-----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, Dd1NDgE5wcwZ+i2PQbmR7CLkVfBvhaBABkIMJbp1EttdWDk2Ky3E4RX+o3e+Veym 8qCVnDI1VCtRCRu9gWkJoA== 0000877908-99-000003.txt : 19990126 0000877908-99-000003.hdr.sgml : 19990126 ACCESSION NUMBER: 0000877908-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19990125 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTIGRAM COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000877908 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 942418021 STATE OF INCORPORATION: DE FISCAL YEAR END: 1102 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19558 FILM NUMBER: 99512093 BUSINESS ADDRESS: STREET 1: 91 EAST TASMAN DR CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089440250 MAIL ADDRESS: STREET 1: 91 E TASMAN DR CITY: SAN JOSE STATE: CA ZIP: 95134 10-K 1 FORM 10-K FOR THE YEAR ENDED OCTOBER 31, 1998 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended OCTOBER 31, 1998 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: 0-19558 CENTIGRAM COMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-2418021 (State or other (I.R.S. Employer jurisdiction of Identification incorporation or Number) organization) 91 EAST TASMAN DRIVE SAN JOSE, CALIFORNIA (Address of principal 95134 executive offices) (Zip Code) Registrant's telephone number, including area code: (408) 944-0250 Securities registered pursuant to Section 12(b) of the Act: TITLE OF CLASS NAME OF EXCHANGE ---------------------------------- ------------------------------------- Common Stock, $0.001 par value Nasdaq National Market System Securities registered pursuant to Section 12(g) of the Act: None 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant (based on the closing price as reported on the NASDAQ/NMS for December 31, 1998) was $41,000,000. Shares of the Registrant's Common Stock, par value $0.001 per share, ("Common Stock") held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in calculating the aggregate market value of voting stock in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant's Common Stock, as of December 31, 1998 was 6,574,000. DOCUMENTS INCORPORATED BY REFERENCE Parts of the Proxy Statement for the Registrant's Annual Meeting of Stockholders scheduled to be held on March 26, 1999 are incorporated by reference to Part III of this Form 10-K Report. ================================================================================ ITEM 1. BUSINESS The following discussion contains forward-looking statements regarding future events or the future financial performance of Centigram Communications Corporation ("Centigram" or the "Company") that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this Item 1 under "Manufacturing," "Patents, Trade Secrets and Licenses," "Competition," the last two paragraphs of "Sales and Distribution," and the last two paragraphs of "Research and Development," as well as in Item 7 hereof under "Certain Trends and Uncertainties" and elsewhere in this report. This report includes certain trademarks of Centigram and other companies which remain the property of their respective holders. OVERVIEW Centigram designs, manufactures and markets wireless and wireline messaging, enhanced services and communication management systems that integrate voice and facsimile on the Company's communications server, and provide access to this multimedia information through a telephone, mobile device or a PC. Centigram's applications operate on industry-standard hardware and software, based on the Company's Modular Expandable System Architecture (MESA). MESA enables a user to generally expand the capacity of a system in cost-effective increments from the Company's smallest to its largest system configuration. Centigram's "Series 6" platform, which was introduced in the first quarter of fiscal 1996, was architected to extend across the Company's entire product line. Series 6 was designed to offer significantly expanded capacity, improved fault tolerance and greater use of industry- standard hardware and software than the Company's prior platform. The Series 6 incorporates the industry-standard Multi-Vendor Industry Protocol (MVIP) Bus, digital signal processor (DSP) technology, Intel Pentium processors, high-density interface cards, and international signaling protocols. Significant changes in hardware are required to upgrade from earlier generations of the Company's products to Series 6. These hardware changes include line cards, and for the Company's larger configurations, new hardware processors, which provide greater robustness and fault tolerance. The Company's systems are based on industry-standard computer hardware and operating system software. This enables the Company to bring additional product features and applications to market more quickly, to utilize low-cost, commonly available components and to capitalize on third party technological developments. Centigram's systems can be integrated with carriers' central office systems, and mobile switch and paging terminal systems. Such systems are used for switching telephone calls in a variety of service provider environments. In addition, Centigram systems located at different sites can be linked together through MesaNet, Centigram's digital network, to create a larger system. Centigram's distribution strategy is to provide broad, effective market coverage through the Company's direct sales force, original equipment manufacturers (OEMs), and distributors. The Company sells its systems in North America directly to Bell operating companies (BOCs), independent local exchange carrier (ILECs), competitive local exchange carriers (CLECs), and wireless operators. Internationally, the Company sells to large independent telephone companies, other wireline and wireless service providers, and distributors. Centigram trains carriers on how to effectively market their services in their geographies through the Company's Market Leadership seminar program. Additionally, the Company sells to service provider customers through OEM arrangements with Motorola, Inc., Siemens, and Lucent Technologies. Service providers, in turn, employ Centigram systems to provide services to corporate, institutional and individual end users. In recent periods the Company has increased its international sales and marketing. Export sales were 46%, 44%, and 30% of net revenue in fiscal 1998, 1997 and 1996, respectively. Since 1984, Centigram has been providing innovative, integrated messaging systems to the Customer Premises Equipment ("CPE") and service provider marketplaces. In May 1998, Centigram sold its CPE division to Mitel Corporation (the "CPE Sale"). The CPE Sale allows the Company to focus on the worldwide service provider market. Centigram's mission is to provide revenue-generating integrated enhanced services to service providers in emerging markets. Today, close to 15,000 Centigram systems are installed worldwide with nearly 2,500 delivering revenue enhancing services to telephone companies, cellular providers, paging companies, and service bureaus. In June 1998, Centigram acquired The Telephone Connection ("TTC"). TTC develops enhanced services for the telecommunications service provider marketplace which will allow Centigram to offer the service provider market a broader portfolio of competitive new products. BACKGROUND The technologies which form the foundation for the Company's products-voice messaging, facsimile communications, and call management- originated as independent technologies and have historically been offered by different groups of vendors as stand-alone products with little, if any, ability to integrate the disparate products. These technologies can generally be described as follows: VOICE MESSAGING enables users to store, send and receive information, or to access information from automated voice messaging systems, via the telephone. Voice messaging applications include automated attendant for inbound call routing, audio text and voice mail. FACSIMILE technology permits communication of text and graphics over the public telephone network using hard copy input and output. This enables applications such as fax mail, fax broadcast and fax publishing. CALL MANAGEMENT allows users to program the features of a switching system to facilitate call placement, call screening and call completion. Recognition of the benefits of simple, integrated access to these communications technologies from any location continues to grow. The Company provides customers the ability to access these technologies in an integrated environment using either the telephone or the PC as a communications workstation. Increasingly, mobile communication devices can be used to access and process these multimedia messages. PRODUCTS AND PRODUCT FEATURES The Company's applications operate on a common software platform, which is based on its Modular Expandable System Architecture (MESA). The MESA architecture allows the Company's systems to be upgraded in continual, cost-effective increments from the Company's smallest to its largest system configurations, and to add new capabilities without having to discard existing equipment. In contrast, systems offered by the Company's principal competitors, due to their architectural constraints, more often require customers to purchase a new system to upgrade features or capacity. Significant changes in hardware are, however, required to upgrade from the Company's Series 5 and earlier generations of the products to the Company's Series 6 product line. These hardware changes include line cards, and for the Company's larger configurations, new hardware platforms which provide greater robustness and fault tolerance. The Company provides financial incentives to those customers desiring such upgrades, as well as software programs to assist in the transfer of data and recorded speech. Centigram's systems are available in configurations ranging from eight ports, supporting 250-500 users in small installations, to 480-port configurations supporting up to 250,000 subscribers. These large port systems can be networked in clusters for telecommunications service provider applications of up to one million users, depending on the application. The Company sells its systems at prices ranging from below $50,000 to several hundred thousand dollars, depending on system configuration. Companies also buy multiple systems, for multi-million dollar installations. The Company's MESA architecture uses a distributed processing approach that links separate modules together into a single system. The Company's Series 6 users can expand systems to provide more ports and hours of message storage by adding line cards and opening up partitions in the disk drive. Additional system modules are added and linked as existing modules are fully used. This approach provides a low-cost entry-level product that can be expanded without replacing existing equipment. In addition, the Company offers connectivity between systems through MESA-Net, a digital networking option that can link up to 1,500 Centigram systems anywhere in the world. MESA-Net provides end-to-end digital networking, which preserves the clarity of voice and fax messages and reduces transmission time and cost. MESA-Net provides two networking options. Low-traffic sites can use MESA-Net Async over modem connections. High traffic sites can use MESA-Net TCP/IP over high-speed Ethernet networks. MESA-Net II, introduced with the Series 6, enables messaging across wide area networks at Ethernet speeds using industry- standard TCP/IP protocols. The Company's products also support the Audio Messaging Interchange Specification (AMIS) analog networking protocol, providing interoperability with disparate voice messaging servers from other vendors. In addition, Centigram has continued to play a leadership role through its participation in the joint development of the industry- standard Voice Profile for Internet Mail (VPIM) protocol for transferring messages between disparate voice messaging servers. VPIM is being designed to enable the exchange of voice, fax or compound voice and fax messages between Centigram Series 6 communications servers and other vendors' universal messaging systems. Series 6 is based on standard hardware and software technology, such as MVIP, Ethernet, QNX (a multi-tasking, real-time operating system for Intel microprocessor-based computers) and the SCSI computer peripherals bus. The Company believes this system architecture offers competitive advantages. In the event that competitors were to successfully implement a similar system architecture, it could have a material adverse effect on the Company's competitive position. The Company's Continuous System Operation software (CSO) is designed to increase the reliability of Centigram's systems by providing software-based fault tolerance in the Company's systems. With CSO, the Company's operating system control is distributed across multiple modules within a system. If one module ceases to function, the balance of the operating system activity is shifted to other modules and the systems continue to function. In addition, each of the Company's Series 6 configurations can store messages redundantly, thereby providing protection against system or disk drive failures. The Company believes that system reliability is a particularly important purchasing criterion for service provider customers. The Company's family of products include: VoiceMemo Centigram's VoiceMemo application provides voice messaging and call processing capabilities for customers in the service provider market. Centigram's systems can be integrated with most central office, mobile switch and paging terminal systems. VoiceMemo provides a full range of features that have been designed to improve customer service, increase operating flexibility and employee productivity, and reduce communications costs. System services include: TELEPHONE ANSWERING. Telephone answering automatically answers a busy or unanswered telephone and allows a user to record a voice message. VOICE MESSAGING. Voice messaging enables users to store, forward and send voice messages to other users on the system, within the network, or to a telephone not associated with a voicemail box. AUTOMATED ATTENDANT. Automated attendant answers incoming calls and allows callers to direct calls to telephone extensions without the use of a human operator. PAGING. The VoiceMemo paging feature initiates a page upon receipt of voicemail messages. VoiceMemo supports all commonly available (tone only, tone/vibration, digital and voice) pagers. AUDIOTEXT. Audiotext adds a voice bulletin board to a voice messaging system which can provide callers access to recorded announcements such as public service, product or service information. CALL PLACEMENT (OFF-SYSTEM MESSAGING). Call placement allows a VoiceMemo user to send messages to an "off-system" telephone number, such as a home number, much the same as a message is sent to a VoiceMemo mailbox. Before making a message, the user enters a telephone number to which the message is to be delivered. The system dials the off-system telephone and attempts to deliver the message. CALLAGENT. CallAgent is a software application that allows system users to control the manner in which their telephone is answered and directed. ONETALK. OneTalk is a spoken user interface that allows mailbox owners to use voice commands to manage the messages in their mailbox. EASYANSWER. EasyAnswer is a feature that allows mailbox subscribers to press a key to place a call to the person who left them a message "live" while still in their mailbox. The subscriber can also enter a different number for the call return if necessary. OneNet The OneNet family of products allows carriers to manage one or more Series 6 servers in their network. OneNet provides administration and provisioning of the Series 6 server through Centigram's OneNet Admin and OneNet Admin Application Programming Interface (API) software products. OneNet Admin is a Windows based Graphical User Interface (GUI) that is designed to be used in provisioning of mailboxes, billing and reporting statistics, and in class-of-service configuration. FaxMemo Centigram's FaxMemo application enables a user to have facsimile communications delivered to voice mailboxes rather than directly to a facsimile machine. FaxMemo features include: FAX MAIL. Using FaxMemo, users can receive facsimile messages in their personal mailboxes with arrival notification, privacy and control. The user can route the facsimile message to any machine at any time, or distribute the facsimile to other users on the system or within the network. Centigram's system permits forwarding of facsimile messages from one person to another, addition of voice comments and forwarding of facsimile messages to a facsimile machine or mailbox at a pre-arranged time. FAX BROADCASTING AND PUBLISHING. FaxMemo supports facsimile publishing and broadcast capabilities. Fax publishing makes frequently required documents such as sales literature, price lists, technical documentation and reports available to any person who has a telephone and fax machine. Fax broadcasting automatically distributes a facsimile message to a large distribution list. GUARANTEED FAX. Guaranteed Fax stores facsimile messages for a recipient when the message cannot be delivered to the recipient's facsimile machine at the time of its initial transmission because the machine is otherwise occupied. The facsimile message is automatically delivered to the recipient's facsimile machine when it becomes available. OneView Centigram's OneView products allow users integrated access to multimedia messaging from their personal computers and, with OneView Remote, even while away from their offices. Connected through a LAN or in a dial-up mode on a personal computer operating under Microsoftr WindowsTM, OneView gives users point and click access to their voice, fax and compound voice and fax messages by listing them in a single In-Box window. In fiscal 1997, Centigram expanded OneView's remote capabilities to include a remote mode which allows users to work "off-line". OneView Remote users can create, play, answer and forward voice and fax messages from their personal computers from remote locations by accessing their messaging system, downloading their messages to their local hard disk, answering messages off-line, and reconnecting to the messaging system to deliver the messages. MobileManager Centigram's MobileManager product adds call management to the message and information management services provided on the Series 6 platform. MobileManager is configured on a switching module that integrates with the Series 6 platform and allows calls to be transferred, connected or conferenced with other parties and destinations. MobileManager is the result of the 1995 joint marketing arrangement with Priority Call Management (PCM), a developer of intelligent telephony systems for large organizations and service providers. MobileManager services include: PERSONAL NUMBER SERVICE. Personal Number Service enables network operators to offer their subscribers a single telephone number that will seamlessly route important communications to people on the move at their mobile number, office or home number, or any telephone number anywhere in the world. In addition to routing, the Personal Number application uses that same number for faxes, voice messages, text messages, and numeric or alpha pagers. PREPAID AND DEBIT CARD SERVICES. Prepaid and Debit Card Services allow carriers to offer creative, revenue-generating network services that are purchased in advance by subscribers whose account balances are debited as calls are made in real time. CREDIT/CALLING CARD SERVICES. Credit/Calling Card Services let subscribers bill toll calls to a corporate calling card. Calling card service tracks and rates calls in real time to provide corporate expense management tools for mobile employees. CALLBACK. Callback lets customers call from anywhere in the world using lowest cost dial tone, least cost routing, and prepaid, or Credit/Calling card billing. SALES AND DISTRIBUTION The market for the Company's systems, prior to May 1998, had generally been divided into two segments; the CPE market and the telecommunications services provider market. Since the sale of the CPE division in May 1998, Centigram has focused its business on providers of telecommunications services, such as large telephone companies and independent service providers, including BOCs, independent telephone companies, cellular providers and voice mail and paging service bureaus, who use Centigram systems to deliver voice, and fax processing capabilities to third party customers on a subscription basis. Centigram has developed a distinct sales channel focused on selling its systems directly to BOCs, such as Bell Atlantic and BellSouth and to independent telephone companies such as Sprint; to wireless service providers such as BellSouth Mobility (BMI), Sonofon GSM, Optus Communications Pty Limited, Paging Network Inc. (PageNet); to service bureaus such as Premiere Technologies; and to large and small telephone companies and service providers overseas. The Company also sells to service provider customers through an OEM arrangement with Motorola, Inc., Siemens and Lucent Technologies. These large telecommunications service providers typically require a sustained, intense direct selling effort and continual, comprehensive customer support. No customer represented more than 10% of net revenue in the last three fiscal years. The Company's top five customers collectively accounted for approximately 32%, 28% and 35% of the Company's net revenue during fiscal 1998, 1997 and 1996, respectively. Centigram believes that a high level of product support is essential to its success. The Company provides system documentation and training to its customers. The training provided by the Company includes courses in technical software, installation and maintenance, and customer support. Centigram also maintains a support center 24 hours a day to assist with customer and distributor inquiries and offers on-site assistance through its field operations. Remote Technical Assistance Centers (TACs) in the United Kingdom, Hong Kong and Sydney, Australia provide local, on-call service and support. To expand its level of service to its customers in 1998, the Company enhanced its "Market Leadership Program" to deliver a comprehensive, fully integrated program designed to increase and expand service providers' revenue streams, maximize resources to reduce costs, and create market leadership in customer service. The program focuses on key areas of a service launch, including operations, market research, promotions, media relations, product packaging and pricing, sales planning and tracking, customer support and billing requirements. The program also offers consulting services to help service providers create an enhanced services deployment plan customized to their market requirements. In recent periods, the Company has been increasing its focus on international sales and direct sales to international service providers. The Company now has sales offices in Europe, China, Korea, Hong Kong, Australia and Latin America. Export sales were 46%, 44% and 30% of net revenue in fiscal 1998, 1997 and 1996, respectively. In particular, the Company's revenue from the Far East region was approximately $6.1 million, $9.2 million, and $1.5 million for fiscal 1998, 1997 and 1996, respectively. There can be no assurance that the Company will be able to maintain or increase its international sales or that the Company's sales subsidiaries will be able to compete effectively. International sales are subject to inherent risks, including the need to obtain certain regulatory approvals and meet other standards, unexpected changes in regulatory requirements and tariffs, difficulties in staffing and managing foreign operations, costs and risks of localizing products for foreign countries, more expensive support costs, longer payment cycles, greater difficulty in accounts receivable collection, potentially adverse tax consequences, potential restrictions on repatriating earnings, and the burdens of complying with a wide variety of foreign laws. In particular, in the last three years, the Company experienced increased expenses associated with its efforts in expanding sales in certain export markets. Gains and losses on the conversion to U.S. dollars of assets and liabilities arising from international operations may contribute to fluctuations in the Company's results of operations, although such gains and losses have not to date been material to the Company's results of operations, and fluctuations in exchange rates could affect demand for the Company's products. In addition, beginning in late fiscal 1997, economies throughout the Far East region were negatively affected by devaluations in local currencies. These devaluations caused the relative cost of the Company's products to increase. Moreover, significant uncertainty exists with respect to these economies, which could cause the businesses and governmental agencies to delay or cancel plans to purchase the Company's products. If the Company were to experience a slowdown in sales to this region, the Company's business, financial condition and results of operations could be materially adversely affected. In order to sell its products to customers in other countries, the Company must comply with governmental regulations, including U.S. export regulations, and convert its voice prompts to additional foreign languages. Foreign sales are also constrained by the limited penetration of touch-tone telephones in some countries and the Company's need to develop adequate sales and marketing channels. Most of the Company's distributors also offer systems manufactured by the competitors of the Company. Accordingly, the Company must compete within any distributor to have the distributor recommend the Company's products to end user customers. The Company also competes with other voice messaging providers for access to distributors. There can be no assurance that the Company will be able to maintain strong relationships with existing distributors or establish strong relationships with new distributors. In addition, certain former customers (including distributors) of the Company had in the past experienced financial difficulties resulting in the Company writing off related accounts receivable balances, and a number of the Company's current customers (including distributors) have limited financial resources. The loss of one or more key customers or distributors, the decision by any key distributor to offer a competitor's product line or otherwise de- emphasize the Company's products, or the weakening of the financial condition of any of the Company's key customers or distributors, could have a material adverse effect on the Company's operating results, financial position and cash flows. PATENTS, TRADE SECRETS AND LICENSES The Company's success depends in part on its proprietary technology. While the Company attempts to protect its proprietary technology through patents, trademarks, copyrights and trade secrets, as well as confidentiality agreements with customers, suppliers and employees and other security measures, the Company believes that its success will depend more upon innovation, technological expertise and distribution strength. There can be no assurance that the Company will be able to protect its technology or that competitors will not be able to develop similar technology independently. The Company currently holds a number of patents and has multiple patent applications on file. No assurance can be given that patents will issue from any applications filed by the Company or that, if patents do issue, the claims allowed will be sufficiently broad to protect the Company's technology. Moreover, the Company relies upon trade secret protection for its basic systems architecture and hardware platform, and does not hold any patents thereon. In addition, no assurance can be given that any patents issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. In addition, a number of other companies, including competitors of the Company, also hold patents in the same general area as the technology used by the Company. The Company has obtained licenses to use certain intellectual property, including patents, from others. The Company from time to time has received, and may receive in the future, letters alleging infringement of patent rights by the Company's products. For example, in December 1997, representatives of Lucent Technologies ("Lucent") informed the Company that they believed that the Company's products may infringe upon certain patents issued to Lucent, and that Lucent was seeking compensation for any past infringement by the Company. The Company evaluated the assertions of Lucent and in the third quarter of fiscal 1998 accrued $7.6 million. Of this amount, $5.6 million was recorded as a non-recurring charge and $2.0 million, which is attributable to the CPE business, was recorded against the gain on the transaction and included in other income. In October 1998 the Company signed an intellectual property cross-licensing agreement with Lucent and in November 1998 paid Lucent $9.2 million. A portion of the settlement agreement amount totaling $1.6 million was recorded as prepaid royalties and will be amortized to cost of goods sold over the future royalty period. Third party companies alleging infringement could seek an injunction prohibiting the Company from selling some or all of its products, which would have an immediate, adverse impact in the Company's business, financial condition and results of operations. There can be no assurance that the Company would prevail in any litigation to enjoin the Company from selling its products on the basis of such alleged infringement, or that the Company would be able to license any valid and infringed patents on reasonable terms, or at all. BACKLOG On October 31, 1998, the Company had a backlog of $27.5 million and on November 1, 1997, a backlog of $15.2 million. The Company includes in backlog orders received that the Company believes are shippable within the next 12 months. The Company does not believe, however, that current or future backlog levels are necessarily indicative of future operating results. A significant portion of bookings and shipments in any quarter have historically occurred near the end of the quarter, and the Company has historically operated with very little backlog. There can be no assurance that backlog will not decrease in the future, that there will not be cancellation or deferral of a significant portion of backlog, or that the Company will maintain any specific backlog level in the future. RESEARCH AND DEVELOPMENT Centigram's development strategy is focused on the development of new applications for the Company's product platform and the enhancement of the Company's MESA architecture. Expenditures for research and development were $18.1 million, $21.3 million, and $20.2 million and as a percentage of net revenue these expenses were 23.3%, 19.5%, and 19.3%, in fiscal 1998, 1997 and 1996, respectively. Development efforts are focused on additional enhanced services applications on the Company's Series 6 platform, developing additional capabilities to connect the Company's products with computer databases, high speed transmission networks and foreign communications networks with non-standard protocols, adding administration and network management capabilities to the Company's products, and developing and enhancing the features, performance, and capacity of the Company's systems. As the Company seeks to continue to add functionality to its products and to support a broader range of computer, LAN-based applications and Internet capable applications, the Company faces continually increasing technical challenges. There can be no assurance that the Company will be able to incorporate additional technologies into the Company's products or introduce new products in a timely manner in order to meet evolving market needs. As the functionality of the Company's systems increases, the complexity of the software utilized in such systems will also increase and software errors or "bugs" may become more numerous and difficult to cure. Identifying and correcting errors and making required design modifications is typically expensive and time consuming and the Company expects that such modifications will increase in complexity with the increasing sophistication of the Company's products. The Company has made a substantial investment in additional testing equipment as well as hiring additional employees to expand the Company's product testing capabilities. There can be no assurance that such investment will lead to reduced errors or that such errors will not in the future cause delays in product introductions and shipments, require costly design modifications or impair customer satisfaction with the Company's products. MANUFACTURING The Company's manufacturing operations consist primarily of final assembly and test and quality control of materials, components, sub- assemblies and systems. The Company's hardware and software product designs are proprietary but use industry-standard hardware components and an industry-standard, real time, multi-tasking operating system. The Company presently uses third parties to perform printed circuit board and subsystem assembly. Although the Company has not experienced significant problems with third party manufacturers in the past, there can be no assurance that such problems will not develop in the future. Although the Company generally uses standard parts and components for its products, certain microprocessors, semiconductor devices and other components are available only from sole source vendors. In addition, other components, including power supplies, disk drives, other semiconductor devices and line cards are presently available or acquired from a single source or from limited sources. The Company to date has been able to obtain adequate supplies of these components in a timely manner from existing sources or, when necessary, from alternative sources of supply. However, the inability to develop such alternative sources if and as required in the future, or to obtain sufficient sole or limited source components as required, would have a material adverse effect on the Company's operating results. EMPLOYEES As of October 31, 1998, the Company had 325 employees, including 13 temporary employees and contractors. Of this total, 87 were engaged in research and development, 161 in sales, marketing and customer support, 38 in manufacturing and quality assurance and 39 in finance and administration. The Company's future success will depend on its ability to attract, train, retain and motivate highly qualified employees, who are in great demand. The Company's employees are not represented by any collective bargaining organization, and the Company has never experienced a work stoppage. The Company believes that its employee relations are good. COMPETITION The Company competes in a number of markets within the communications systems industry, each of which is highly competitive. Many of the Company's competitors have substantially greater financial, technical, marketing and sales resources than the Company and have larger installed bases of existing systems. The Company expects to encounter continued competition from both existing competitors and new market entrants in the service provider business. Increased competitive pressures could result in intensified price competition, which would adversely affect the Company's operating results. In addition, the Company believes that its ability to integrate its systems with many different central office systems is an important competitive feature. Consequently, the Company's operating results could be adversely affected if switch manufactures such as Lucent, Northern Telecom, and Siemens redesign their switches to limit current methods of integration. Although the Company is not aware of any significant switch manufacturer who is pursuing a strategy of redesigning its switches to limit the Company's current integrations, there can be no assurance that such manufacturers are not doing so or will not do so in the future. ITEM 2. PROPERTIES The Company leases an 85,000 square foot headquarters facility and a 35,000 square foot operations facility in San Jose, California, pursuant to leases that expire in September 2007 and November 2003, respectively. The Company also leases training facilities and sales and support offices in various cities in the United States and overseas. The Company believes that such facilities are adequate to meet its current needs and that suitable additional or alternative space will be available in the future on commercially reasonable terms. ITEM 3. LEGAL PROCEEDINGS The information in the second paragraph in the section entitled "Patents, Trade Secrets and Licenses" under Item 1 above is hereby incorporated by reference. In addition, during the fourth quarter of fiscal 1998, Mitel Corporation commenced arbitration proceedings against the Company alleging that Centigram has not delivered all materials required to be delivered in connection with the Company's sale of its CPE division. Centigram believes the allegations are without merit and intends to vigorously defend against them. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Reference is made to the information regarding market, market price range and dividend information appearing under "Quarterly Financial Data (Unaudited)" in Registrant's Notes to Consolidated Financial Statements, October 31, 1998, which is contained elsewhere in this Annual Report. ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data)
Year Ended Month --------------------------------------------------- Ended Year Ended October 31, November 1, November 2, October 28, October 29, October 1, 1998 1997 1996 1995 1994(1) 1994(1) ------------ ------------ ------------ ------------ ------------ ------------ Operations Data: Net revenue.................. $77,587 $108,836 $104,324 $69,374 $1,988 $79,179 Net income (loss)............ (12,174) (1,678) 1,000 (4,134) (1,890) 7,745 Basic income (loss) per share....................... (1.77) (0.24) 0.15 (0.63) (0.30) 1.18 Diluted income (loss) per share....................... (1.77) (0.24) 0.14 (0.63) (0.30) 1.26 Balance Sheet Data: Working capital.............. $48,029 $66,824 $65,297 $64,489 $70,132 $72,401 Total assets................. 95,977 99,920 104,009 99,017 98,374 102,309 Long-term liabilities........ -- -- 78 232 409 436 Stockholders' equity......... 65,208 81,624 83,412 79,800 81,006 83,177
(1) In the fourth quarter of fiscal 1995, the Company changed its fiscal year-end from the Saturday following September 30 to a fiscal year of 52 or 53 weeks ending on the Saturday nearest October 31. Fiscal 1996 was a 53 week year, while the other fiscal years are 52 weeks. The Company has not paid and does not anticipate paying cash dividends on its common stock in the foreseeable future. The Company's bank credit line agreement requires the banks' consent to pay cash dividends. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following contains forward-looking statements regarding future events or the future financial performance of Centigram that involve risks and uncertainties. These statements include but are not limited to statements related to changes in Centigram's research and development and selling, general and administrative expenses, investment in receivables and inventories, Centigram's expenditures for capital equipment and sufficiency of Centigram's cash reserves. Actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this Item 7 under "Certain Trends and Uncertainties," in Item 1 hereof under "Manufacturing," "Patents, Trade Secrets and Licenses," "Competition," the last two paragraphs of "Sales and Distribution," and the last two paragraphs of "Research and Development" and elsewhere in this report. Centigram designs, manufactures and markets wireless and wireline messaging, enhanced services and communication systems that integrate voice and facsimile on the Company's communications server and provide access to this multimedia information through a telephone or a PC. Centigram's applications operate on common hardware and software platforms based on industry-standard hardware and software which is the Company's implementation of its Modular Expandable System Architecture (MESA). Centigram's system architecture enables a user generally to expand the capacity of a system in cost-effective increments from the Company's smallest to its largest system configuration. Centigram's systems can be integrated with wireline and wireless switches and paging terminal systems. Such systems are used for switching telephone calls and integrating voice and facsimile messaging in a variety of service provider environments. In addition, Centigram systems located at different sites can be linked together in a digital network. SALE OF CPE BUSINESS UNIT On May 8, 1998, the Company licensed or sold certain assets to Mitel Corporation ("Mitel") and Mitel assumed certain liabilities related to the Company's customer premise equipment voicemail and unified messaging ("CPE") business for a purchase price of $26.8 million in cash. As part of this sale ("CPE Sale"), the Company agreed until May 8, 2001, not to compete in the CPE market and until April 2000 to provide Mitel on an OEM basis large port count systems as required until Mitel develops this internal capability. The Company recorded a pre-tax gain of approximately $14.3 million on this transaction. ACQUISITION AND REVISION OF PURCHASE PRICE ALLOCATION On June 24, 1998, the Company acquired substantially all of the assets of The Telephone Connection, Inc. ("TTC") for approximately $11.6 million, including transaction costs of $0.4 million. This acquisition was accounted for as a business combination using the purchase method of accounting. Results of operations of TTC for the four months ended October 31, 1998 are included in the Company's fiscal 1998 Consolidated Statement of Operations. In accordance with Accounting Principles Board Opinion No. 16, "Accounting for Business Combinations," the costs of these acquisitions were allocated to the assets acquired and the liabilities assumed (including in-process research and development ("IPR&D")) based on their estimated fair values using valuation methods believed to be appropriate at the time. The amount was computed using a discounted cash flow analysis on the anticipated income stream of the related product sales. The discounted cash flow analysis was based on management's forecast of future revenues, costs of revenues, and operating expenses related to the products and technologies purchased from TTC. The amount allocated to IPR&D of $8.4 million was expensed in the period in which the acquisition was consummated in accordance with FASB Interpretation No. 4, "Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method." Subsequent to the acquisition and the issuance of the Company's condensed financial statements for the quarter ended August 1, 1998, the staff of the SEC in its September 9, 1998 letter to the American Institute of Certified Public Accountants set forth their views on the valuation of IPR&D. The Company has reallocated the previously reported purchase price based on its understanding and interpretations of the issues set forth in the aforementioned letter. The reallocation reduced the amount previously written-off as IPR&D from $8.4 million to $5.0 million and increased goodwill and other intangible assets by the same amount. The effect of these adjustments on previously reported unaudited condensed consolidated financial statements for the three and nine months ended August 1, 1998 and as of August 1, 1998 are as follows:
Quarter Ended Nine Months Ended ------------------- ------------------- (in thousands, except per share As As data) Reported Restated Reported Restated - ------------------------------------- --------- --------- --------- --------- Purchased IPR&D..................... $8,400 $5,000 $8,400 $5,000 Loss from operations................ ($18,576) ($15,176) ($30,349) ($26,949) Net loss............................ ($3,666) ($266) ($14,250) ($10,850) Basic and diluted net loss per share............................. ($0.53) ($0.04) ($2.05) ($1.56) August 1, 1998 ------------------- As (in thousands) Reported Restated - ------------------------------------- --------- --------- Intangible assets, net.............. $3,429 $6,829 Accumulated deficit................. ($20,920) ($17,520)
PRO FORMA STATEMENTS OF OPERATIONS The following pro forma statements represent the combined results of operations of the Company, plus TTC, as adjusted to reflect the amortization of intangible assets acquired in the purchase, less the CPE Sale, as if each of these transactions had occurred at the beginning of fiscal 1996. The pro forma statements exclude the gain realized on the CPE Sale and exclude the non-recurring charge of the write-off of the IPR&D acquired in the TTC transaction. This summary does not purport to be indicative of what operating results would have been had these transactions been made as of the beginning of fiscal 1996 nor are they necessarily indicative of future operating results.
Year Ended ------------------------------------ October 31, November 1, November 2, (in thousands, except per share data) 1998 1997 1996 - --------------------------------------- ----------- ----------- ---------- Net revenue....................... $66,690 $70,789 $56,304 Cost and expenses: Costs of goods sold............. 33,112 29,913 22,658 Research and development........ 17,595 20,795 19,283 Selling, general and administrative............... 36,877 37,210 34,694 Non-recurring charges........... 5,600 3,263 -- ----------- ----------- ---------- 93,184 91,181 76,635 ----------- ----------- ---------- Operating loss.................... (26,494) (20,392) (20,331) Other income and expense, net..... 2,877 6,180 2,374 ----------- ----------- ---------- Loss before income taxes. (23,617) (14,212) (17,957) Provision for income taxes........ 379 833 53 ----------- ----------- ---------- Net loss.......................... ($23,996) ($15,045) ($18,010) =========== =========== ========== Basic and diluted loss per share......................... ($3.49) ($2.17) ($2.58) =========== =========== ========== Shares used for basic and diluted loss per share............ 6,883 6,943 6,981 =========== =========== ==========
RESULTS OF OPERATIONS Net Revenue Net revenue for fiscal 1998 was 29% lower than net revenue for fiscal 1997. This decrease reflects lower sales of both small and large systems products and was primarily due to reduced volumes as a result of the CPE Sale. Sales to international customers represented 46% of sales for fiscal 1998 as compared to 44% for fiscal 1997. Net revenue for fiscal 1997 was 4% higher than net revenue for fiscal 1996. This increase was primarily attributable to higher sales of large system products to service provider customers offset in part by lower sales of CPE systems and upgrade products and small system sales. Sales to international customers represented 44% of sales for fiscal 1997 as compared to 30% for fiscal 1996. This percentage increase was due primarily to increased large orders from Latin America and the Pacific Rim in 1997. CPE sales decreased 20% for fiscal 1997 as compared to the prior year due to reduced orders from the Company's distributors. These reduced CPE sales were a result of increased competition from PC based systems providers whose products compete with the Company's small system products. On a pro forma basis, net revenue for fiscal 1998 was 6% lower than 1997 due to reduced large system orders from Europe and the Pacific Rim. On a pro forma basis, net revenue for fiscal 1997 was 26% higher than 1996 due to the same factors affecting the service provider business as noted above. Gross Margin Gross margin for 1998 decreased 6.5% to 51.5% from 58.0% in the prior year. This decrease reflects lower sales of and lower margins in the Company's large systems products which typically carry higher profit margins due to increased sales price competition and reduced international sales from the Pacific Rim due to slower economic growth. Gross margin for 1997 decreased 1.2% to 58.0% from 59.2% in fiscal 1996. This decrease in gross margin reflects lower margins on upgrade and expansion products and customer services offset by a favorable mix of increased sales of large system products and lower provisions for retrofit obligations and inventory obsolescence. On a pro forma basis, gross margin was 50.3%, 57.7%, and 59.8% for 1998, 1997 and 1996, respectively. The decrease in gross margin of 7.4% from 1997 to 1998 and the 2.1% decrease from 1996 to 1997 reflects the same factors as noted above in connection with the service provider business. Research & Development Research and development ("R&D") expenses for 1998 were 15.0% below 1997. This decrease reflects reduced payroll expenses and related costs resulting from lower average engineering staffing levels due to the CPE Sale. R&D expenses for fiscal 1997 were 5% higher than fiscal 1996. This increase reflects higher payroll expenses resulting from higher average engineering staffing levels and increased supplies and outside services expenses. As a percentage of net revenue, R&D expenses were 23.3%, 19.5%, and 19.3% in fiscal 1998, 1997 and 1996, respectively. The Company believes that ongoing development of new products and features is required to maintain and enhance its competitive position. The Company expects to continue to invest in R&D and therefore R&D expenses should continue to increase, notwithstanding the level of sales realized in future quarters. On a pro forma basis, R&D expenses decreased $3.2 million in 1998 from 1997 reflecting savings from lower R&D staffing levels and related costs. Also, expenses were higher in fiscal 1997 resulting from the release in the first quarter of the Series 6 platform without comparable expenses in 1998. On a pro forma basis, R&D expenses increased $1.5 million from 1996 to 1997 because of increased staffing levels and related costs and costs associated with the release of the Series 6 platform in 1997. Selling, General & Administrative Selling, General & Administrative ("SG&A") expenses in 1998 were 11.8% below fiscal 1997. This decrease reflects primarily reduced salaries and benefits and related expenses in the sales and marketing functions due to the CPE Sale. SG&A expenses in 1997 were 6.5% higher than fiscal 1996. This increase reflects primarily increases in salaries and benefits in the sales and marketing functions. As a percentage of net revenue, SG&A expenses were 51.8%, 41.9%, and 41.0% in fiscal 1998, 1997 and 1996, respectively. The Company believes that continued investments in sales and marketing, particularly in export markets, are essential to maintaining its competitive position and that the dollar amount of SG&A expenses will increase in future periods. On a pro forma basis, SG&A expenses increased $0.3 million in 1998 over 1997 and $2.5 million in 1997 over 1996. These increases reflect primarily increases in salaries and benefits in the sales and marketing functions. Non-recurring Charges Non-recurring charges were $10.6 million, and $3.3 million for 1998 and 1997, respectively. The 1998 non-recurring charges consisted of $5.0 million for the write-off of IPR&D acquired in the purchase of TTC and $5.6 million associated with the Company's patent dispute with Lucent Technologies. (See Acquisition and Revision of Purchase Price Allocation.) The 1997 non-recurring charges consisted of $2.4 million in restructuring expenses and $0.9 million associated with the termination of acquisition discussions with Voice-Tel Enterprises and Voice-Tel Network ("Voice-Tel"). These restructuring expenses represented termination benefits for approximately 40 employees from all functions of the Company and costs associated with the resignation of the Company's president and chief executive officer. The Company restructured its business to align its operational expense with its anticipated revenue levels. Cash payment termination benefits of $0.3 million and $1.8 million were paid in fiscal 1998 and 1997, respectively. Other Income and Expense, Net Other income and expense, net was $17.1 million, $6.1 million, and $2.2 million for 1998, 1997 and 1996, respectively. Interest income on investments increased $0.4 million to $3.1 million in fiscal 1998 due to higher average investment balances although interest yields on investments were lower in 1998 versus 1997. Interest income on investments increased in fiscal 1997 over 1996 due to higher average investment balances and higher average interest rates. In addition to the Company's net investment income, other income and expense in 1998 included the $14.3 million gain on the CPE Sale and in 1997 a $3.9 million gain on the sale of the Company's Text-To-Speech business. Provision for income Taxes The Company recorded income tax provision of $379,000, $833,000, and $53,000, respectively, for fiscal years 1998, 1997 and 1996. The 1998 and 1997 tax provisions consist of minimum federal, state, and foreign taxes. An additional provision of $500,000 was provided in fiscal year 1997, resulting from an increase in the valuation allowance for previously recognized deferred tax assets that were no longer realizable through potentially refundable taxes. The 1996 income tax provision primarily represents current foreign taxes. No income tax benefits were recorded for the losses incurred in fiscal years 1998 and 1997 because realization of the deferred tax asset arising as a result of the losses sustained is dependent upon future taxable income, the amount and timing of which are uncertain. Accordingly, a valuation allowance has been established to fully offset the deferred tax asset other than that which represents potentially refundable taxes. LIQUIIDITY AND CAPITAL RESOURCES Cash and cash equivalents and short-term investments at October 31, 1998 were $57.2 million, increasing $5.1 million from November 1, 1997. At the end of fiscal 1997 and 1996, cash, cash equivalents and short-term investments were $52.1 million and $42.1 million, respectively. Net cash used for operating activities was $2.8 million during fiscal 1998. Trade receivables at the end of fiscal 1998 decreased $3.3 million from the prior year balance primarily due to improved collection efforts and a reduction in extended payment terms to certain international service provider customers. Days sales outstanding (computed using quarterly revenues) were 66 days at the end of fiscal 1998 compared to 68 days at end of fiscal 1997. This decrease in DSO was primarily due to the factors noted above. Inventory levels at October 31, 1998 decreased $0.9 million from fiscal 1997 because of improved inventory management. The Company expects investment in receivables and inventories will continue to represent a significant portion of working capital. The Company accrued $9.2 million in fiscal 1998 in connection with its settlement with Lucent and paid this amount in November 1998. During the fiscal year ended October 31, 1998, the Company made $3.0 million in capital expenditures. A significant portion of these expenditures were related to the purchase of engineering equipment and computer equipment for all functions. The Company currently expects to spend approximately $4.0 million for capital equipment during fiscal 1999, although no assurance can be given that expenditures will not be higher or lower. During fiscal 1998 the Company sold its CPE business unit to Mitel for $26.8 million in cash, and the Company purchased substantially all of the assets of TTC for approximately $11.6 million. In April 1997, the Company's Board of Directors authorized a stock repurchase program whereby up to one million shares of its common stock may be repurchased in the open market from time-to-time. In September 1998, the repurchase of an additional 500,000 shares was authorized. During 1998 and 1997, the Company purchased 659,000 and 243,000 shares, respectively, at a total cost of approximately $10.8 million under this repurchase program. The Company's principal sources of liquidity as of October 31, 1998 consisted of $57.2 million of cash and cash equivalents and short-term investments and $15.0 million available under the Company's bank line of credit (which expires May 29, 1999). The Company expects to renew this bank line in fiscal 1999. This bank line requires the Company to maintain certain financial ratios, minimum working capital, minimum tangible net worth and financial performance benchmarks, and requires the banks' consent for the payment of cash dividends. The Company is in compliance with this agreement and there were no borrowings outstanding under the bank line as of October 31, 1998. The Company presently believes, notwithstanding its accumulated deficit, that its existing cash and short-term investments and credit under its line of credit will be sufficient to support the Company's working capital and capital equipment purchase requirements at least through fiscal 1999. CERTAIN TRENDS AND UNCERTAINTIES The Company has in the past experienced and will likely in the future experience substantial fluctuations in quarterly operating results. For instance, the Company has typically experienced a slowdown in its sales levels in the first quarter of its fiscal year. The Company generally has no long-term order commitments from its customers, and a significant portion of bookings and shipments in any quarter have historically occurred near the end of the quarter. Accordingly, the Company has historically operated with very little backlog, and net revenue has been difficult to predict. In addition, the portion of backlog shippable in the next quarter varies over time. As a result, revenue in future quarters will depend largely on the level of orders received during such quarters. The Company continues to obtain a large percentage of its sales from its international operations, including sales from the Pacific Rim. In addition to the business risks associated with international operations, the recent economic turmoil has increased the uncertainty regarding future sales of the Company's products in the Pacific Rim. See "Sales and Distribution" for a description of certain risks associated with the Company's international operations. If new order bookings do not meet expected levels, or if the Company experiences delays in shipments at the end of a quarter, operating results will be adversely affected, and these developments may not become apparent to the Company until near or at the end of a quarter. Net revenue can also be affected by product sales mix, distribution mix, the size and timing of customer orders and shipments, customer returns and reserves provided therefor, competitive pricing pressures, the effectiveness of key distributors in selling the Company's products, changes in distributor inventory levels, the timing of new product introductions by the Company and its competitors, regulatory approvals, and the availability of components for the Company's products, each of which is difficult to predict accurately. Each of such factors has in the past affected the Company's revenue. The Company has in the past experienced higher than usual headcount turnover which has had an adverse effect on the Company's booking levels. There can be no assurance that such turnover will not continue in future periods. Any failure by the Company to attract, retain and train additional sales and other personnel could have a material adverse effect on the Company's business and results of operations. Approximately 46% of the Company's sales in fiscal 1998 consisted of sales outside of the United States. The Company's international sales are subject to a number of additional risks generally associated with international sales, including the effect on demand for the Company's products in international markets as the result of any strengthening or weakening of the U.S. dollar, the effect of currency fluctuations on consolidated multinational financial results, state imposed restrictions on the repatriation of funds, import and export duties and restrictions, the need to modify products for local markets, and the logical difficulties of managing multinational operations. In particular, the Company's sales in the Pacific Rim have been adversely affected in recent quarters by financial difficulties in that region and may be so adversely affected in the future. A significant portion of the Company's net revenue is attributable to a limited number of customers. The Company's top five customers, representing a combination of major distributors and service providers, accounted for approximately 32%, 28% and 35% of the Company's net revenue in fiscal 1998, 1997 and 1996, respectively, although the Company's five largest customers were not the same in these periods. The Company has no long-term order commitments from any of its customers. Any material reduction in orders from one or more such customers or the cancellation or deferral of any significant portion of backlog could have an adverse effect on net revenue and operating results. Such concentration of sales typically results in a corresponding concentration of accounts receivable. Although the Company has established reserves for uncollectible accounts, the inability of any large customer to pay the Company could have a material adverse impact on the Company's financial position, results of operations and cash flows. See Risk and Uncertainties Note to "Consolidated Financial Statements". The Company's gross margin can be affected by a number of factors, including changes in product, distribution channel, and customer mix, cost and availability of parts and components, royalty obligations to suppliers of licensed software, provisions for warranty, retrofits, and excess and obsolete inventory, customer returns, and competitive pressures on pricing. The Company has experienced increasing competitive pricing pressure in all markets and expects this pricing pressure to continue. Further, distributors purchase products at discounts, and the Company's margins can therefore vary depending upon the mix of distributor and direct sales in any particular fiscal period. The Company anticipates that its sales mix will fluctuate in future periods. As a result of the above factors, gross margin fluctuations are difficult to predict, and gross margins may decline from current levels in future periods. The Company's future success will depend in part upon the ability of the Company to continue to introduce new features and products as the Company's markets evolve, new technologies become available, and customers demand additional functionality. The Company's competitors continue to add functionality to their products, and any failure by the Company to introduce in a timely manner new products and features that meet customer requirements would adversely affect the Company's operating results and cash flows. The Company's ability to develop such new features and products depends in large measure on its ability to hire and retain qualified technical talent and outside contractors in highly competitive markets for such services. There can be no assurance that the Company's product development efforts will be successful, or that it will be able to introduce new products in a timely manner. In this regard, the Company during fiscal 1996, announced significant new products, after experiencing delays in the introduction of such products. Moreover, customers' expectations of the introduction of new products by the Company or its competitors can adversely affect sales of current products. In addition, upon the introduction of new products, the Company could be subject to higher customer returns with respect to prior generations of products, which could adversely affect financial position, operating results and cash flows. The Company presently uses third parties to perform printed circuit board and subsystem assembly. Although the Company has not experienced significant problems with third-party manufacturers in the past, there can be no assurance that such problems will not develop in the future. In addition, certain components used in the Company's products, including certain microprocessors, line cards, power supplies, disk drives, application cards and other semiconductor devices and other components are available from sole sources. To date, the Company has been able to obtain adequate supplies of components in a timely manner from existing sources or, when necessary, from alternative sources of supply. However, the inability to develop such alternative sources if and as required in the future, or to obtain sufficient sole or limited source components as required, would have a material adverse affect on the Company's operating results and cash flows. In addition, the Company's products are dependent on the QNX software operating system, a multitasking, real-time operating system for Intel microprocessor-based computers. In future periods, the Company's products may become increasingly dependent on software licensed from third party suppliers. There can be no assurance such licenses will continue to be available to the Company as needed or at commercially reasonable prices. In addition, a number of other companies, including competitors of the Company, also hold patents in the same general area as the technology used by the Company. The Company has obtained licenses to use certain intellectual property, including patents, from others. The Company from time to time has received, and may receive in the future, letters alleging infringement of patent rights by the Company's products. For example, in December 1997, representatives of Lucent Technologies ("Lucent") informed the Company that they believed that the Company's products may infringe upon certain patents issued to Lucent, and that Lucent was seeking compensation for any past infringement by the Company. The Company evaluated the assertions of Lucent, and in October 1998 settled by signing an intellectual property cross-licensing agreement and in November 1998 paid Lucent $9.2 million. (See Patents, Trade Secrets and Licenses.) Third party companies alleging infringement could seek an injunction prohibiting the Company from selling some or all of its products, which would have an immediate, adverse impact in the Company's business, financial condition and results of operations. There can be no assurance that the Company would prevail in any litigation to enjoin the Company from selling its products on the basis of such alleged infringement, or that the Company would be able to license any valid and infringed patents on reasonable terms, or at all. Like many other companies, the year 2000 computer issue creates risks for Centigram. If internal systems do not correctly recognize and process date information beyond the year 1999, there could be an adverse impact on the Company's operations. To address the year 2000 issues with its internal systems, the Company has initiated a comprehensive program which is designed to deal with the most critical systems first. Assessment and remediation are proceeding in tandem, and the Company currently plans to have changes to critical systems completed and tested by mid-1999. These activities are intended to encompass all major categories of systems in use by the Company, including manufacturing, sales, customer service, finance and administration. The Company is also actively working with critical suppliers of products and services to determine that the suppliers' operations and the products and services they provide are year 2000 capable or to monitor their progress toward year 2000 capability. In addition, the Company has commenced work on various types of contingency planning to address potential problems areas with internal systems and with suppliers and other third parties. It is expected that assessment, remediation and contingency planing activities will be on-going throughout 1999, with the goal of appropriately resolving all material internal systems and third party issues. The Company also has a program to assess the capability of its products to handle the year 2000. The Company believes that its products are year 2000 compliant, although there can be no assurance of this. The Company is incurring various costs to provide customer support and customer satisfaction services regarding year 2000 issues, and it is anticipated that these expenditures will continue through 1999 and thereafter. As used by Centigram, "Year 2000 Capable" means that when used properly and in conformity with the product information provided by Centigram, the Centigram product will accurately store, display, process, provide, and/or receive data from, into, and between the twentieth and twenty-first centuries, including leap year calculations, provided that all other technology used in combination with the Centigram product properly exchanges date data with the Centigram product. The costs incurred to date related to these programs are less than $250,000. The Company currently expects that the total cost of these programs, including both incremental spending and redeployed resources, will not exceed $500,000, although there can be no assurance of this. The total cost estimate does not include potential costs related to any customer or other claims or the cost of internal software and hardware replaced in the normal course of business. In some instances, the installation schedule of new software and hardware in the normal course of business is being accelerated to also afford a solution to year 2000 capability issues. The total cost estimate is based on the current assessment of the projects and is subject to change as the projects progress. Based on currently available information, management does not believe that the year 2000 matters discussed above related to internal systems or products sold to customers will have a material adverse impact on the Company's financial condition or overall trends in results of operations; however, it is uncertain to what extent the Company may be affected by such matters. In addition, there can be no assurance that the failure to ensure year 2000 capability by a supplier or another third party would not have a material adverse effect on the Company. In recent years, stock markets have experienced extreme price and volume trading volatility. This volatility has had a substantial effect on the market prices of securities of many high technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad markets fluctuations may adversely affect the market price of the Company's common stock. In addition, the trading price of the Company's common stock could be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, announcements of new products or technological innovations by the Company or its competitors, and general conditions in the computer and communications industries. ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company maintains a strict investment policy which ensures the safety and preservation of its invested funds by limiting default risk, market risk, and reinvestment risk. The table below presents notional amounts and related weighted-average interest rates by year of maturity for the Company's investment portfolio as of October 31, 1998.
Fair (in thousands) 1999 2000 2001 2002 2003 Therafter Total Value - ----------------------- --------- --------- --------- --------- --------- --------- --------- --------- Cash equivalents Fixed rate....... $3,125 $ -- $ -- $ -- $ -- $ -- $3,125 $3,125 Average rate..... 5.49% -- -- -- -- -- 5.49% -- Short-term investments Fixed rate....... 28,143 5,275 -- -- -- -- 33,418 33,760 Average rate..... 5.62% 5.89% -- -- -- -- 5.66% -- --------- --------- --------- --------- --------- --------- --------- --------- Total securities... $31,268 $5,275 $ -- $ -- $ -- $ -- $36,543 $36,885 Average rate..... 5.61% 5.89% -- -- -- -- 5.65% --
The Company endeavors to mitigate default risk by attempting to invest in high credit quality securities and by constantly positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity and maintains what the Company believes is a prudent amount of diversification. The company has cash flow exposure on the interest expense related to its $15.0 million line of credit due to the rates which vary with the banks' reference rate. At October 31, 1998 the Company had no borrowings against its line of credit. The Company conducts business on a global basis and sells its products in U.S. dollars, except for an occasional sale in British pounds. When the Company is exposed to adverse or beneficial movements in foreign currency exchange rates, the Company enters into foreign currency forward contracts to minimize the impact of exchange rate fluctuations. The realized gains and losses on these contracts are deferred and offset against realized and unrealized gains and losses from the settlement of the related receivables. At October 31, 1998, the notional amount of outstanding foreign currency exchange contracts were $1,100,000. The unrealized loss on the contracts at October 31, 1998 was $20,000. An adverse change in the British Pound of approximately 15% would result in an unrealized loss of approximately $165,000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's financial statements included with this Form 10-K are set forth under Item 14. CENTIGRAM COMMUNICATIONS CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
October 31, November 1, 1998 1997 ----------- ----------- Assets Current Assets: Cash and cash equivalents.......................... $23,430 $19,791 Short-term investments............................. 33,760 32,262 Trade receivables, net of allowances of $1,919 and $1,724................................ 14,566 21,637 Inventories........................................ 5,297 9,060 Other current assets............................... 1,745 2,370 ----------- ----------- Total current assets............................. 78,798 85,120 Property and equipment, net.......................... 6,653 12,893 Intangible assets, net............................... 6,637 1,468 Deposits and other assets............................ 3,889 439 ----------- ----------- $95,977 $99,920 =========== =========== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable................................... $5,985 $6,925 Accrued compensation............................... 4,034 5,141 Patent settlement payable.......................... 9,200 -- Deferred income.................................... 4,394 678 Accrued expenses and other liabilities............. 5,179 3,391 Warranty and retrofit reserves..................... 1,977 2,161 ----------- ----------- Total current liabilities........................ 30,769 18,296 Commitments and contingencies........................ Stockholders' equity:................................ Preferred stock, $0.001 par value, 1,000,000 authorized; none outstanding...................... -- -- Common stock, $0.001 par value, 25,000,000 authorized; 7,171,000 and 7,110,000 outstanding, and capital in excess of par value ............... 90,625 90,724 Treasury stock, 597,000 and 198,000 shares, at cost........................................... (6,867) (2,427) Accumulated deficit................................ (18,844) (6,670) Unrealized loss on investments..................... 342 68 Cumulative translation adjustments................. (48) (71) ----------- ----------- Total stockholders' equity....................... 65,208 81,624 ----------- ----------- $95,977 $99,920 =========== ===========
See accompanying notes. CENTIGRAM COMMUNICATIONS CORPORATION STATEMENTS OF OPERATIONS (in thousands, except per share data)
Year Ended ------------------------------------ October 31, November 1, November 2, 1998 1997 1996 ----------- ----------- ---------- Net revenue............................. $77,587 $108,836 $104,324 Cost and expenses: Cost of goods sold.................... 37,653 45,661 42,516 Research and development.............. 18,062 21,260 20,154 Selling, general and administrative... 40,212 45,611 42,832 Non-recurring charges................. 10,600 3,263 -- ----------- ----------- ---------- 106,527 115,795 105,502 ----------- ----------- ---------- Operating loss.......................... (28,940) (6,959) (1,178) Other income and expense, net........... 17,145 6,114 2,231 ----------- ----------- ---------- Income (loss) before income taxes....... (11,795) (845) 1,053 Provision for income taxes.............. 379 833 53 ----------- ----------- ---------- Net income (loss)....................... ($12,174) ($1,678) $1,000 =========== =========== ========== Basic income (loss) per share........... ($1.77) ($0.24) $0.15 =========== =========== ========== Diluted income (loss) per share......... ($1.77) ($0.24) $0.14 =========== =========== ========== Shares used for basic income (loss) per share........................ 6,883 6,943 6,824 =========== =========== ========== Shares used for diluted income (loss) per share........................ 6,883 6,943 6,981 =========== =========== ==========
See accompanying notes. CENTIGRAM COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
Year Ended -------------------------------------- October 31, November 1, November 2, 1998 1997 1996 ------------ ----------- ----------- Common stock and capital in excess of par value: Balance, beginning of year.............. $90,724 $88,774 $85,815 Shares issued under stock plans......... 599 2,015 2,412 Issue of treasury shares under stock plans........................... (698) (65) -- Tax benefits from stock plans........... -- -- 547 ------------ ----------- ----------- $90,625 $90,724 $88,774 ------------ ----------- ----------- Treasury stock: Balance, beginning of year.............. (2,427) $ -- $ -- Purchase of treasury shares............. (7,856) (2,970) -- Issue of treasury shares under stock plans........................... 3,416 543 -- ------------ ----------- ----------- ($6,867) ($2,427) $ -- ------------ ----------- ----------- Accumulated deficit: Balance, beginning of year.............. ($6,670) ($4,992) ($5,992) Net income (loss)....................... (12,174) (1,678) 1,000 ------------ ----------- ----------- ($18,844) ($6,670) ($4,992) ------------ ----------- ----------- Unrealized gain (loss) on investments: Balance, beginning of year.............. $68 ($36) ($14) Unrealized gain (loss) on investments for year.............................. 274 104 (22) ------------ ----------- ----------- $342 $68 ($36) ------------ ----------- ----------- Cumulative translation adjustments: Balance, beginning of year.............. ($71) ($34) ($9) Translation adjustments................. 23 (37) (25) ------------ ----------- ----------- ($48) ($71) ($34) ------------ ----------- ----------- Note receivable from officer: Balance, beginning of year.............. $ -- ($300) $ -- Loan issued to officer.................. -- -- ($300) Forgiveness of note..................... -- 300 -- ------------ ----------- ----------- $ -- $ -- ($300) ------------ ----------- ----------- $65,208 $81,624 $83,412
============ =========== =========== See accompanying notes. CENTIGRAM COMMUNICATIONS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended ------------------------------------- October 31, November 1, November 2, 1998 1997 1996 ----------- ----------- ----------- Cash and equivalents, beginning of year... $19,791 $12,668 $10,633 ----------- ----------- ----------- Cash flows from operations: Net income (loss)....................... (12,174) (1,678) 1,000 Gain on sale of business................ (14,302) (3,598) -- Write-off of IPR&D...................... 5,000 -- -- Depreciation and amortization........... 7,178 8,740 7,729 Deferred taxes.......................... (325) 1,424 679 Trade receivables....................... 3,293 6,104 (9,411) Inventories............................. 863 2,407 (5,646) Other assets............................ (2,492) 1,239 (1,392) Accounts payable........................ (1,333) (2,814) 2,786 Patent settlement payable............... 9,200 -- -- Accrued expenses and other liabilities.. 2,298 341 (682) ----------- ----------- ----------- (2,794) 12,165 (4,937) ----------- ----------- ----------- Cash flows used for investing: Purchase of short-term investments...... (50,195) (127,579) (68,702) Proceeds from sale and maturities of short-term investments................ 48,971 129,829 84,354 Proceeds from CPE sale.................. 26,849 -- -- Purchase of property and equipment...... (3,017) (6,203) (10,615) Increase in intangible assets........... -- (458) -- Note receivable from officer............ -- -- (300) Acquisition of TTC...................... (11,558) -- -- ----------- ----------- ----------- 11,050 (4,411) 4,737 ----------- ----------- ----------- Cash flows from financing: Proceeds from sale of common stock...... 3,317 2,493 2,412 Purchase of treasury shares............. (7,856) (2,970) -- Principal payments on capital leases.... (78) (154) (177) ----------- ----------- ----------- (4,617) (631) 2,235 ----------- ----------- ----------- Net change in cash and equivalents...... 3,639 7,123 2,035 ----------- ----------- ----------- Cash and equivalents, end of year....... $23,430 $19,791 $12,668 =========== =========== =========== SUPPLEMENTAL DATA: Interest (paid)......................... ($100) ($98) ($37) Income taxes paid....................... $226 $599 $383
See accompanying notes. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATURE OF BUSINESS OPERATIONS Centigram Communications Corporation (the Company) designs, manufactures and markets wireless and wireline messaging, enhanced services, communications systems that integrate voice and facsimile on the Company's communications server, and provide access to this multimedia information through a telephone or PC. In addition to these products, the Company offers installation, training, consulting, and post-contract support services to its customers. The principal geographic markets for the Company's products are North America, Latin America, the Pacific Rim, and Europe. The Company sells primarily to telecommunications service providers, Bell Operating Companies, and independent telephone companies. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements include the Company and its wholly owned subsidiaries after eliminating all significant intercompany accounts and transactions. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition Revenue from sales of the Company's products is recognized upon shipment to customers. Allowances for estimated future returns and exchanges are provided at that time based on the Company's return policies and experience. In October 1997, the AICPA issued Statement of Position 97-2, "Software Revenue Recognition" which will be effective for the Company in fiscal 1999. The adoption of this statement is not expected to have a significant impact on the Company's results of operations. Warranty The Company generally warrants its products for one year. A provision for estimated future warranty costs is recorded at the time of revenue recognition. Research and Development Research and Development expenses include costs of developing new products and processes as well as design and engineering costs. Such costs are charged to expense as incurred. Product customization costs incurred pursuant to customer orders and/or contracts are included in cost of sales. Development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional costs are capitalized in accordance with Statement of Financial Accounting Standards No.86 (FAS86). Cash Equivalents and Short-term Investments Cash equivalents consist of highly liquid investments with a maturity of three months or less at the time of acquisition and are carried at cost plus accrued interest which approximates fair value. Short-term investments have an initial maturity of greater than three months and are carried at fair value. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to five years. Capitalized leases and leasehold improvements are amortized using the straight-line method over the shorter of the useful lives of the assets or the terms of the leases. Intangible Assets Intangible assets consist of patent license acquisition costs and goodwill and are stated at cost. Patent license costs are being amortized over ten years, the estimated useful lives of the patents. During fiscal 1997 the Company sold its Text-to-Speech business and as a result of this transaction the Company reduced goodwill by $703,000, net. During fiscal 1998 the Company purchased substantially all the assets of The Telephone Connection, Inc. ("TTC") including purchased intangibles which will be amortized over their estimated useful lives, ranging from three to seven years. The carrying values of intangible assets are reviewed if the facts and circumstances suggest that they may be impaired. If this review indicates that the asset is not fully recoverable, as determined by the undiscounted cash flows of the acquired business or the related products over the remaining amortization period, the Company would reduce these asset's carrying value to net realizable value. Intangible amortization expense was approximately $337,000, $290,000, and $375,000 in fiscal 1998, 1997 and 1996, respectively. Foreign Currency Translation The Company's international subsidiaries use their local currencies as their functional currencies. Assets and liabilities are translated at exchange rates in effect at the balance sheet date, and income and expense accounts at average exchange rates during the year. Translation adjustments are recorded to a separate component of stockholders' equity. Derivative Financial Instruments The Company uses derivative financial instruments to reduce financial market risks and as a matter of policy does not engage in speculative or trading transactions. The Company enters into foreign exchange forward contracts to hedge certain receivables denominated in foreign currencies. The Company's accounting policies for these instruments are based on the Company designation of such instruments as hedging transactions. The criteria the Company uses for designating an instrument as a hedge include the instrument's effectiveness in risk reduction and one-to-one matching of derivative instruments to underlying transactions. Gains and losses on these contracts are designated and effective as hedges and are deferred and recognized in income in the same period that the underlying transactions are settled. Gains and losses on any instruments not meeting the above criteria would be recognized in the current period. Capital Structure In February 1997, the FASB released Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" (FAS 129). FAS 129 consolidates the existing guidance regarding disclosure relating to a company's capital structure and will be effective in the Company's fiscal 1999. Adoption of FAS 129 is not expected to have a material impact on the Company's consolidated financial statements. Comprehensive Income In June 1997, the FASB released Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements and will be effective in the Company's fiscal 1999. The Company believes that adoption of FAS 130 will not have a material impact on the Company's consolidated financial statements. Segment Information In June 1997, the FASB released Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). FAS 131 will change the way companies report selected segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports to stockholders. FAS 131 will be effective in the Company's fiscal 1999. The Company has not yet reached a conclusion as to the appropriate segments, if any, which it will be required to report to comply with FAS 131. Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board issued Statement No. 133. "Accounting for Derivative Instruments and Hedging Activities." The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings, or is recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. SFAS 133 is effective as of the beginning of the Company's fiscal year 2001. The Company is currently evaluating the impact of SFAS 133 on its financial statements and related disclosures. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. ACQUISITION AND DIVESTITURE In June 1998, the Company purchased substantially all of the assets of The Telephone Connection, Inc. ("TTC") for approximately $11.6 million in cash, including transaction costs of $0.4 million. The acquisition has been accounted for using the purchase method of accounting with the purchase price being allocated as follows:
(in thousands) Net fixed assets....................................... $600 Purchased IPR&D charged to operations in the quarter ended August 1, 1998 .................... 5,000 Purchased technology and other intangible assets....... 2,600 Goodwill............................................... 3,400 --------- $11,600 =========
Amortization of these purchased intangibles is provided on the straight-line basis over the respective useful lives of the assets, ranging from three to seven years. The operating results of TTC which have not been material in relation to those of the Company, have been included in consolidated financial statements from the acquisition date. In-Process Research and Development Management estimates that $5.0 million of the purchase price represents purchased IPR&D that has not yet reached technological feasibility and has no alternative future use. Accordingly, this amount was expensed in the third quarter of the current fiscal year following consummation of the acquisition. The value assigned to purchased IPR&D, based on a valuation prepared by a third- party appraisal, was determined by identifying research projects in areas for which technological feasibility had not been achieved. The value was determined by estimating the costs to develop the purchased IPR&D into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the purchased IPR&D projects. Developed Technology To determine the value of the developed technology ($ 2.2 million), the expected future cash flows of the existing developed technologies were discounted taking into account the characteristics and applications of the product, the size of existing markets, growth rates of existing and future markets, as well as an evaluation of past and anticipated product-life cycles. Assembled Work Force To determine the value of the assembled work force ($0.4 million), the Company evaluated the work force in place at the acquisition date and utilized the cost approach to estimate the value of replacing the work force. Costs considered in replacing the work force included costs to recruit and interview candidates, as well as the cost to train new employees. Revision of Purchase Price Allocation Subsequent to the acquisition and the issuance of the Company's condensed financial statements for the quarter ended August 1, 1998, the staff of the SEC in its September 9, 1998 letter to the American Institute of Certified Public Accountants set forth their views on the valuation of IPR&D. The Company has reallocated the previously reported purchase price based on its understanding and interpretations of the issues set forth in the aforementioned letter. The reallocation reduced the amount previously written-off as IPR&D from $8.4 million to $5.0 million and increased goodwill and other intangible assets by the same amount. The effect of these adjustments on previously reported unaudited condensed consolidated financial statements for the three and nine months ended August 1, 1998 and as of August 1, 1998 are as follows:
Quarter Ended Nine Months Ended ------------------- ------------------- (in thousands, except per share As As data) Reported Restated Reported Restated - ------------------------------------- --------- --------- --------- --------- Purchased IPR&D..................... $8,400 $5,000 $8,400 $5,000 Loss from operations................ ($18,576) ($15,176) ($30,349) ($26,949) Net loss............................ ($3,666) ($266) ($14,250) ($10,850) Basic and diluted net loss per share............................. ($0.53) ($0.04) ($2.05) ($1.56) August 1, 1998 ------------------- As (in thousands) Reported Restated - ------------------------------------- --------- --------- Intangible assets, net.............. $3,429 $6,829 Accumulated deficit................. ($20,920) ($17,520)
SALE OF CPE BUSINESS UNIT In May 1998, the Company licensed and sold certain Customer Premise Equipment ("CPE') business unit assets to Mitel Corporation ("Mitel") for $26.8 million in cash, and Mitel assumed certain of the Company's liabilities. The Company recorded a pre-tax gain of approximately $14.3 million on this transaction representing the difference between the sales price and the net carrying value of the tangible and intangible assets sold by the Company and the liabilities assumed. PRO FORMA INFORMATION (UNAUDITED) The following unaudited pro forma consolidated results of operations for the Company's last three fiscal years assumes the TTC acquisition and the CPE Sale occurred as of October 29, 1995. These pro forma results also reflect the amortization of purchased TTC tangible and intangible assets and exclude the gain realized on the CPE sale and the write-off of TTC in-process research and development. This pro forma information is not necessarily indicative of the results that would actually have been reported had the sale and purchase transactions underlying the pro forma adjustments actually been consummated on such dates, nor is it necessarily indicative of future operating results.
(in thousands, except per share data) 1998 1997 1996 - --------------------------------------- ----------- ----------- ---------- Net revenue....................... $66,690 $70,789 $56,304 Net loss.......................... ($23,996) ($15,045) ($18,010) Basic and diluted loss per share......................... ($3.49) ($2.17) ($2.58)
INCOME (LOSS) PER SHARE In February 1997, the financial Accounting Standards Board ("FASB") released Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("FAS 128"), which was adopted during the quarter ended January 31, 1998. FAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. For fiscal 1998 and 1997, net loss per share was computed using only the weighted average number of shares of Centigram common stock outstanding during the period. For fiscal 1996, basic net income per share was based on the weighted average number of shares of Centigram common stock outstanding during the period. For the same period diluted net income per share further included the effect of stock options outstanding which were dilutive. Options to purchase approximately 420,000 shares of common stock were outstanding during 1996, but were not included in the computation of diluted net income per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. All net income (loss) amounts for prior periods have been presented and, where necessary, restated to conform to FAS 128 requirements. Basic income (loss) per share amounts are computed by dividing net income (loss) by the average number of shares outstanding. Diluted income (loss) per share amounts are computed by dividing net income (loss) by the sum of the average number of shares outstanding and all potentially dilutive common stock equivalents outstanding. The details of these computations are as follows:
(in thousands, except per share data) 1998 1997 1996 - --------------------------------------- ----------- ----------- ---------- Net income (loss)....................... ($12,174) ($1,678) $1,000 =========== =========== ========== Weighted average shares outstanding..... 6,883 6,943 6,824 Effect of dilutive securities: Shares issued upon exercise of dilutive outstanding stock options... -- -- 157 ----------- ----------- ---------- Adjusted weighted average shares........ 6,883 6,943 6,981 =========== =========== ========== Basic income (loss) per share........... ($1.77) ($0.24) $0.15 =========== =========== ========== Diluted income (loss) per share......... ($1.77) ($0.24) $0.14 =========== =========== ==========
RISK AND UNCERTAINTIES Supplies/Source of Supply The Company's manufacturing operations consist primarily of final assembly and test and quality control of materials, components, sub-assemblies and systems. The Company's hardware and software product designs are proprietary but use industry- standard hardware components and an industry-standard, real time, multi- tasking operating system. The Company presently uses third parties to perform printed circuit board and subsystem assembly. Although the Company generally uses standard parts and components for its products, certain of these parts and components are available only from sole source vendor or from limited sources. The Company to date has been able to obtain adequate supplies of these components in a timely manner from existing sources or, when necessary, from alternative sources of supply. However, the inability to develop such alternative sources if and as required in the future, or to obtain sufficient sole or limited source components as required, would have a material adverse effect on the Company's operating results. Diversification of Credit Risks and Off-balance-sheet Risks The Company's investments and trade receivables subject the Company to certain credit risks. The Company maintains cash and investments in various financial instruments, and maintains policies establishing credit and concentration criteria for such assets and limiting the exposure to any one institution or guarantor. Cash equivalents and short-term investments at October 31, 1998 consisted primarily of commercial paper, U.S. government and agency bonds and corporate debt obligations. The Company sells primarily to telecommunications service providers, Bell Operating Companies, and independent telephone companies. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. At October 31, 1998 five customers represented approximately 52% of trade receivables. The Company enters into foreign exchange forward contracts to hedge customer receivables denominated in foreign currencies. The counterparties to such contracts are major financial institutions and the Company's policy is to not require collateral. At October 31, 1998 the notional amount of outstanding foreign exchange contracts was approximately $1.1 million and the unrealized loss on these contracts was approximately $20,000. The Company had no foreign exchange contracts outstanding as of November 1, 1997. INVESTMENTS AND OTHER FINANCIAL INSTRUMENTS Management determines the appropriate classifications of securities at the time of the investment purchase and reevaluates such designation as of each balance sheet date. The Company has classified its investments as "available for sale" at the estimated fair value with unrealized gains and losses reported as a separate component of stockholders' equity. Investment income is recorded using an effective interest rate for each investment which includes interest earned and an amortization or accretion of each investment's associated premium or discount over the term of the investment. Realized gains or losses, using the specific identification method, and declines in value judged to be other than temporary are also included in investment income. The fair values of the Company's investments are based on quoted market prices at October 31, 1998 and November 1, 1997. Investments at October 31, 1998 were as follows (in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- --------- U.S. government and agency obligations....................... $10,500 $49 $ -- $10,549 Corporate debt securities........... 6,188 45 -- 6,233 Commercial paper.................... 19,809 248 -- 20,057 Temporary cash investments.......... 46 -- -- 46 ---------- ---------- ---------- --------- Total available-for-sale securities. 36,543 342 0 36,885 Less amounts classified as cash equivalents.................. (3,125) -- -- (3,125) ---------- ---------- ---------- --------- $33,418 $342 $ -- $33,760 ========== ========== ========== =========
Contractual maturities of available-for-sale securities at October 31, 1998 are as follows (in thousands): Estimated Amortized Fair Cost Value ---------- ---------- Due in one year or less............. $31,268 $31,566 Due in one to three years........... 5,275 5,319 ---------- ---------- $36,543 $36,885 ========== ========== Investments at November 1, 1997 were as follows (in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- --------- U.S. government and agency obligations....................... $17,086 $34 ($23) $17,097 Corporate debt securities........... 4,564 12 -- 4,576 Commercial paper.................... 9,489 45 -- 9,534 Temporary cash investments.......... 3,006 -- -- 3,006 ---------- ---------- ---------- --------- Total available-for-sale securities. 34,145 91 (23) 34,213 Less amounts classified as cash equivalents.................. (1,951) -- -- (1,951) ---------- ---------- ---------- --------- $32,194 $91 ($23) $32,262 ========== ========== ========== =========
NOTE RECEIVABLE In December 1996, the Company entered into two 12-year leases for approximately 225,000 square feet of office space in San Jose, California. In January 1998, the Company and the developer of the property terminated these leases. As a condition of this termination agreement, the Company loaned the developer approximately $2.2 million at 9% interest. This unsecured 10-year loan will be fully amortized by monthly payments of $28,409, including principal and interest, commencing in March 1998. At October 31, 1998 the remaining balance on the note was approximately $2.1 million and this balance is included in deposits and other assets. BANK CREDIT LINES The Company has a $15.0 million unsecured line of credit which expires May 29, 1999. Amounts borrowed bear interest at various rates as defined under the agreement, including the banks' reference rate (8.0% at October 31, 1998). The loan agreement requires the Company to maintain certain financial ratios, minimum working capital, and minimum tangible net worth and requires the banks' consent for the payment of cash dividends. The Company is in compliance with this agreement and there were no borrowings outstanding under the line on October 31, 1998. The Company plans to renew this line of credit upon its expiration. The Company also has bank contracts allowing it to enter into foreign currency spot and future exchange transactions in amounts not to exceed $10.0 million outstanding at one time. BALANCE SHEET COMPONENTS (in thousands) October 31, November 1, 1998 1997 ---------- ---------- Inventories Raw materials..................... $1,198 $3,005 Work-in-process................... 1,793 2,274 Finished goods.................... 2,306 3,781 ---------- ---------- $5,297 $9,060 ========== ========== Property and equipment Equipment......................... $33,527 $35,701 Furniture and fixtures............ 4,106 4,709 Leasehold improvements............ 2,661 2,785 ---------- ---------- 40,294 43,195 Less accumulated depreciation and amortization................ (33,641) (30,302) ---------- ---------- $6,653 $12,893 ========== ========== Intangible assets Goodwill.......................... $3,373 $ -- Patent licenses................... 1,350 1,350 Developed technology and other.... 2,590 458 ---------- ---------- 7,313 1,808 Less accumulated amortization..... (676) (340) ---------- ---------- $6,637 $1,468 ========== ========== Accrued expenses and other liabilities Accrued expenses.................. $4,664 $3,040 Other liabilities................. 515 351 ---------- ---------- $5,179 $3,391 ========== ========== COMMITMENTS AND CONTINGENCIES Leases The Company leases its facilities and certain equipment under noncancellable operating leases expiring through 2007. Leases for the Company's two principal operating facilities, its headquarters facility and operations facility, require the Company to pay property taxes, insurance premiums and normal maintenance costs, and contain provisions for rental adjustments. In November 1998 the Company renewed its lease on its operations facility ("Renewal"), for an additional five year period. Future minimum lease payments under noncancellable operating leases inclusive of the November 1998 Renewal are as follows for the following years: Operating (in thousands) Leases - ------------------------------------- ---------- 1999............................. $2,521 2000............................. 2,609 2001............................. 2,414 2002............................. 2,368 2003 and beyond.................. 8,541 ---------- Total minimum payments........... $18,453 ========== Rent expense totaled approximately $3,028,000, $2,548,000, and $1,964,000 for years 1998, 1997 and 1996, respectively. Letters of Credit The Company enters into letters of credit as performance securities for certain sales contracts. Various standby letters of credit totaling approximately $1,100,000 were outstanding as of October 31, 1998. Litigation The Company from time to time has received letters from other parties, including competitors of the Company, that make allegations of patent infringement. Certain lawsuits have also arisen from time to time in the ordinary course of business. In December 1997, representatives of Lucent Technologies ("Lucent") informed the Company that they believed that the Company's products may infringe upon certain patents issued to Lucent. The Company evaluated the assertions of Lucent and in the third quarter of fiscal 1998 accrued $7.6 million. Of this amount, $5.6 million was recorded as a non-recurring charge and $2.0 million, which is attributable to the CPE business, was recorded against the gain on the transaction and included in other income. In October 1998, the Company signed an intellectual property cross-licensing agreement with Lucent and in November 1998, paid Lucent $9.2 million. A portion of the settlement agreement amount totaling $1.6 million was recorded as prepaid royalties and will be amortized to cost of goods sold over the future royalty period. STOCKHOLDERS' EQUITY Common Stock The Company had 7,171,000 and 7,110,000 shares outstanding for fiscal 1998 and 1997, respectively. This increase represents shares issued for exercises of stock options under the Company's stock plans and shares issued under the Company's stock purchase plan. Shares Authorized The Company has authorized but unissued shares of 2,208,000 and 111,000 common shares for the Company's Stock Option Plans and the Employee Stock Purchase Plan, respectively, at October 31, 1998. Treasury Stock In April 1997, the Company's Board of Directors authorized a stock repurchase program whereby up to one million shares of its common stock may be repurchased in the open market from time-to-time. In September 1998, an additional 500,000 shares was authorized. The Company purchased 659,000 and 243,000 shares in fiscal 1998 and 1997, respectively, at a total cost of approximately $10.8 million. Stockholder Rights Plan The Company has adopted a Stockholder Rights Plan (the Rights Plan) which is intended to protect stockholders from unfair or coercive takeover practices. In accordance with the Rights Plan, the Company declared a dividend distribution of one Preferred Share Purchase Right (the Purchase Right) for each outstanding share of the Company's common stock held at the close of business on November 30, 1992. Each Purchase Right entitles the registered holder to purchase from the Company a unit consisting of one-thousandth of a share of the Company's Series A Participating Preferred Stock at an exercise price of $115.00. The Purchase Rights separate from the common stock and become exercisable by the holders and are redeemable by the Company on various dates and in certain situations as defined in the Rights Plan. The Purchase Rights expire November 30, 2002. STOCK AND BENEFIT PLANS Employee Stock Purchase Plan The Company's 1991 Employee Stock Purchase Plan (the Purchase Plan), as amended, allows eligible employees through payroll deduction to purchase shares of the Company's common stock at the lower of 85% of the fair market value of the stock on the first or last day of a six-month offering period, or such other offering period as determined by the Board of Directors but at no time to exceed 27 months. Approximately 100,000 and 120,000 shares were issued under the Purchase Plan at average prices of $10.07 and $10.89 per share in 1998 and 1997, respectively. Stock Option Plans The Company has in effect two stock option plans: the 1997 Stock Plan (the 1997 Plan) and the 1995 Nonstatutory Stock Option Plan (the 1995 Plan). The 1997 Plan has a ten year term and provides for the granting of incentive stock options and nonstatutory stock options to officers, directors, employees and consultants of the Company at prices ranging from 100% to 110% of the fair market value of the common stock on the date prior to the grant as determined by the Board of Directors. Also, stock options are automatically granted to directors who are not employees of the Company. Options generally expire five or ten years after the date of grant. The vesting and exercise provisions of option grants are determined by the Board of Directors. Options to new employees generally vest at the rate of 25% of the shares subject to the option one year after the date of grant, and then ratably over the following 36 months, based on continued service to the Company. Options granted to current employees generally vest at the rate of 12.5% of the shares subject to the option six months after the date of grant and then ratably over the following 42 months, based on continued service to the Company. Options to outside directors generally vest in equal monthly amounts over a three-year or one-year period depending on the nature of the option. Unexercised options are canceled thirty days following termination of the optionee's service to the Company. The 1995 Plan has a ten year term and was approved by the Board of Directors in July 1995. The 1995 plan provides for the granting of nonstatutory stock options to employees (excluding officers and directors) and consultants of the Company at the fair market value of the common stock on the date prior to the option grant. The vesting and exercise provisions of option grants are determined by the Board of Directors, and are generally similar to those provided under the 1997 Plan. A summary of stock option plan transactions follows (shares in thousands):
Outstanding Options -------------------- Shares Weighted Available Average for Out- Exercise Options standing Price ----------- --------- ---------- October 29, 1995 ............... 148 964 $14.93 Additional shares authorized .. 505 -- -- Granted ....................... (637) 637 18.23 Exercised ..................... -- (123) 7.92 Canceled ...................... 147 (147) 14.37 ----------- --------- November 2, 1996 ............... 163 1,331 17.22 Additional shares authorized .. 1,002 -- -- Granted ....................... (2,027) 2,027 12.68 Exercised ..................... -- (127) 9.42 Expired........................ (187) -- -- Canceled ...................... 1,272 (1,272) 16.33 ----------- --------- November 1, 1997 ............... 223 1,959 13.62 Additional shares authorized .. 705 -- -- Granted ....................... (1,088) 1,088 11.45 Exercised ..................... -- (222) 10.41 Expired........................ (457) -- -- Canceled ...................... 1,321 (1,321) 14.19 ----------- --------- October 31, 1998 ............... 704 1,504 $10.44 =========== ========= Options exercisable at: November 2, 1996 .............. 472 $17.54 November 1, 1997 .............. 504 $14.72 October 31, 1998 .............. 328 $10.85
The following tables summarize information about options outstanding at October 31, 1998: (shares in thousands):
Outstanding Options Exercisable Options --------------------------------- ---------------------- Weighted Number average Weighted Number Weighted of shares contractual average of shares average Range of outstanding life exercise exercisable exercise Exercise Prices at 10/31/98 (in years) price at 10/31/98 price - ---------------- ----------- ----------- --------- ------------ --------- $9.50 - 9.63 105 8.45 $9.57 50 $9.59 10.13 882 9.63 10.13 23 10.13 10.38 - 11.50 462 8.58 10.90 225 10.90 11.75 - 18.88 55 6.83 13.14 30 13.09 ----------- ------------ $9.50 - 18.88 1,504 9.12 $10.44 328 $10.85 =========== ============
These options will expire if not exercised at specific dates ranging from November 1998 to October 2008. Stock Based Compensation As permitted under Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based Compensation," the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations, in accounting for stock-based awards to employees. Under APB 25, the Company generally recognized no compensation expense with respect to such awards since the exercise price of such grants were at the market price of the Company's stock on the date of such grants. Pro forma information regarding net income (loss) and net income (loss) per share is required by FAS 123 for awards granted in fiscal years beginning after December 31, 1994 (fiscal 1996), as if the Company had accounted for its stock-based awards to employees under the fair value method of FAS 123. The fair value of the Company's stock-based awards to employees was estimated using a Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The fair value of the Company's stock-based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:
Option Plans Purchase Plan ----------------------- ----------------------- 1998 1997 1996 1998 1997 1996 ------- ------- ------- ------- ------- ------- Expected life in years....... 4.0 4.0 4.0 0.5 0.5 0.5 Expected stock price volatility factors......... 0.6 0.6 0.6 0.6 0.5 0.5 Risk-free interest rate percentage................. 5.5 6.0 5.9 5.5 5.4 5.7
For pro forma purposes, the estimated fair value of the Company's stock-based awards is amortized over the options' vesting period (for Option Plans) and the six-month purchase period (for the Purchase Plan). The Company's reported and pro forma information follows (in thousands except per share data):
1998 1997 1996 --------- --------- --------- Net income (loss) - as reported....... ($12,174) ($1,678) $1,000 Net loss - pro forma.................. ($14,027) ($6,427) ($452) Diluted income (loss) per share - as reported......................... ($1.77) ($0.24) $0.14 Diluted loss per share - pro forma.... ($2.04) ($0.93) ($0.06)
The weighted-average estimated fair value of employee stock options granted were $6.77, $6.89, and $9.83 per share for fiscal 1998, 1997 and 1996, respectively. The weighted-average estimated fair value of employee stock purchase rights granted under the Purchase Plan were $4.25, $4.30, and $5.59 for fiscal 1998, 1997 and 1996, respectively. The effects on pro forma disclosures of applying FAS No. 123 are not likely to be representative of the effects on pro forma disclosures of future years. Because FAS 123 is applicable only to options granted subsequent to October 28, 1995, its pro forma effect will not be fully reflected until approximately fiscal 2000. In June 1997, the Company offered all employees the option to exchange their stock options on a 5 for 4 share exchange ratio at the current market price, with no change in the stock options vesting periods. As a result of this offer, stock options to purchase 809,000 shares of common stock with a weighted average exercise price of $16.50 per share were canceled or amended to stock options to purchase 641,000 shares with an exercise price of $10.38 per share. In June 1998, the Company offered all employees and directors the option to reprice their stock options to the then current market price with a restart of the options vesting periods. As a result of this offer, 904,000 shares of common stock with a weighted average exercise price of $16.21 per share were canceled or amended to stock options with an exercise price of $10.13 per share. Employee Benefit Plan The Company has an employee savings plan, which qualifies under Section 401(k) of the Internal Revenue Code (the 401(k) Plan). Under the 401(k) Plan, all eligible employees may defer from 1% to 20% of their pre-tax compensation, but not more than statutory limits. The Company is allowed to make contributions as defined in the 401(k) Plan and as approved by the Board of Directors. Company contributions of $713,000 were made through fiscal 1998. The Company contributed $181,000, $205,000, and $152,000 in 1998, 1997 and 1996, respectively. In December 1996 the Board of Directors approved a matching program, not to exceed $500 per eligible employee. NON-RECURRING CHARGES During the third quarter of fiscal 1998 the Company purchased substantially all of the assets of The Telephone Connection, Inc. ("TTC") for approximately $11.6 million in cash, including transaction costs of approximately $0.4 million. During this quarter the Company wrote off $5.0 million of IPR&D. See Acquisition and Divestiture Note. In December 1997, representatives of Lucent Technologies ("Lucent") informed the Company that they believed that the Company's products may infringe upon certain patents issued to Lucent, and that Lucent was seeking compensation for any past infringement by the Company. During the third quarter of fiscal 1998 the Company accrued $7.6 million, $5.6 million of this amount was recorded as a non-recurring charge. See Commitments and Contingencies Note. During the second quarter of fiscal 1997, the Company recorded restructuring and other charges of $3.3 million. These expenses consisted of $2.4 million in restructuring charges and $0.9 million in expenses associated with the termination of acquisition discussions with Voice-Tel Enterprises and Voice-Tel Network ("Voice-Tel"). The restructuring charges primarily represent termination benefits for approximately 40 employees from all functions of the Company and costs associated with the resignation of the Company's president and chief executive officer. The Company restructured its business to align its operational expenses with its anticipated revenue levels. Cash payment termination benefits of $0.3 million and $1.8 million were paid in fiscal 1998 and 1997, respectively. OTHER INCOME AND EXPENSE, NET Other income and expense, net consists of (in thousands): 1998 1997 1996 --------- --------- --------- Investment income................. $3,053 $2,645 $2,321 Interest expense.................. (100) (103) (76) Other............................. 14,192 3,572 (14) --------- --------- --------- $17,145 $6,114 $2,231 ========= ========= ========= On May 8, 1998, the Company licensed and sold certain Customer Premise Equipment ("CPE") business unit assets to Mitel Corporation ("Mitel") for a total purchase price of $26.8 million in cash, and Mitel assumed certain of the company's liabilities. The Company recorded a pre-tax gain of approximately $14.3 million, computed as the difference between the net carrying value of the tangible and intangible assets sold and the liabilities assumed by the Company and the purchase price. During fiscal 1997 the Company sold its Text-to-Speech business to Learnout & Hauspie Speech Products ("L&H") for $5.0 million in L&H common stock. The Company recorded a pre-tax gain, computed as the difference between the fair market value of the shares received at closing and the net carrying value of related Text-to-Speech tangible and intangible assets of approximately $3.6 million. The Company subsequently sold this common stock for an additional gain of approximately $.3 million which was included in investment income. INCOME TAXES Income tax provisions have been determined in accordance with statement of Financial Accounting Standards No. 109 -- Accounting for Income Taxes (FAS 109). The components of the provision for income taxes are as follows (in thousands): 1998 1997 1996 --------- --------- --------- FEDERAL Current................................. $421 ($1,475) ($901) Deferred................................ (325) 2,023 901 STATE Current................................. 83 35 -- FOREIGN Current................................. 200 250 53 --------- --------- --------- $379 $833 $53 ========= ========= ========= The total provision for income taxes differs from the amount computed by applying the federal statutory income tax rate to income before taxes as follows: 1998 1997 1996 --------- --------- --------- Income tax (benefit) computed at federal statutory rate................. -34.0% -34.0% 34.0% State taxes, net of federal benefit...... 0.5% 2.7% -- Foreign taxes............................ 1.7% 29.6% 5.0% Goodwill amortization.................... -- 36.0% 8.3% Adjustment to valuation allowance........ 33.5% 49.0% -27.3% Tax-exempt interest income............... -- -- -16.1% Other individually immaterial items...... 1.5% 15.3% 1.1% --------- --------- --------- Effective tax rate....................... 3.2% 98.6% 5.0% ========= ========= ========= Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities are as follows (in thousands): 1998 1997 --------- --------- Deferred tax liabilities Difference in accounting periods........... ($1,660) ($2,889) --------- --------- Deferred tax assets Net operating loss carryforwards........... 867 2,531 Tax credit carryforwards................... 3,410 2,886 Fixed assets............................... 2,750 1,686 Allowance for doubtful accounts............ 740 780 Other accruals and reserves not currently deductible for tax purposes.............. 8,354 2,206 Inventory valuation accounts............... 203 2,026 Other...................................... 41 63 --------- --------- 16,365 12,178 Valuation allowance........................ (14,380) (9,289) --------- --------- 1,985 2,889 --------- --------- Total deferred taxes....................... $325 $ -- ========= ========= The change in the valuation allowance was a net increase of $5,091,000, $2,933,000, and $770,000 for 1998, 1997 and 1996, respectively. Approximately $1,267,000 of the valuation allowance is related to stock options, the benefits of which will be credited to additional paid-in capital when realized. As of October 31, 1998, the Company has federal tax net operating loss carryforwards of approximately $1,875,000, which will expire beginning in 2001 through 2003, if not utilized. Also available at October 31, 1998 are tax credit carryforwards for federal and state income tax purposes of approximately $2,308,000 and $1,670,000, respectively, which will expire beginning in the year 2002, if not utilized. Utilization of all of the federal net operating loss carryforwards and the deduction equivalent of approximately $118,000 of tax credit carryforwards are limited to less than $1,000,000 per year, due to the application of the change in ownership provisions of Sections 382 and 383 of the internal Revenue Code of 1986, as amended. SEGMENT AND CUSTOMER INFORMATION The Company operates in a single industry segment: the design, manufacture and marketing of systems and software for communications applications including voice messaging and facsimile storage and forwarding. No customer represented more than 10% of net revenue in the last three fiscal years. A significant portion of the Company's net revenue is attributable to a limited number of customers. The Company's top five customers, representing a combination of major distributors and service providers, accounted for approximately 32%, 28% and 35% of the Company's net revenue in fiscal 1998, 1997 and 1996 respectively, although the Company's five largest customers were not the same in these periods. Export revenue consist of sales from the Company's U.S. operating company to non-affiliated customers by geographic area after adjustments to include such export sales based on the location of the customer (in thousands): 1998 1997 1996 --------- --------- --------- Latin America............................ $16,700 $16,200 $9,800 Europe................................... 6,000 10,200 5,600 Far East................................. 6,100 9,200 1,500 Canada................................... 5,200 6,700 5,900 Australia................................ 1,800 5,200 9,000 --------- --------- --------- $35,800 $47,500 $31,800 ========= ========= ========= SUBSEQUENT EVENTS In December 1998, the Board of Directors approved an increase in shares reserved for issuance under the Company's stock option plans and the Employee Stock Purchase plan of 300,000 and 125,000, respectively. The increase in the shares for the Employee Stock Plan and the increase in ISO shares for the 1997 Plan are subject to stockholders' approval. See the first, second and fifth paragraphs of "Commitments and Contingencies" Note. QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands, except per share data)
Net Income (Loss) Operating ------------------- Net Gross Income Per Stock Price Range Revenue Margin (Loss) Amount Share(1) Shares(1) High - Low --------- --------- --------- --------- --------- ----------- ------------------ 1998 Q1 $18,158 $9,087 ($6,626) ($5,978) ($0.85) 7,016 $18.00 - 11.06 Q2 21,202 11,049 (5,147) (4,606) (0.66) 6,996 14.06 - 11.63 Q3(2) 18,143 9,306 (15,176) (266) (0.04) 6,885 13.75 - 10.13 Q4 20,084 10,492 (1,991) (1,324) (0.20) 6,634 11.50 - 5.63 --------- --------- --------- --------- $77,587 $39,934 ($28,940) ($12,174) ($1.77) 6,883 $18.00 - 5.63 ========= ========= ========= ========= 1997 Q1 $27,913 $16,570 $259 $680 $0.10 6,986 $14.73 - 12.13 Q2(3) 24,899 14,060 (6,871) (6,304) (0.90) 6,994 13.75 - 9.50 Q3(4) 27,010 15,461 (1,138) 3,149 0.45 7,019 13.75 - 9.50 Q4 29,014 17,084 791 797 0.11 7,176 21.88 - 11.00 --------- --------- --------- --------- $108,836 $63,175 ($6,959) ($1,678) ($0.24) 6,943 $21.88 - 9.50 ========= ========= ========= =========
(1) Represents the computation of basic and diluted net income (loss) per share. Shares represent the weighted average number of shares outstanding. Net income (loss) per share is computed independently for each of the quarters presented and therefore may not sum to the total for the year. (2) During the third quarter of fiscal 1998 the Company purchased substantially all of the assets of The Telephone Connection, Inc. "TTC") for approximately $11.6 million in cash, including transaction costs of approximately $0.4 million. The third quarter was restated; see Acquisition and Divestiture Note. In December 1997, representatives of Lucent Technologies ("Lucent") informed the Company that they believed that the Company's products may infringe upon certain patents issued to Lucent, and that Lucent was seeking compensation for any past infringement by the Company. The Company settled this dispute by signing a patent license agreement and paying Lucent $9.2 million. The Company recorded $5.6 million as a non-recurring charge in the third fiscal quarter. See Commitments and Contingencies Note. (3) During the second quarter of fiscal 1997, the Company recorded restructuring and other charges of $3.3 million. The expenses consisted of $2.4 million in restructuring charges and $0.9 million in expenses associated with the termination of acquisition discussions with Voice-Tel Enterprises and Voice-Tel Network ("Voice-Tel"). The restructuring charges primarily represent termination benefits for approximately 40 employees from all functions of the Company and costs associated with the resignation of the Company's president and chief executive officer. (4) During the third quarter of fiscal 1997, the Company sold its Text-to-Speech business to Learnout & Hauspie Speech Products ("L&H") for $5.0 million in L&H common stock. The Company recorded a pre-tax gain, computed as the difference between the fair market value of the shares received at closing and the net carrying value of related Text-to-Speech tangible and intangible assets of approximately $3.6 million. The Company subsequently sold this common stock for an additional gain of approximately $0.3 million which was included in investment income. The Company's common stock is traded on the over-the-counter market and is quoted on The Nasdaq National Market System under the symbol CGRM. As of October 31, 1998, there were approximately 350 stockholders of record. The Company has not paid and does not anticipate paying cash dividends on its common stock in the foreseeable future. The Company's bank credit line agreement requires the banks' consent to pay cash dividends. PRO FORMA QUARTERLY FINANCIAL DATA (UNAUDITED) The following pro forma information represents the combined results of operations of the Company, plus TTC, as adjusted to reflect the amortization of intangible assets acquired in the purchase, less the CPE Sale, as if each of these transactions had occurred at the beginning of fiscal 1997. The pro forma statements exclude the gain realized on the CPE Sale and exclude the non-recurring charge of the write-off of the IPR&D acquired in the TTC transaction. This summary does not purport to be indicative of what operating results would have been had these transactions been made as of the beginning of fiscal 1997 nor are they necessarily indicative of future operating results.
(in thousands, except per share data) Net Income (Loss) ------------------- Net Gross Operating Per Revenue Margin R&D SG&A Loss Amount Share(1) --------- --------- --------- --------- --------- --------- --------- 1998 Q1 $12,816 $6,023 $4,587 $8,976 ($7,540) ($6,876) ($0.98) Q2 15,524 7,821 4,718 9,313 (6,210) (5,658) (0.81) Q3(2) 18,266 9,242 4,371 15,624 (10,753) (10,138) (1.47) Q4 20,084 10,492 3,919 8,564 (1,991) (1,324) (0.20) --------- --------- --------- --------- --------- --------- $66,690 $33,578 $17,595 $42,477 ($26,494) ($23,996) ($3.49) ========= ========= ========= ========= ========= ========= 1997 Q1 $15,885 $9,499 $5,601 $8,524 ($4,626) ($4,181) ($0.60) Q2(3) 17,625 9,758 5,290 13,365 (8,897) (8,297) (1.19) Q3(4) 18,375 10,350 4,837 9,540 (4,027) 276 0.04 Q4 18,904 11,269 5,067 9,044 (2,842) (2,843) (0.40) --------- --------- --------- --------- --------- --------- $70,789 $40,876 $20,795 $40,473 ($20,392) ($15,045) ($2.15) ========= ========= ========= ========= ========= =========
(1) Represents the computation of basic and diluted net income (loss) per share. Net income (loss) per share is computed independently for each of the quarters presented and therefore may not sum to the total for the year. (2) As noted above in footnote (2) to the QUARTERLY FINANCIAL DATA (UNAUDITED), the Company accrued and recorded in Q3, as a non-recurring charge, $5.6 million to reflect the settlement of its patent license dispute with Lucent. (3) As noted above in footnote (3) to the QUARTERLY FINANCIAL DATA (UNAUDITED), the Company recorded in Q2, restructuring and other charges of $3.3 million. (4) As noted above in footnote (4) to the QUARTERLY FINANCIAL DATA (UNAUDITED), the Company recorded in Q3, a pre-tax gain on the sale of its Text-to-Speech business of $3.6 million. REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND STOCKHOLDERS CENTIGRAM COMMUNICATIONS CORPORATION We have audited the accompanying consolidated balance sheets of Centigram Communications Corporation as of October 31, 1998 and November 1, 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for the three years in the period ended October 31, 1998. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Centigram Communications Corporation at October 31, 1998 and November 1, 1997 and the consolidated results of its operations and its cash flows for the three years in the period ended October 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP San Jose, California November 24, 1998 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to the Proxy Statement for the Company's Annual Meeting of Stockholders scheduled to be held on March 26, 1999, under the headings "Proposal No. 1" and "Management". ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the Proxy Statement for the Company's Annual Meeting of Stockholders, scheduled to be held on March 26, 1999, under the heading "Executive Officer Compensation". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the Proxy Statement for the Company's Annual Meeting of Stockholders, scheduled to be held on March 26, 1999, under the heading "Security Ownership of Management". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the Proxy Statement for the Company's Annual Meeting of Stockholders, scheduled to be held on March 26, 1999, under the heading "Certain Transactions". PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) 1. THE FOLLOWING CONSOLIDATED FINANCIAL STATEMENTS OF CENTIGRAM COMMUNICATIONS CORPORATION ARE INCLUDED IN ITEM 8: FINANCIAL STATEMENTS COVERED BY REPORT OF INDEPENDENT AUDITORS: Report of Independent Auditors Consolidated Balance Sheets-October 31, 1998 and November 1, 1997 Consolidated Statements of Operations-Years ended October 31, 1998, and November 1, 1997 and November 2, 1996 Consolidated Statements of Stockholders' Equity-Years ended October 31, 1998, November 1, 1997 and November 2, 1996 Consolidated Statements of Cash Flows-Years ended October 31, 1998, November 1, 1997 and November 2, 1996 Notes to Consolidated Financial Statements-October 31, 1998, except the note "Quarterly Financial Data (Unaudited)" SUPPLEMENTARY FINANCIAL DATA NOT COVERED BY REPORT OF INDEPENDENT AUDITORS: The notes: "Pro Forma Information (Unaudited)", "Quarterly Financial Data (Unaudited)" and "Pro Forma Quarterly Financial Data (Unaudited)" in Notes to Consolidated Financial Statements (A) 2. FINANCIAL STATEMENT SCHEDULE: The following financial schedule of the Registrant for the years ended October 31, 1998, November 1, 1997 and November 2, 1996 Schedule II-Valuation and Qualifying Accounts Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the consolidated financial statements or notes. (B) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the last quarter of the fiscal year covered by this Annual Report on Form 10-K. (C) EXHIBITS (The Company will furnish to any stockholders who so request a copy of this Annual Report on Form 10-K, as amended, including a copy of any Exhibit listed below, provided that the Company may require payment of a reasonable fee not to exceed its expense in furnishing any such Exhibit.)
Exhibit Number Exhibit Description 3.1 Second Restated Certificate of Incorporation of Registrant.(1) 3.2 Bylaws of Registrant.(1) 4.1 Preferred Shares Rights Agreement dated as of October 20, 1992 by and between Registrant and The First National Bank of Boston.(2) 4.2 Amendment to Preferred Shares Rights Agreement dated April 26, 1994.(4) 10.1 Amended and Restated 1987 Incentive Stock Option Plan.(4) 10.2 Amended and Restated 1991 Employee Stock Purchase Plan.(4) 10.3 Settlement Agreement and Cross-License between the Company and VMX, Inc. dated June 29, 1990.(1)+ 10.4 Standard Triple Net Industrial Lease between the Company and Pactel Properties dated May 30, 1990.(1) 10.7 Form of Change of Control Agreement.(1) 10.8 Employment Agreement dated February 22, 1985 by and between Registrant and George H. Sollman, as amended.(1) 10.11 Credit Agreement dated as of March 28, 1994 by and between the Registrant and Silicon Valley Bank.(4) 10.12 Industrial Lease Agreement dated June 7, 1993 between the Company and Aetna Life Insurance Company.(3) 10.13 Loan Modification Agreement entered into as of April 21, 1995 between the Registrant and Silicon Valley Bank.(5) 10.14 Loan Modification Agreement entered into as of September 12, 1995 between the Registrant and Silicon Valley Bank.(5) 10.15 1995 Nonstatutory Stock Option Plan.(5) 10.16 Amendment to Triple Net Industrial Lease Between the Company and Bryan/Cilker Properties (successor in interest to Pactel Properties) dated December 23, 1996.(6) 10.17 1997 Stock Plan.(6) 10.18 Promissory Note dated April 15, 1996 between the Company and George H. Sollman. (6) 10.19 Standard Triple Net Industrial Lease between the Company and Sobrato Interests III dated December 20, 1996.(6) 10.20 Standard Triple Net Industrial Lease between the Company and Sobrato Interests III dated December 20, 1996.(6) 10.21 Amended and Restated Loan Agreement entered into April 30, 1997 between the Company and Silicon Valley Bank and Bank of Hawaii.(7) 10.22 Settlement Agreement and Mutual Release between the Company and George H. Sollman dated August 1, 1997.(7) 10.23 Promissory note dated February 18, 1997 between the Company and Dennis L. Barsema.(7) 10.24 Settlement Agreement and General Release dated October 4, 1997 between the Company and Dennis L. Barsema.(7) 10.25 Termination of Build to Suit Leases and Loan to Sobrato Interests III.(7) 10.26 Amendment to Amended and Restated Loan Agreement entered into May 30, 1998 between the Company and Silicon Valley Bank and Bank of Hawaii. 10.27 Patent License Agreement between Lucent Technologies, Inc. and the Company effective as of October 1, 1998.+ 10.28 Employment Agreement dated October 27, 1997 by and between Registrant and Robert L. Puette. 21.1 List of Subsidiaries of Registrant. 23.1 Consent of Independent Auditors. 27.1 Financial Data Schedule.
(1) Incorporated by reference to the Form S-1 Registration Statement as filed with the Securities and Exchange Commission on October 10, 1991 (Registration No. 33-42039). (2) Incorporated by reference to the Form 8-A Registration Statement as filed with the Securities and Exchange Commission on November 3, 1992. (3) Incorporated by reference to Annual Report on Form 10-K for fiscal 1993. (4) Incorporated by reference to Annual Report on Form 10-K for fiscal 1994. (5) Incorporated by reference to Annual Report on Form 10-K for fiscal 1995. (6) Incorporated by reference to Annual Report on Form 10-K for fiscal 1996. (7) Incorporated by reference to Annual Report on Form 10-K for fiscal 1997. + Confidential treatment requested as to certain portions filed separately with the Securities and Exchange Commission. 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. CENTIGRAM COMMUNICATIONS CORPORATION Date: January 22, 1999 By: /s/ Robert L. Puette ---------------------------------------- Robert L. Puette PRESIDENT AND CHIEF EXECUTIVE OFFICER KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert L. Puette and Thomas E. Brunton, jointly and severally his attorneys-in-fact, each with the power of substitution for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - ------------------------------ -------------------------------- --------------- /s/ ROBERT L. PUETTE President, Chief Executive January 25, 1999 ---------------------------- Officer, Director Robert L. Puette (Principal Executive Officer) /s/ THOMAS E. BRUNTON Senior Vice President and January 25, 1999 ---------------------------- Chief Financial Officer Thomas E. Brunton (Principal Accounting and Financial Officer) /s/ JAMES H. BOYLE Director January 25, 1999 ---------------------------- James H. Boyle /s/ DOUGLAS CHANCE Director January 25, 1999 ---------------------------- Douglas Chance /s/ JAMES F. GIBBONS Director January 25, 1999 ---------------------------- James F. Gibbons Director ---------------------------- Edward R. Kozel /s/ DAVID S. LEE Director January 25, 1999 ---------------------------- David S. Lee /s/ DEAN O. MORTON Director January 25, 1999 ---------------------------- Dean O. Morton
SCHEDULE II CENTIGRAM COMMUNICATIONS CORPORATION VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Additions Additions Balance at Charged to Charged to Balance Beginning Costs and Other at end of Period Expenses Accounts(2) Deductions(1) of Period ----------- ------------- ------------ -------------- ---------- Year ended October 31, 1998 Allowance for doubtful accounts.................... $774 $160 $ -- ($190) $744 Product return reserve....... 950 -- 225 -- 1,175 Year ended November 1, 1997 Allowance for doubtful accounts.................... $955 $160 $ -- ($341) $774 Product return reserve....... 1,100 -- (150) -- 950 Year ended November 2, 1996 Allowance for doubtful accounts.................... $841 $330 -- ($216) $955 Product return reserve....... 1,100 -- -- -- 1,100
- ------------------------------ (1) Write-offs of uncollectible accounts, net of recoveries. (2) The product return reserve is charged to revenue. EX-10.26 2 AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT ENTERED INTO MAY 30, 1998 BETWEEN THE COMPANY AND SILICON VALLEY BANK AND BANK OF HAWAII. AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT (UNSECURED) This Amendment to Amended and Restated Loan Agreement (Unsecured) is entered into as of May 30, 1998 (the "Amendment") by and between SILICON VALLEY BANK ("Agent") as Servicing Agent and a Bank and BANK OF HAWAII ("BofH"; SVB and BofH are referred to individually herein as "Bank", and collectively as the "Banks") and CENTIGRAM COMMUNICATIONS CORPORATION, a Delaware corporation ("Borrower"). RECITALS Borrower and Bulk are parties to that certain Amended and Restated Loan Agreement (Unsecured) dated as of April 30, 1997, and modified by that certain Loan Modification Agreement dated as of April 27, 1998 (the "Agreement"). The parties desire to amend the Agreement in accordance with the terms of this Amendment, NOW, THEREFORE the parties agree as follows: 1. The following definitions in Section 1.1 are amended to read as follows: "Committed Line" means Fifteen Million Dollars ($15,000,000). "LIBOR Rate Advance" means an Advance bearing interest at a rate equal to the LIBOR Rate plus two percent (2.00%) and made pursuant to Section 2.1. "Maturity Date" means May 29, 1999. 2. The following new definitions are added to Section 1.1: "Borrowing Base" means an amount equal to eighty percent (80%) of Eligible Accounts, as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower. "Eligible Accounts" means those Accounts that arise in the ordinary course of Borrower's business that comply with all of Borrower's representations and warranties to Bank set forth in Section 5.4; provided, that standards of eligibility may be fixed and revised from time to time by Bank in Bank's reasonable judgment and upon notification thereof to Borrower in accordance with the provisions thereof. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following: (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date; (b) Accounts with respect to an account debtor, twenty-five percent (25%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date; (c) Accounts with respect to which the account debtor is an officer, employee, or agent of Borrower; (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional; (e) Accounts with respect to which the account debtor is an Affiliate of Borrower; (f) Accounts with respect to which the account debtor does not have its principa1 place of business in the United States, except for Eligible Foreign Accounts; (g) Accounts with respect to which the account debtor is the United States or any department, agency, or instrumentality of the United States; (h) Account with respect to which Borrower is liable to the account debtor for goods sold or services rendered by the account debtor to Borrower, but only to the extent of fifty percent (50%) of any amounts owing to the amount debtor against amounts owed to Borrower; (i) Accounts with respect to an account debtor, including Subsidiaries and Affiliates, whose total obligations to Borrower exceed twenty-five percent (25%) of all Accounts, to the extent such obligations exceed the aforementioned percentage; (j) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; and (k) Accounts the collection of which Bank reasonably determines to be doubtful. "Eligible Foreign Accounts" means Accounts with respect to which the account debtor does not have its principal place of business in the United States and that (i) are supported by one or more letters of credit in an amount and of a tenor, and issued by a financial institution acceptable to Bank, or (ii) that Bank approves on a case-by-case basis. 3. Section 2.1(a) is hereby deleted in its entirety and replaced with the following: "(a) Advances. Subject to and upon the terms and conditions of this Agreement, Banks agree to make Advances to Borrower in an aggregate amount not to exceed the Committed Line; provided that if the aggregate outstanding Advances plus Letters of Credit plus the Foreign Exchange Reserve exceed $5,000,000 then Banks will make Advances to Borrower in an aggregate amount not to exceed (i) the lesser of the Committed Line or the Borrowing Base minus (ii) the face amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit) minus the outstanding amount of the Foreign Exchange Reserve. Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1 may he repaid and reborrowed at any time during the term of this Agreement." 4. The reference in Section 2.1(d) to 150 basis points is hereby amended to read "200 basis points". 5. The first sentence in Section 2.1.1(c) is hereby deleted and replaced with the following: "The maximum aggregate obligation at any one time for undrawn and drawn but unreimbursed Letters of Credit shall not exceed (i) the lesser of the Committed Line or the Borrowing Base minus (ii) the outstanding amount of the Foreign Exchange Reserve, provided that the aggregate face amount of outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit) shall not in any case exceed Two Million Dollars ($2,000,000)." 6. The reference in Section 2.1.2(a) to ten percent (10%) of the gross amount of the Exchange Contracts is hereby amended to read "twenty percent (20%)". 7. Section 2.2 is hereby deleted in its entirety and replaced with the following: "2.2 Overadvances. If, at any time or for any reason that a Borrowing Base Certificate is required under Section 5.3, the sum of (i) Advances owed by Borrower to Banks pursuant to Section 2.1(a) of this Agreement plus (ii) the face amount of Letters of Credit issued under Section 2.1.1 (including undrawn and drawn but unreimbursed Letters of Credit) plus (iii) the reserve, if any, taken under Section 2.1.l(d) plus (iv) the Foreign Exchange Reserve is greater then the lesser of the Committed Line or the Borrowing Base, Borrower shall immediately pay to Servicing Agent, in cash, the amount of such excess, for payment to the Banks according to their respective Percentage Shares." 8. The last paragraph in Section 5.3 is hereby deleted and replaced with the following paragraphs: "In the event that outstanding Advances (including undrawn and drawn but unreimbursed Letters of Credit) exceed Four Hundred Thousand Dollars ($400,000), then Borrower shall deliver to Banks with the quarterly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto. In the event that outstanding Advances under the Committed Line exceed Five Million Dollars ($5,000,000), then within thirty (30) days after the last day of each month, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto, together with aged listings of accounts receivable and accounts payable." 9. The attached Exhibit D is hereby added incorporated by reference into the Agreement. 10. Section 5.10 is hereby deleted in its entirety and replaced with the following: "5.10 Tangible Net Worth . Borrower shall maintain, as of the last day of each fiscal quarter, a Tangible Net Worth of not less than Seventy Million Dollars ($70,000.000), minus the amount used to repurchase Borrower's capital stock in accordance with Section 6.6 up to aggregate amount of Seven Million Five Hundred Thousand Dollars ($7,500,000). 11. The following now Section 5.13 shall be added: "5.13 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide existing obligations. The property giving rise to such Eligible Accounts has been delivered to the account debtor or to the account debtor's agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has not received notice of actual or imminent Insolvency Proceeding of any account debtor that is included in any Borrowing Base Certificate as an Eligible Account." 12. Section 6.6 is hereby deleted in its entirety and replaced with the following: "6.6 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock; provided, that (i) Borrower may declare and make any dividend payment or other distribution payable in its equity securities, (ii) Borrower may convert any of its convertible securities into other securities pursuant to the terms of such convertible securities or otherwise in exchange therefor, and (iii) Borrower may repurchase stock in an aggregate amount not to exceed Seven Million Five Hundred Thousand Dollars ($7,500,000) for so long as an Event of Default has not occurred and will not exist after giving effect to such repurchase." 13. The first sentence of Section 11.1 is hereby deleted and replaced with the following: "Except as otherwise provided in this Agreement, the rights, interests, and obligations of each Bank under this Agreement and the Loan Documents at any time shall be shared in the ratio of (a) Seven Million Five Hundred Thousand Dollars ($7,500,000) to (b) the Committed Line." 14. As a result of the termination by Borrower of two twelve-year property leases entered into in December of 1996, Borrower has made an unsecured loan in the approximate amount of Two Million Two Hundred Forty- Three Thousand Dollars ($2,243,000) to a third party developer ("Unsecured Loan''), This Unsecured Loan violates Section 6.7 of the Agreement because the Unsecured Loan is not a Permitted Investment. Bank hereby consents to such Unsecured Loan and hereby waives such Event of Default under the Agreement. 15. In connection with this Amendment, Borrower shall pay Bank a fee in an amount equal to Twenty-Five Thousand Dollars ($25,000), payable upon the date hereof, plus all Bank Expenses incurred in connection with the preparation of this Amendment." 16. As a condition to the effectiveness of this Amendment, Bank shall have received, in form and substance satisfactory to Bank, the following: (a) a resolution by Borrower authorizing the execution and delivery of this Amendment; and (b) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. 17. Unless otherwise defined, all capitalized terms in this Amendment shall be as defined in the Agreement. Except as. amended, the Agreement remains in full force and effect. 18. Borrower represents and warrants that the Representations and Warranties contained in the Agreement are true and correct as of the date of this Amendment, and that no Event of Default has occurred and is continuing. 19. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first date above written . CENTIGRAM COMMUNICATIONS CORPORATION By: /s/ Tom Brunton Title: Chief Financial Officer SILICON VALLEY BANK By: /s/ Timothy M. Walker Title: Vice President BANK OF HAWAII By: /s/ David L. Ward Title Officer EX-10.27 3 PATENT LICENSE AGREEMENT BETWEEN LUCENT TECHNOLOGIES, INC. AND THE COMPANY EFFECTIVE AS OF OCTOBER 1, 1998.+ PATENT LICENSE AGREEMENT between LUCENT TECHNOLOGIES INC. and CENTIGRAM COMMUNICATIONS CORPORATION Effective as of October 1, 1998 Relating to Various Product PATENT LICENSE AGREEMENT TABLE OF CONTENTS ARTICLE I - GRANTS OF LICENSES 1.01 Grant 1.02 Duration and Extent 1.03 Scope 1.04 Ability to Provide Licenses 1.05 Joint Inventions 1.06 Publicity ARTICLE II - ROYALTY AND PAYMENTS 2.01 Initial Fee 2.02 Running Royalty [ * ] 2.03 Accrual 2.04 Records and Adjustments 2.05 Reports and Payments ARTICLE III - TERMINATION 3.01 Breach 3.02 Voluntary Termination 3.03 Survival ARTICLE IV - MISCELLANEOUS PROVISIONS 4.01 Disclaimer 4.02 [ * ] 4.03 Addresses 4.04 Taxes 4.05 Choice of Law 4.06 Integration 4.07 Outside the United States 4.08 Dispute Resolution 4.09 Releases 4.10 Confidentiality 4.11 Counterparts DEFINITIONS APPENDIX PATENT LICENSE AGREEMENT Effective as of October 1, 1998, LUCENT TECHNOLOGIES INC., a Delaware corporation ("LUCENT"), having an office at 600 Mountain Avenue, Murray Hill, New Jersey 07974, and CENTIGRAM COMMUNICATIONS CORPORATION, a Delaware corporation ("CENTIGRAM"), having an office at 91 East Tasman Drive, San Jose, California 95134 agree as follows:? ARTICLE I GRANTS OF LICENSES 1.01 Grant (a) LUCENT grants to CENTIGRAM under LUCENT's PATENTS personal, nonexclusive and non-transferable licenses for: [ * ] (b) CENTIGRAM grants to LUCENT under CENTIGRAM's PATENTS personal, nonexclusive, royalty-free and non-transferable licenses for [ * ] 1.02 Duration and Extent Subject to the provisions of ARTICLE III and Section 4.02, all licenses granted herein shall continue [ * ] 1.03 Scope (a) The licenses granted herein are licenses to (i) make, have made, use, lease, sell and import LICENSED PRODUCTS; (ii) make, have made, use and import machines, tools, materials and other instrumentalities, insofar as such machines, tools, materials and other instrumentalities are involved in or incidental to the development, manufacture, testing or repair of LICENSED PRODUCTS which are or have been made, used, leased, owned, sold or imported by the grantee of such license; and (iii) convey to any customer of the grantee, with respect to any LICENSED PRODUCT which is sold or leased by such grantee to such customer, rights to use and resell such LICENSED PRODUCT as sold or leased by such grantee (whether or not as part of a larger combination); provided, however, that no rights may be conveyed to customers with respect to any invention which is directed to (1) a combination of such LICENSED PRODUCT (as sold or leased) with any other product [ * ] (2) a method or process which is other than the inherent use of such LICENSED PRODUCT itself (as sold or leased), or (3) a method or process involving the use of a LICENSED PRODUCT to manufacture (including associated testing) any other product. (b) Licenses granted herein to CENTIGRAM are not to be construed either (i) as consent by the grantor to any act which may be performed by the grantee, except to the extent impacted by a patent licensed herein to the grantee, or (ii) to include licenses to contributorily infringe [ * ] or to induce infringement under U.S. law or a foreign equivalent thereof. [ * ] (c) The grant of each license hereunder includes the right to grant sublicenses within the scope of such license to a party's RELATED COMPANIES for so long as they remain its RELATED COMPANIES. Any such sublicense may be made effective retroactively, but not prior to the effective date hereof, nor prior to the sublicensee's becoming a RELATED COMPANY of such party. Each party shall not have any right to sublicense any entity other than as specified in this Section. 1.04 Ability to Provide Licenses (a) It is recognized that certain actions of the parties to this Agreement may limit their ability to provide licenses hereunder without constituting a breach. In particular, (i) prior to the earliest filing of a patent application disclosing an invention of a party or its RELATED COMPANY, such party or RELATED COMPANY may assign to a third party the title to patents on such invention, or (ii) prior to the execution of this Agreement, a party or its RELATED COMPANY may have limited by contract its ability to provide licenses hereunder with respect to certain patents or technologies. (b) Each party agrees to disclose to the other party, promptly upon receipt of a written request for such disclosure, any such assignment or other contractual limitation with respect to any patent and/or technology which is specifically identified in such request. (c) Each party represents that it has already disclosed to the other party any such assignment or other contractual limitation currently in effect with respect to any patent and/or technology specifically identified in any such disclosure request received by it prior to execution of this Agreement. (d) A party's failure to meet any obligation hereunder, due to the assignment of title to any invention or patent, or the granting of any licenses, to the United States Government or any agency or designee thereof pursuant to a statute or regulation of, or contract with, such Government or agency, shall not constitute a breach of this Agreement. (e) LUCENT represents to CENTIGRAM that it has the right to license LUCENT's PATENTS as specified in this Agreement and CENTIGRAM represents to LUCENT that it has the right to license CENTIGRAM's PATENTS as specified in this Agreement. 1.05 Joint Inventions (a) There are countries (not including the United States) which require the express consent of all inventors or their assignees to the grant of licenses or rights under patents issued in such countries for joint inventions. (b) Each party shall give such consent, or shall obtain such consent from its RELATED COMPANIES, its employees or employees of any of its RELATED COMPANIES, as required to make full and effective any such licenses and rights respecting any joint invention granted to the grantee hereunder by such party and by another licensor of such grantee. (c) Each party shall take steps which are reasonable under the circumstances to obtain from third parties whatever other consents are necessary to make full and effective such licenses and rights respecting any joint invention purported to be granted by it hereunder. If, in spite of such reasonable steps, such party is unable to obtain the requisite consents from such third parties, the resulting inability of such party to make full and effective its purported grant of such licenses and rights shall not be considered to be a breach of this Agreement. 1.06 Publicity Nothing in this Agreement shall be construed as conferring upon either party or its RELATED COMPANIES any right to include in advertising, packaging or other commercial activities related to a LICENSED PRODUCT, any reference to the other party (or any of its RELATED COMPANIES), its trade names, trademarks or service marks in a manner which would be likely to cause confusion or to indicate that such LICENSED PRODUCT is in any way certified by the other party hereto or its RELATED COMPANIES. ARTICLE II ROYALTY AND PAYMENTS 2.01 Initial Fee [ * ] CENTIGRAM shall pay LUCENT after October 1, 1998 and before October 31, 1998 (but in no case sooner than 10 days after execution of this Agreement by LUCENT), the sum of nine million, two hundred thousand United States dollars (U.S. $9,200,000.00). This fee shall not be creditable with respect to any additional payments due under Sections 2.02 and 4.02 and in no event shall such fee or any portion thereof be refunded to CENTIGRAM. 2.02 Running Royalty [ * ] 2.03 Accrual (a) Royalty shall accrue and become payable under Section 2.02 upon the receipt of revenues for such product or service. Obligations to pay royalties under Section 2.02 for time periods prior to any termination of licenses and rights pursuant to Article III shall survive such termination and the expiration of any patent. (b) Royalties which have accrued under Section 2.02 but have not been paid for any company which is a RELATED COMPANY of the acquired, separately identifiable business and then ceases to be the same, shall become payable with the next scheduled royalty payment under Section 2.02. (c) Notwithstanding any other provisions hereunder, royalty shall accrue and be payable only to the extent that enforcement of the obligation to pay such royalty would not be prohibited by applicable law. 2.04 Records and Adjustments (a) [ * ] to pay royalties under Section 2.02, hereinafter referred to as "the Entity", shall keep full, clear and accurate records so as to enable LUCENT to ascertain the proper royalty due thereunder. The Entity shall retain such records with respect to each product for at least five (5) years from the sale, lease or putting into use of such product. LUCENT shall have the right through an independent, nationally recognized accounting firm (hereinafter "auditors") to make an examination, during normal business hours, but upon at least fourteen (14) calendar days notice, of all records and accounts bearing upon the amount of royalty payable to it under Section 2.02. LUCENT's right to have auditors inspect the Entity's records and accounts shall be limited to one audit per calendar year, unless the immediately previous audit revealed an underpayment by the Entity of at least ten percent (10%) for the audited period. Prompt adjustment shall be made to compensate for any errors or omissions disclosed by such examination. The auditors must execute an appropriate confidential information nondisclosure agreement (NDA) with the Entity prior to its inspection of the Entity's records. (b) Independent of any such examination, LUCENT will credit the Entity against future royalty payments, provided there are any, the amount of any overpayment of royalties made in error which is identified and fully explained in a written notice to LUCENT delivered within five (5) years after the due date of the payment which included such alleged overpayment, provided that LUCENT is able to verify, to its own satisfaction, the existence and extent of the overpayment. (c) No refund, credit or other adjustment of royalty payments shall be made by LUCENT except as provided in this Section 2.04. Rights conferred by this Section 2.04 shall not be affected by any statement appearing on any check or other document, except to the extent that any such right is expressly waived or surrendered by a party having such right and signing such statement. 2.05 Reports and Payments (a) The provisions of Section 2.05 shall apply [ * ] (b) Within sixty (60) days after each anniversary date of the end of the SEMIANNUAL PERIOD that [ * ] (i) [ * ] (ii) [ * ] (iii) [ * ] (iv) the amount of royalty, if any, payable for the twelve month period in (i). If there are no [ * ] for the twelve month period, the statement shall show that fact. (c) Within such sixty (60) days the acquired, separately identifiable business or the acquiring company shall pay in United States dollars to LUCENT at the address specified in Section 4.03 the royalties payable in accordance with such statement. Any conversion to United States dollars shall be at the prevailing rate for bank cable transfers as quoted for the last day of such semiannual period by leading United States banks in New York City dealing in the foreign exchange market. (d) If payment for a semiannual period is overdue, such payment shall be subject to a late payment charge calculated at an annual rate of three percentage points (3%) over the prime rate or successive prime rates quoted for the last day of such semiannual period by leading U.S. banks in New York City during delinquency. If the amount of such charge exceeds the maximum permitted by law, such charge shall be reduced to such maximum. ARTICLE III TERMINATION 3.01 Breach In the event of a breach of this Agreement by either party, the other party may, in addition to any other remedies that it may have, at any time terminate all licenses and rights granted by it hereunder by not less than two (2) months' written notice specifying such breach, unless within the period of such notice all breaches specified therein shall have been remedied. Exercise of the right of either party to terminate this Agreement pursuant to this Section 3.01 shall be subject to challenge in accordance with Section 4.08, in which case the effectiveness of such termination shall be determined by the Dispute Resolution process defined in Section 4.08. 3.02 Voluntary Termination By written notice to the other party, either party may voluntarily terminate all or a specified portion of the licenses and rights granted to it hereunder. Such notice shall specify the effective date (not more than six (6) months prior to the giving of said notice) of such termination and shall clearly specify any affected patent, invention or product. 3.03 Survival (a) If a company ceases to be a RELATED COMPANY of a party, licenses and rights granted hereunder with respect to patents of such company on inventions made prior to the date of such cessation, shall not be affected by such cessation. (b) Any termination of licenses and rights of a party under the provisions of this Article III shall not affect such party's licenses, rights and obligations with respect to any LICENSED PRODUCT made prior to such termination, and shall not affect the other party's licenses and rights (and obligations related thereto) hereunder. ARTICLE IV MISCELLANEOUS PROVISIONS 4.01 Disclaimer Neither party nor any of its SUBSIDIARIES makes any representations, extends any warranties of any kind, assumes any responsibility or obligations whatever, or confers any right by implication, estoppel or otherwise, other than the licenses, rights and warranties herein expressly granted. 4.02 [ * ] 4.03 Addresses (a) Any notice or other communication hereunder shall be sufficiently given to CENTIGRAM when sent by certified mail addressed to Centigram Communications Corporation, 91 East Tasman Drive, San Jose, California 95134, Attn: President, or to LUCENT when sent by certified mail addressed to Contract Administrator, Intellectual Property Business, Lucent Technologies Inc., Suite 105, 14645 N.W. 77th Avenue, Miami Lakes, Florida 33014, United States of America. Changes in such addresses may be specified by written notice. (b) Payments by CENTIGRAM shall be made to LUCENT at Sun Trust, P.O. Box 913021, Orlando, Florida, 32891-3021, United States of America. Alternatively, payments to LUCENT may be made by bank wire transfers to LUCENT's account: Lucent Technologies Licensing, Account No. 910-2-568475, Swift Code: CHASUS33, ABA Code: 021000021, at Chase Manhattan Bank, N.A., 55 Water Street, New York, New York 10041, United States of America. Changes in such address or account may be specified by written notice. 4.04 Taxes (a) CENTIGRAM shall bear all taxes, duties, levies, or similar charges ("taxes"), including interest and penalties thereon, however designated, imposed as a result of the operation or existence of this Agreement, including taxes which CENTIGRAM is required to withhold or deduct from payments to LUCENT, except (i) any net income tax imposed upon LUCENT by any governmental entity within the United States (the fifty (50) states and the District of Columbia), and (ii) any tax imposed upon LUCENT by jurisdictions outside the United States if such tax is allowable as a credit against the United States income taxes of LUCENT or is actually fully usable as a credit toward the income taxes of LUCENT in the jurisdiction in which the tax is imposed. In order for the exception in (ii) to be effective, CENTIGRAM must furnish to LUCENT evidence sufficient to satisfy the United States or other country's taxing authorities that such taxes have been paid. Such evidence must be furnished to LUCENT within sixty (60) days of CENTIGRAM's actual receipt thereof from the local taxing authority. (b) If CENTIGRAM is required to bear a tax, duty, levy, or similar charge pursuant to (a) above, CENTIGRAM shall pay such tax, duty, levy or similar charge and any additional amounts as are necessary to ensure that the net amounts received by LUCENT hereunder after all such payments or withholdings equal the amounts to which LUCENT is otherwise entitled under this Agreement as if such tax, duty, levy or similar charge did not apply. 4.05 Choice of Law The parties are familiar with the principles of New York commercial law, and desire and agree that the law of New York shall apply in any dispute arising with respect to this Agreement. 4.06 Integration This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof and merges all prior discussions between them. Neither of the parties shall be bound by any warranties, understandings or representations with respect to such subject matter other than as expressly provided herein or in a writing signed with or subsequent to execution hereof by an authorized representative of the party to be bound thereby. 4.07 Outside the United States (a) There are countries in which the owner of an invention is entitled to compensation, damages or other monetary award for another's unlicensed manufacture, sale, lease, use or importation involving such invention prior to the date of issuance of a patent for such invention but on or after a certain earlier date, hereinafter referred to as the invention's "protection commencement date" (e.g., the date of publication of allowed claims or the date of publication or "laying open" of the filed patent application). In some instances, other conditions precedent must also be fulfilled (e.g., knowledge or actual notification of the filed patent application). The parties agree that (i) an invention which has a protection commencement date in any such country may be used in such country pursuant to the terms of this Agreement on and after any such date, and (ii) all such conditions precedent are deemed satisfied by this Agreement. (b) There may be countries in which a party hereto may have, as a consequence of this Agreement, rights against infringers of the other party's patents licensed hereunder. Each party hereby waives any such right it may have by reason of any third party's infringement or alleged infringement of any such patents. (c) CENTIGRAM hereby agrees to register or cause to be registered, to the extent required by applicable law, and without expense to LUCENT or any of its RELATED COMPANIES, any agreements wherein sublicenses are granted by it under LUCENT's PATENTS. CENTIGRAM hereby waives any and all claims or defenses, arising by virtue of the absence of such registration, that might otherwise limit or affect its obligations to LUCENT. 4.08 Dispute Resolution In the event a dispute or disagreement (hereinafter called "Dispute") arises between the parties in connection with the interpretation of any provision of this Agreement or the compliance or noncompliance therewith, or the validity or enforceability thereof, or the performance or nonperformance of either party to the Agreement, the following Dispute resolution process shall be followed by the parties: (a) A dispute will be deemed to have arisen upon the delivery of a written "Dispute Notice" advising of the nature of the dispute. Upon such delivery, the parties agree to attempt to resolve the Dispute in a prompt and expeditious manner. Except for the Notice of Dispute, all communications between the parties will be on a without prejudice basis. (b) If the parties have not been able to resolve the Dispute in a prompt and expeditious manner after delivery of the Dispute Notice, either party may at any time thereafter request by written notice to the other that the dispute be escalated to Senior Management. (c) In the event a request is made under (b) hereinabove, each party shall make available the senior executives specified in this subparagraph who shall meet within fifteen (15) business days after such request is made at the offices of the party which received the request to attempt to resolve the Dispute. The Senior Management for each party is as follows: Centigram Communications Corporation Mr. Thomas Brunton Chief Financial Officer Lucent Technologies Inc. Contract Manager Intellectual Property Business Either party may change the Senior Management appointee upon prior written notice to the other. (d) In case such Dispute is not settled amicable by Senior Management within forty-five (45) days of escalation to Senior Management, such Dispute will be arbitrated by an Arbitration Board acting in accordance with the rules of The American Arbitration Association, whose decision will be final and binding upon the parties. The Arbitration Board will consist of the person or persons that the parties may agree on and in default of agreement within twenty (20) days following the expiration of the above-mentioned forty-five (45) day period, each of the parties in dispute shall nominate one member to serve on the Arbitration Board and shall give notice to the other party of the name of its nominee. If one party fails to give this notice within the later of fifteen (15) days after the other party has done so or sixty (60) days of escalation to Senior Management, then the member nominated by the other party shall constitute the Arbitration Board. If each party gives this notice, then the two members so nominated by agreement shall select a third member who shall be Chairman. If the original two members are unable to agree upon a third member within thirty (30) days after the second notice has been given, then either party may apply to a Judge of an appropriate Court of the jurisdiction in which the arbitration will take place to appoint the third member who shall be unconditionally accepted by both parties. The place of arbitration for disputes for which arbitration is initiated by LUCENT will be San Jose or Palo Alto, California (to be selected by CENTIGRAM) and the place of arbitration for disputes for which arbitration is initiated by CENTIGRAM will be New York, New York. Each member shall have knowledge of and experience in the telecommunications and/or voice mail industry and shall determine issues of arbitrability but may not limit, expand or otherwise modify the terms of the agreement. The arbitration hearing will commence within sixty (60) days after appointment of the Arbitration Board is done. (e) Expenses related to the compensation and expenses of the Arbitration Board will be borne equally by the parties. (f) Each party shall bear the cost of preparing its own case. However, the Arbitration Board will have the right to include in the award the prevailing party's costs of arbitration and reasonable fees of attorneys, accountants, engineers and other professionals incurred by it in connection with the arbitration. (g) Any award made (i) shall be a holding for or against a party and affording such remedy as is deemed equitable, just and within the scope of the agreement; provided that any monetary award be accompanied by an accounting summary sufficient to assure that the provisions of this Agreement, including subsection (k) of this Section 4.08 set forth below, have been followed; (ii) shall be without findings as to issues of patent validity and/or infringement; (iii) may in appropriate circumstances (other than patent disputes) include injunctive relief; (iv) shall be made within four (4) months of the appointment of the arbitrators; and (v) may be entered in any court of competent jurisdiction within the continental United States. (h) The requirement for mediation and arbitration shall not be deemed a waiver of any right of termination under this Agreement and the arbitrator is not empowered to act or make any award other than based solely on the rights and obligations of the parties prior to any such termination. (i) The agreement shall be interpreted in accordance with the laws of the State of New York exclusive of its conflict of laws provisions. (j) A request by a party to a court for interim measures shall not be deemed a waiver of the obligation to mediate and arbitrate. (k) The arbitrator shall not have authority to award punitive or other damages in excess of compensatory damages and each party irrevocably waives any claim thereto. (l) The parties, their representatives, other participants and the mediator and arbitrator shall hold the existence, content and result of any activities under this Section 4.08 in confidence except to the extent required for enforcement of any award in a court of law or defense of such court action alleging improprieties in the arbitration process. 4.09 Releases (a) In consideration of [ * ] and other good and valuable consideration paid by CENTIGRAM to LUCENT, and subject to the receipt thereof, LUCENT, for itself and for its present RELATED COMPANIES, hereby releases CENTIGRAM, its present RELATED COMPANIES, all of the present and former directors of such companies, and all customers (purchasers and users) of products of the kinds herein licensed as of the effective date hereof to CENTIGRAM, from all claims, demands and rights of action which LUCENT or any of its present RELATED COMPANIES may have on account of any infringement or alleged infringement of any patent issued in any country of the world by reason of the manufacture or any past or future use, lease, sale or importation of any of such products which, prior to the effective date hereof, were manufactured by or for, or used, furnished or imported by CENTIGRAM or any of its present RELATED COMPANIES. The releases granted in this Section 4.09(a) with respect to any of CENTIGRAM's present RELATED COMPANIES cover any such company for all time periods prior to its becoming a RELATED COMPANY of CENTIGRAM. (b) CENTIGRAM, for itself and for its present RELATED COMPANIES, hereby releases LUCENT, both in its present form and as part of AT&T Corp., LUCENT's present RELATED COMPANIES, all of the present and former directors of such companies, and all customers (purchasers and users) of products of the kinds herein licensed as of the effective date hereof to LUCENT, from all claims, demands and rights of action which CENTIGRAM or any of its present RELATED COMPANIES may have on account of any infringement or alleged infringement of any patent issued in any country of the world by reason of the manufacture or any past or future use, lease, sale or importation of any of such products which, prior to the effective date hereof, were manufactured by or for, or used, furnished or imported by LUCENT, both in its present form and as part of AT&T Corp., or any of its present RELATED COMPANIES. The releases granted in this Section 4.09(b) with respect to any of LUCENT's present RELATED COMPANIES cover any such company for all time periods prior to its becoming a RELATED COMPANY of LUCENT. 4.10 Confidentiality Neither party shall disclose any of the terms and conditions (including but not limited to payments) of this Agreement without the written consent of the other party, unless such disclosure is: (i) in response to a valid order of a court or other governmental body of the United States or any political subdivision thereof; provided, however, that the disclosing party shall have given prior notice to the other party and made a reasonable effort to obtain a protective order requiring that the information so disclosed be used only for the purposes for which the order was issued; or (ii) otherwise required by law, including but not limited to disclosures required by securities laws or regulations; or (iii) necessary to establish rights under this Agreement; or necessary for use by outside accountants and legal counsel. Notwithstanding (ii) and (iii), each party shall take reasonable steps to preclude the release of the financial terms of this Agreement such as, for example, filing this Agreement in confidence with the Securities and Exchange Commission (SEC), and deleting the financial terms therefrom in any copy, if any, made available to the public. 4.11 Counterparts This Agreement may be executed in counterparts, which taken together shall constitute one document. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed in duplicate originals by its duly authorized representatives on the respective dates entered below. LUCENT TECHNOLOGIES INC. By: M. R. Greene Vice President - Intellectual Property Date: CENTIGRAM COMMUNICATIONS CORPORATION By: Robert L. Puette President Date: THIS AGREEMENT DOES NOT BIND OR OBLIGATE EITHER PARTY IN ANY MANNER UNLESS DULY EXECUTED BY AUTHORIZED REPRESENTATIVES OF BOTH PARTIES. DEFINITIONS APPENDIX GENERAL DEFINITIONS: [ * ] CENTIGRAM's PATENTS means [ * ] LICENSED PRODUCT means, as to any grantee, any product (including any specified combination of other products) listed for such grantee in Section 1.01. LIMITED PERIOD means the period commencing on the effective date of this Agreement and having a duration of [ * ] LUCENT's PATENTS means [ * ] RELATED COMPANIES of a company are SUBSIDIARIES of the company and any other company so designated in writing signed by LUCENT and CENTIGRAM. SEMIANNUAL PERIOD of any year means a twenty-six (26) or twenty-seven (27) week interval. The first SEMIANNUAL PERIOD of any year commencing thirteen weeks before the Saturday closest to October 31st of that year and ending thirteen weeks thereafter and the second SEMIANNUAL PERIOD of that year commencing at the end of the first SEMIANNUAL PERIOD of that year and ending thirteen (13) weeks after the Saturday closest to October 31st of the next year. [ * ] SUBSIDIARY of a company means a corporation or other legal entity (i) the majority of whose shares or other securities entitled to vote for election of directors (or other managing authority) is now or hereafter controlled by such company either directly or indirectly; or (ii) which does not have outstanding shares or securities but the majority of whose ownership interest representing the right to manage such corporation or other legal entity is now or hereafter owned and controlled by such company either directly or indirectly; but any such corporation or other legal entity shall be deemed to be a SUBSIDIARY of such company only as long as such control or ownership and control exists. ? Any term in capital letters which is defined in the Definitions Appendix shall have the meaning specified therein. [ * ] An asterisk indicates that certain material has been omitted pursuant to an application for confidential treatment. The omitted material has been separately filed with the Securities and Exchange Commission. EX-10.28 4 EMPLOYMENT AGREEMENT DATED OCTOBER 27, 1997 BY AND BETWEEN REGISTRANT AND ROBERT L. PUETTE. EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into effective as of October 24, 1997, by and between Centigram Communications Corporation, a Delaware corporation (the "Company") and Robert L. Puette (the "Employee"). R E C I T A L S A. The Employee has been employed by the Company as the Company's President and Chief Executive Officer. B. The Company and the Employee desire to enter into this Agreement to provide additional financial security and benefits to the Employee as an inducement for Employee to be employed by the Company and to encourage the Employee to continue his employment with the Company. C. Certain capitalized terms used in the Agreement are defined in Section 3 below. A G R E E M E N T In consideration of the mutual covenants herein contained, and in consideration of the continuing employment of the Employee by the Company, the parties agree as follows: 1. Employment Relationship and Compensation. (a) Subject to the terms and conditions hereof, the Employee shall be employed as the Company's President and Chief Executive Officer with all the duties, authority and responsibilities customary to such positions. The Company and the Employee acknowledge that the Employee's employment is and shall continue to be at-will, as defined under applicable law. If the Employee's employment terminates for any reason, the Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be available in accordance with the Company's established employee plans and policies at the time of termination. (b) Employee's base salary shall initially be $340,000 per year at $28,333.33 per month, paid bi-weekly. Employee shall also participate in the Company's Executive Bonus Program pursuant to which Employee shall be eligible to receive a bonus of at least fifty percent (50%) of Employee's then current base salary upon achievement of one hundred percent (100%) of target operating profits and corporate objectives as determined by the Company's Board of Directors (the "Board"). For fiscal year 1998 (November 1997 to October 1998), Employee is guaranteed his bonus of at least $170,000 provided that he is an employee at the end of such fiscal year, provided further that, in the event Employee is Involuntarily Terminated other than for Cause during such fiscal year, such guaranteed bonus shall be prorated to the Termination Date. For fiscal year 1998, $85,000 of Employee's bonus shall be paid promptly following the end of the Company's second fiscal quarter and the remainder of Employee's bonus shall be paid promptly following the end of the Company's fiscal year. As of the first date of his employment, Employee shall also be granted an option to purchase 350,000 shares of the Company's Common Stock. Such option shall vest over four (4) years with twenty-five percent (25%) vesting one year after Employee's first date of employment and the remaining shares shall vest monthly thereafter. (c) Employee shall be eligible to participate in the Company's Employee Benefit Program which presently includes medical, dental, prescription, vision and hospital coverage, life insurance, long- term disability income insurance, a 401(k) Plan and the Company's Employee Stock Purchase Plan. Employee shall also receive $500 per month for car allowance and reimbursement for tax preparation and an annual executive physical exam. 2. Severance Benefits. (a) Termination Not for Cause. Subject to Sections 4 and 5 below, if the Employee's employment with the Company terminates as a result of Involuntary Termination other than for Cause at any time prior to a Change of Control, then (i) the Employee shall be entitled to receive a severance payment equal to one year of the Employee's base compensation for the Company's fiscal year then in effect plus Employee's bonus calculated at one hundred percent of target for the Company's fiscal year then in effect and (ii) for the one year period commencing on the Employee's Termination Date, Employee shall continue to receive at Company's expense all benefits described in Section 1(c) hereof which are provided to Employee on the Termination Date except participation in the Company's 401(k) Plan and Employee Stock Purchase Plan. The Company may satisfy the obligation to provide the foregoing benefits by a cash payment to Employee equal to the reasonable cost to obtain equivalent benefits. Any severance payments to which the Employee is entitled pursuant to clause (i) of this Section 2(a) shall be paid to the Employee (or to the Employee's estate or beneficiary in the event of the Employee's death) in a lump sum within fifteen (15) days of the Employee's Termination Date. (b) Termination as Part of or Following A Change of Control. Subject to Sections 4 and 5 below, if the Employee's employment with the Company terminates at any time within twelve months after a Change of Control (or within sixty days prior to a Change in Control if such termination is directly caused by such Change of Control) as a result of Involuntary Termination other than for Cause, (i) the Employee shall be entitled to receive a severance payment equal to the 1.5 times one year of the Employee's base compensation for the Company's fiscal year then in effect plus 1.5 times Employee's bonus calculated at one hundred percent of target for the Company's fiscal year then in effect and (ii) for the five hundred and forty day period commencing on the Employee's Termination Date, Employee shall continue to receive at Company's expense all benefits described in Section 1(c) hereof which are provided to Employee on the Termination Date except participation in the Company's 401(k) Plan and Employee Stock Purchase Plan. The Company may satisfy the obligation to provide the foregoing benefits by a cash payment to Employee equal to the reasonable cost to obtain equivalent benefits. Any severance payments to which the Employee is entitled pursuant to clause (i) of this Section 2(b) shall be paid to the Employee (or to the Employee's estate or beneficiary in the event of the Employee's death) in a lump sum within fifteen (15) days of the Employee's Termination Date. (c) Voluntary Resignation; Termination For Cause. If the Employee voluntarily resigns from the Company (other than as an Involuntary Termination), or if the Company terminates the Employee's employment for Cause, then the Employee shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and policies at the time of such resignation or termination. (d) Disability; Death. If the Company terminates the Employee's employment as a result of the Employee's Disability, or if the Employee's employment terminates due to the death of the Employee, then the Employee shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and policies at the time of such Disability or death. (e) Options. Subject to Sections 4 and 5 below, (i) in the event of a Change of Control, the unvested portion of any stock option(s) held by the Employee under the Company's stock option plans which, were the Employee to remain employed by the Company for all relevant periods, would have vested and become exercisable at any time during the two years following such Change in Control, shall, as of the date of such Change in Control, immediately vest and become exercisable in full, and the Employee shall have the right to exercise such additional vested portion of such stock option(s) at such time; and (ii) in the event the Employee is entitled to severance benefits pursuant to Section 2(b), then in addition to any such severance benefits, the unvested portion of all stock option(s) held by the Employee granted by the Company or any successor in interest thereto shall, as of the Termination Date, immediately vest and become exercisable in full, and the Employee shall have the right to exercise such additional vested portion of such stock option(s) at such time. 3. Definition of Terms. The following terms referred to in this Agreement shall have the following meanings: (a) Cause. "Cause" shall mean (i) any act of personal dishonesty taken by the Employee in connection with his responsibilities as an employee and intended to result in substantial personal enrichment of the Employee, (ii) conviction of a felony that is demonstrably injurious to the Company, (iii) a willful act by the Employee which constitutes gross misconduct and which is demonstrably injurious to the Company, and (iv) continued violations by the Employee of the Employee's obligations as an employee of the Company that are demonstrably willful and deliberate on the Employee's part after there has been delivered to the Employee a written demand for performance from the Company which dearly describes the basis for the Company's belief that the Employee has not substantially performed his duties and Employee has been given fourteen (14) days to perform after receipt of such written demand. (b) Change of Control. "Change of Control" shall mean the occurrence of any of the following events: (i) The acquisition by any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of the "beneficial ownership" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) A change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination; or (iii) A merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the approval by the stockholders of the Company of a plan of complete liquidation of the Company or of an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (c) Disability. "Disability" shall mean that the Employee has been unable to substantially perform his duties under this Agreement as the result of his incapacity due to physical or mental illness for at least 26 weeks and such incapacity is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Employee or the Employee's legal representative (such Agreement as to acceptability not to be unreasonably withheld). d) Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (e) Involuntary Termination. "Involuntary Termination" shall mean (i) without the Employee's express written consent, the significant reduction of the Employee's duties, authority or responsibilities relative to the Employee's duties, authority and responsibilities granted by this Agreement; (ii) without the Employee's express written consent, a substantial reduction, without good business reasons, of the facilities and perquisites (including office space and location) available to the Employee immediately prior to such reduction; (iii) without the Employee's express written consent, a reduction by the Company in the base compensation of the Employee as in effect immediately prior to such reduction; (iv) a material reduction by the Company in the kind or level of employee benefits to which the Employee is entitled immediately prior to such reduction with the result that the Employee's overall benefits package is significantly reduced; (v) the relocation of the Employee to a facility or a location more than 30 miles from the Employee's then present location, without the Employee's express written consent; (vi) any purported termination of the Employee by the Company which is not effected for Disability or for Cause, or any purported termination for which the grounds relied upon are not valid; or (vii) the failure of the Company to obtain the assumption of this agreement by any successors contemplated in Section 6 below. (g) Termination Date. "Termination Date" shall mean (i) if the Employee's employment is terminated by the Company for Death or Disability, thirty (30) days after notice of termination is given to the Employee (provided that, in the event of Disability, the Employee shall not have returned to the performance of the Employee's duties on a full-time basis during such thirty (30) day period), (ii) if the Employee's employment is terminated by the Company for any other reason, the date on which the Company delivers notice of termination to the Company or such later date, not to exceed ninety (90) days, specified in the notice of termination, or (iii) if the Agreement is terminated by the Employee, the date on which the Employee delivers notice of termination to the Company. 4. Limitation on Payments. (a) In the event that the severance and other benefits provided for in this Agreement or otherwise payable to the Employee (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section 4 would be subject to the excise tax imposed by Section 4999 of the Code, then the Employee's severance benefits under Section 2 shall be payable either (i) in full, or (ii) as to such lesser amount which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by the Employee on an after-tax basis, of the greatest amount of severance benefits under this Agreement, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. (b) If a reduction in the payments and benefits that would otherwise be paid or provided to the Employee under the terms of this Agreement is necessary to comply with the provisions of Section 4(a), the Employee shall be entitled to select which payments or benefits will be reduced and the manner and method of any such reduction of such payments or benefits (including but not limited to the number of options that would vest under Section 2(e)) subject to reasonable limitations (including, for example, express provisions under the Company's benefit plans) (so long as the requirements of Section 4(a) are met). Within thirty (30) days after the amount of any required reduction in payments and benefits is finally determined in accordance with the provisions of Section 4(c), the Employee shall notify the Company in writing regarding which payments or benefits are to be reduced. If no notification is given by the Employee, the Company will determine which amounts to reduce. If, as a result of any reduction required by Section 4(a), amounts previously paid to the Employee exceed the amount to which the Employee is entitled, the Employee will promptly return the excess amount to the Company. Subject to the terms and conditions of this Section 4, in connection with any reduction of benefits pursuant to Section 4(a), the Company will use its commercially reasonable efforts to assist Employee in obtaining the benefits to which Employee is entitled hereunder to the fullest extent practicable. (c) Unless the Company and the Employee otherwise agree in writing, any determination required under this Section 4 shall be made in writing by the Company's independent public accountants (the "Accountants"), whose determination shall be conclusive and binding upon the Employee and the Company for all purposes. For purposes of making the calculations required by this Section 4, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Employee shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 4. 5. Certain Business Combinations. In the event it is determined by the Board, upon receipt of a written opinion of the Company's independent public accountants, that the enforcement of any Section or subsection of this Agreement, including, but not limited to, Section 2(e) hereof, which allows for the acceleration of vesting of options to purchase shares of the Company's common stock upon a termination in connection with a Change of Control, would preclude accounting for any proposed business combination of the Company involving a Change of Control as a pooling of interests, and the Board otherwise desires to approve such a proposed business transaction which requires as a condition to the closing of such transaction that it be accounted for as a pooling of interests, then any such Section of this Agreement shall be null and void, but only if the absence of enforcement of such Section would preserve the pooling treatment. For purposes of this Section 5, the Board's determination shall require the unanimous approval of the disinterested Board members. In such event, if Employee is Involuntarily Terminated other than for Cause within twelve months following such Change in Control, Employee shall be retained as a consultant to the Company for two years and be permitted to continue vesting of all stock options held by the Employee on the Termination Date during such period, provided that, nothing in this sentence shall require the Company (or any successor thereto or acquirer thereof) to take any action which would result in such entity incurring a material accounting expense for purposes of such entity's financial statements as a result of such continued vesting. 6. Successors. (a) Companys Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business and/or assets which executes and delivers the assumption agreement described in this Section 6(a) or which becomes bound by the terms of this Agreement by operation of law. (b) Employee's Successors. The terms of this Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, devisees and legatees. 7. Notice. (a) General. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U. S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Employee, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Chief Financial Officer. (b) Notice of Termination. Any termination by the Company for Cause or by the Employee as a result of an Involuntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with Section 7(a) of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and shall specify the Termination Date (which shall be not more than ninety (90) days after the giving of such notice). The failure by the Employee to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of the Employee hereunder or preclude the Employee from asserting such fact or circumstance in enforcing his rights hereunder. 8. Miscellaneous Provisions. (a) No Duty to Mitigate. The Employee shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that the Employee may receive from any other source. (b) Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the party hereto whose interests are adversely affected thereby (provided that Employee may not sign on behalf of the Company for such purpose). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Whole Agreement. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. This Agreement shall replace and supersede any prior agreement between the parties hereto relating to the accrual of any benefits to the Employee in connection with a change in control or organic change to the Company or the cessation of Employee's employment relationship with the Company (other than stock option agreements, if any, but including, without limitation, that certain letter agreement pursuant to which the Company offered Employee the position of President and Chief Executive Officer of the Company dated on or about September 24, 1997) and all such agreements shall henceforth be void and of no further force and effect. (d) Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (e) Severability. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (f) Arbitration. Any dispute or controversy arising out of, relating to or in connection with this Agreement shall be settled exclusively by binding arbitration in San Jose, California, in accordance with the California Code of Civil Procedure section 1280 et seq., as amended, including, but not limited to, sections 1283, 1283.05 and 1283.1, such that the full degree of discovery permitted under the aforementioned statutes will be allowed in any dispute hereunder. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The prevailing party shall be awarded its counsel fees and expenses, including costs of arbitration. Punitive damages shall not be awarded. (g) No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this Section 8(g) shall be void. (h) Employment Taxes. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (i) Assignment by Company. The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation that actually employs the Employee. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. (k) Attorney's Fees. The Company shall reimburse Employee for his reasonable attorney's fees incurred in connection with this Agreement, up to a maximum of $3,500. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. COMPANY: CENTIGRAM COMMUNICATIONS CORPORATION By: /s/ D. O. Morton Title: Chairman EMPLOYEE: /s/ Robert L. Puette EX-21.1 5 SUBSIDIARIES EXHIBIT 21.1 LIST OF SUBSIDIARIES OF REGISTRANT Centigram Asia Limited Centigram Australasia Pty Limited Centigram Communications (Barbados), Inc. Centigram Europe B.V. Centigram UK Limited TTCI Acquisition Corp. EX-23.1 6 CONSENT OF INDEPENDENT AUDITORS CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 333-56469, 33-43726, 33-98484, 333-4215, 333-4217, 333- 21051, and 333-41831) pertaining to the Amended and Restated 1987 Stock Option Plan, 1991 Employee Stock Purchase Plan, the 1995 Nonstatutory Stock Option Plan, 1997 Stock Plan and Stock Option Agreements of Centigram Communications Corporation of our report dated November 24, 1998, with respect to the consolidated financial statements and schedule of Centigram Communications Corporation included in the Annual Report (Form 10-K) for the year ended October 31, 1998. /s/ Ernst & Young LLP San Jose, California January 19, 1999 EX-27.1 7 ARTICLE 5 FIN. DATA SCHEDULE FOR 10-K
5 This schedule contains summary financial information extracted from the Balance Sheet and Statement of Operations included in the Company's Form 10-K for the year ended October 31, 1998 and is qualified in its entirety by reference to such Financial Statements. 1,000 OCT-31-1998 NOV-02-1997 OCT-31-1998 12-MOS 23,430 33,760 16,485 1,919 5,297 78,798 40,294 33,641 95,977 30,769 0 0 0 90,625 (25,417) 95,977 77,587 77,587 37,653 37,653 68,874 0 0 (11,795) 379 (12,174) 0 0 0 (12,174) ($1.77) ($1.77)
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