of the California action. Both parties filed motions for summary judgment on a variety of issues, including a motion by Octel for summary judgment declaring the Gilbarco patent unenforceable due to inequitable conduct during the procurement of the patent. On February 12, 1996, the Court granted Octel's motion for summary judgment (and denied Gilbarco's counter-motion) and declared the patent unenforceable as a matter of law. The Court subsequently entered judgment in favor of Octel and against Gilbarco in the underlying action and awarded Octel its costs in connection with the lawsuit. Gilbarco's subsequent challenge of the Court's ruling was denied and it is now expected that Gilbarco will appeal the final judgment invalidating their patent. The Company believes, based on information currently available, that the Company is not infringing any valid patents of Theis or Gilbarco. The Company will vigorously defend the patent infringement claims and any related claims for compensatory damages. While litigation is inherently uncertain, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position. -17- 18 OCTEL COMMUNICATIONS CORPORATION PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. Description ----------- ----------- 3.0 Certificate of Incorporation of the Company 11.0 Statement re computation of earnings per share 27.0 Financial Data Schedule (b) Report on Form 8-K No report on Form 8-K was filed by the Company during its fiscal quarter ended March 31, 1996. -18- 19 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: May 15, 1996 /s/ JEAN-YVES DEXMIER ---------------------------------------- Jean-Yves Dexmier, Senior Vice President and Chief Financial Officer -19- 20 OCTEL COMMUNICATIONS CORPORATION EXHIBIT INDEX REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996
Exhibit Page Number Description Number - - ------ ----------- ------ 3.0 Certificate of Incorporation of the Company 2 11.0 Statement re computation of earnings per share 5 27.0 Financial Data Schedule 6
1 EX-3.0 2 CERTIFICATE OF INCORPORATION OF THE COMPANY 1 EXHIBIT 3.0 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF OCTEL COMMUNICATIONS CORPORATION Octel Communications Corporation, a Delaware corporation, hereby certifies as follows: The Certificate of Incorporation for Octel Communications Corporation (the "Corporation") was filed in the office of the Secretary of State of the State of Delaware on June 22, 1987. The Certificate of Incorporation was amended and restated on December 15, 1989 and is hereby amended and restated pursuant to Section 242 and Section 245 of the Delaware General Corporation Law. All amendments to the Certificate of Incorporation reflected herein have been duly authorized and adopted by the Corporation's Board of Directors and stockholders in accordance with the provisions of Sections 242 and 245. This Amended and Restated Certificate of Incorporation restates and integrates and further amends the Certificate of Incorporation of the Corporation. The text of the Certificate of Incorporation is amended hereby to read in its entirety as set forth on Exhibit A attached hereto: IN WITNESS WHEREOF, said Corporation has caused this Certificate to be signed by Robert Cohn, the Chief Executive Officer of the Corporation, and attested by Derek S. Daley, the Secretary of the Corporation. The signatures below shall constitute the affirmation or acknowledgment, under penalties of perjury, that the facts herein stated are true. Dated: March 21, 1996 /s/ ROBERT COHN --------------- Robert Cohn Chief Executive Officer ATTEST: /s/ DEREK S. DALEY - - -------------------- Derek S. Daley Secretary 2 2 EXHIBIT 3.0 (CONTINUED) EXHIBIT A FIRST: The name of the Corporation is Octel Communications Corporation (the "Corporation"). SECOND: The address of the Corporation's registered office in the State of Delaware is 15 East North Street, Dover, Kent County, Delaware 19901. The name of its registered agent at such address is Paracorp Incorporated. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: Section 1. The total number of shares which the Corporation shall have authority to issue is 105,000,000 shares of capital stock. Section 2. Of such authorized shares, one hundred million (100,000,000) shares shall be designated "Common Stock," and have a par value of $.001. Section 3. Of such authorized shares, five million (5,000,000) shares shall be designated "Preferred Stock," and have a par value of $.001. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Corporation is authorized to determine or alter the powers, preferences, and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, and within the limitations or restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of any such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series, to determine the designation of any series, and to fix the number of shares of any series. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. FIFTH: The Corporation is to have perpetual existence. SIXTH: Elections of directors need not be by written ballot unless a stockholder demands election by written ballot at the meeting and before voting begins or unless the Bylaws of the Corporation shall so provide. SEVENTH: The number of directors which constitute the whole Board of Directors of the Corporation shall be designated in the Bylaws of the Corporation. 3 3 EXHIBIT 3.0 (CONTINUED) EIGHTH: In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation. NINTH: To the fullest extent permitted by the Delaware General Corporation Law as the same exists or as it may hereafter be amended, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. TENTH: At the election of directors of the Corporation, each holder of stock of any class or series shall be entitled to as many votes as shall equal the number of votes which (except for such provision as to cumulative voting) he would be entitled to cast for the election of directors with respect to his shares of stock multiplied by the number of directors to be elected by him, and he may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two or more of them as he may see fit, so long as the name of the candidate for director shall have been placed in nomination prior to the voting and the stockholder, or any other holder of the same class or series of stock, has given notice at the meeting prior to the voting of the intention to cumulate votes. ELEVENTH: Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. TWELFTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. 4 EX-11.0 3 STATEMENT RE COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.0 OCTEL COMMUNICATIONS CORPORATION STATEMENT RE COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
Three Months Ended Nine Months Ended -------------------------- -------------------------- March 31, March 31, March 31, March 31, 1996 1995(1) 1996 1995(1) -------- -------- -------- -------- PRIMARY NET INCOME PER SHARE Net income ................................ $ 12,246 $ 6,091 $ 30,577 $ 18,664 ======== ======== ======== ======== Weighted average shares outstanding ............................. 49,565 47,550 48,994 47,699 Dilutive effect of outstanding stock options (as determined by the application of the treasury stock method) ................................. 3,963 2,020 4,036 2,005 Other ..................................... (14) (112) (18) (56) -------- -------- -------- -------- 53,514 49,458 53,012 49,648 ======== ======== ======== ======== Primary net income per share .............. $ 0.23 $ 0.12 $ 0.58 $ 0.38 ======== ======== ======== ======== FULLY DILUTED NET INCOME PER SHARE* Net income ................................ $ 12,246 $ 6,091 $ 30,577 $ 18,664 ======== ======== ======== ======== Weighted average shares outstanding ............................. 49,565 47,550 48,994 47,699 Dilutive effect of outstanding stock options (as determined by the application of the treasury stock method) ................................. 5,199 2,020 5,519 2,005 Other ..................................... 75 (112) 66 (56) -------- -------- -------- -------- 54,839 49,458 54,579 49,648 ======== ======== ======== ======== Fully diluted net income per share ................................... $ 0.22 $ 0.12 $ 0.56 $ 0.38 ======== ======== ======== ========
* This computation is submitted in accordance with Securities Exchange Act of 1934 Release No. 9083 although not required for all periods under APB Opinion No. 15 because it results in dilution of less than three percent. (1) The computation has been restated to reflect a two-for-one stock split effected in the form of a 100% stock dividend distributed on May 10, 1996 to stockholders of record on April 5, 1996. 5 EX-27.0 4 FINANCIAL DATA SCHEDULE
5 1000 3-MOS JUN-30-1996 MAR-31-1996 28,933 22,653 137,578 3,593 57,317 261,748 214,213 81,635 417,284 90,793 0 0 0 214,098 112,068 417,284 93,752 139,849 29,276 58,229 63,144 0 0 19,146 6,900 12,246 0 0 0 12,246 0.23 0.22
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